Arbor Realty Trust

Good morning ladies and gentlemen and welcome to the third 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 press star 1 on your telephone. If you want to remove yourself from the queue simply press star 2. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Paul Elenio Okay. Thank you, Jamie, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter ended September 30th, 2024. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform these 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 ARVA's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. ARVA undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman. 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 challenging environment. As we discussed in the past, we appropriately positioned the company to succeed in this market, are executing our business plan very effectively and in line with our expectations. We have a diversified business model with many counter-cyclical income streams, are invested in the right asset class with the appropriate liability structures, and are well capitalized, which has allowed us to consistently outperform our peers in every major financial category over a long period of time and by a wide margin. In fact, most stock 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. As we have stated many times, and as you can clearly see from the charts posted on our website, our results have been nothing short of remarkable, and we're a consistent outperforming and leader in this space. As we discussed on the last few calls, we expected the first two quarters of this year to be the most challenging part of the cycle. And we also thought it could leak into the third and fourth quarters as well if rates remain higher for longer. With the recent 50 basis point rate cut by the Fed and a significant drop in the 10-year to a low of around 360, we began to see a much more positive outlook as a result of cap costs becoming less becoming far less expensive and bars being able to access five and ten year fixed rate agency deals and buyers moving off the sidelines and becoming extremely active in the market however there's been a backdrop in the 10-year again to 425 which has somewhat changed the tenor and we now believe that the recovery will be a little bit slower and could lead to a challenging fourth quarter, which is consistent with our previous guidance. We continue to do a very effective job of working through our portfolio by getting borrowers to recap their deals and purchase interest rate caps. In the third quarter, we modified another $1.2 billion of loans with $43 million of fresh equity committed to be injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, fund interest and renovation reserves, bring past interest due, current, and pay down loan balances where appropriate. We also continue to make progress in line with our previous guidance on the approximately $1 billion of loans that were passed due at June 30th by either modifying these loans, foreclosing and taking them into REO, or bringing in new sponsorship, either consensually or simultaneously with the foreclosure. Last quarter, we discussed our plans for these loans, and we estimated that approximately 30% to 35% of the pool would be modified another 30% to 35% would pay off, and the remaining 30% would be taken back as REO. In the third quarter, we successfully modified 250 million of these loans, or 23%, and we expect to modify another roughly 10% in the fourth quarter. We also had one delinquent loan for $8 million pay off in full in the third quarter, and we're expecting another 300 million plus of these delinquencies to pay off over the next few quarters. Additionally, we took back as REO roughly $77 million of loans in the third quarter and are expecting to take back another $250 million plus over the next few quarters. This is strong progress in one quarter and has reduced to $1 billion in delinquencies we had as June 30th down to just over $700 million at September 30th, or a 30% decrease. But as expected, we did experience additional delinquencies during the quarter of approximately $225 million, bringing our total delinquencies at September 30th to approximately $945 million, which is down 10% from our peak in the second quarter. And while we anticipate having additional delinquencies in this environment, we believe our resolutions will exceed new defaults, resulting in a continued decline in our total delinquencies. It is also very important to distinguish between REOs we take back and bring in new sponsorship to operate and assume debt, and REOs we own and operate ourselves. Of the 77 million of REOs we took back in Q3, 20 million we successfully brought in new sponsors to operate and assume our debt, and 57 million we now own and operate directly. We are working exceptionally hard in resolving our delinquencies in accordance with our plan, which, when achieved, will convert non-interest earning assets into income-producing investments that will be highly accretive to our future earnings. This is a challenging and demanding work, and I am very pleased with the progress we are making in resolving our delinquencies in accordance with our objectives. We also continue to focus on maintaining adequate liquidity levels and the appropriate liability structures, which is critical to our success in this environment. Currently, we have approximately $600 million in cash and liquidity, providing us with the flexibility needed to manage through the balance of this downturn and take advantage of the opportunities that exist in this market to generate stronger funds on our capital. One of these opportunities is our bridge lending platform. And I have said before, some of the best times, some of the best loans are made in the bottom of the cycle. We believe now is the appropriate time to start ramping up our bridge lending program again and take advantage of the opportunities that exist in the market to originate high-quality short-term bridge loans, allowing us to generate strong level returns on our capital in the short run, while continuing to build up a significant pipeline of future agency deals, which is critical to our strategy. We have also done an excellent job at deleveraging our balance sheet and reducing our exposure to short-term bank debt. We have approximately $2.9 billion in outstanding with our commercial banks, which is down from a peak of $4 billion. And we have 65% of our security net in this and non-mark-to-market, non-recourse, low CLO vehicles. Our CLOs are a major part of our business strategy, and they provide us with a tremendous strategic advantage in times of distress and dislocation due to the nature of their non-lawful market, non-recourse elements. In addition, they contribute significantly to providing a lower-cost alternative for warehousing banks, which in times like this have fluctuating pricing and leverage points parameters. In fact, one of the significant drivers of our income change are our low-cost CLO vehicles, as well as fixed-rate debt and equity instruments that make up a big part of our capital structure. We were very strategic in our approach to capitalizing our business with a substantial amount of low-cost, 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 third quarter, we produced $1.1 billion of agency originations, which was in line with our second quarter volumes. In the third quarter, we also saw a big dip in the 10-year to a range of 360 to 380, which immediately resulted in a massive increase in our agency pipeline to approximately 1.9 billion, which is one of the highest levels we have ever seen. During that timeframe, the agencies got significantly backed up by creating a delay of three to six weeks, which certainly affected the timing of our closings, which was compounded by the recent backup in rates to solvably above 4% again. As a result of these factors and given the magnitude of our pipeline, we are guiding our fourth quarter volumes to be in the range of $1.2 billion to $1.5 billion, which is very rate dependent. If rates stay at these levels, we are confident we can originate $1.2 billion in the fourth quarter. But if rates get meaningfully below 4% again, we can produce the top end of our range to $1.5 billion. We also continue to do an effective job at converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. In the third quarter, we generated $520 million of payoffs, and $385 million, or 74% of these loans being refinanced into fixed-rate agency deals for the first nine months of this year. We recaptured over 60%, or $1.1 billion, of our balance sheet runoff into agency production. And as I have said in the past, if interest rates continue to decline, we expect that this will become an even more meaningful part of our business going forward. Our fee-based servicing portfolio, which grew another 2% this quarter and 10% year-over-year to $33 billion, generates approximately $125 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances. In fact, we are earning 4.6% on around $2.3 billion of balances, or roughly $120 million annually, which combined with our servicing income and annuity totals $235 million of annual gross cash earnings, or $1.15 a share. This is in addition to the strong gain-on-sale margins we generate from our originations platform. And it's extremely important to emphasize that our agency business generates over 45% of our net revenues, the vast majority of which occurs before we even turn the lights on every day. This is completely unique to our platform. We continue to do an excellent job in growing our single-family rental business. We have another strong quarter with $240 million of fundings and another $375 million of commitments signed up, which now brings our nine-month numbers to $1.1 billion, which is already right on top of the total we've produced for all of last year, and brings our total commitment volume to $4.6 billion from this platform. Additionally, we have a large pipeline and remain committed to doing this business that results in three turns 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 also continue to make steady progress in our newly added construction lending business. This is a business we believe can produce very accretive returns to our capital by generating 10% to 12% unlevered returns initially and mid to high unlevered returns on our capital when we obtain leverage. We closed our first deal in the third quarter for $47 million, and we continue to see growth in our pipeline with roughly $300 million under application and $200 million in LOIs and $600 million of additional deals in the current screening. We believe this product is very appropriate for our platform as it offers us three turns on our capital from construction, bridge, and permanent agency lending opportunities. And again, between our SFR and construction lending products, we expect to be able to continue to grow our balance sheet loan book and generate strong returns on our capital, very importantly, seeding a significant amount of our future agency production. In summary, we had another productive quarter, and we are working very hard to manage through the balance of this dislocation. We feel we've done an excellent job in working through our loan book and in 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 realize that although the market backdrop is improving, there's still a lot of work to be done to manage through this environment, and we believe we're well-positioned to execute our business plan and continue to outperform our peers. 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 distributive earnings of $88 million, or 43 cents per share, which translated into ROEs of approximately 14% for the third quarter. As Ivan mentioned, we modified another 24 loans in the third quarter, totaling $1.2 billion. On approximately $710 million of those loans, we required borrowers to invest additional capital to recap their deals, with us providing some form of temporary rate relief through a pay and accrual feature. The pay rates were modified on average to approximately 6%, with 2.5% of the residual interest due being deferred until maturity. 240 million of these loans were delinquent last quarter and are now current in accordance with their modified terms. Our total delinquencies are down 10% to 945 million at September 30th, compared to 1.05 billion at June 30th. 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're 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 $625 million this quarter compared to $676 million last quarter due to approximately $152 million of modifications, $77 million of loans taken back as REO, which was partially offset by $110 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, and $68 million of additional defaulted loans during the quarter. The second bucket consisting of loans that are less than 60 days past due also came down to $319 million this quarter from $368 million last quarter due to $88 million of modifications, $110 million of loans progressing to greater than 60 days past due, an $8 million payoff which was partially offset by approximately $157 million of new delinquencies during the quarter. And while we're making good progress in resolving these delinquencies in accordance with the objectives that we discussed earlier, at the same time, we do anticipate that there could be new delinquencies in this environment. As Ivan mentioned, in accordance with our plans of resolving certain delinquencies, we have started to take back real estate in the third quarter, and we expect to take back more over the next few quarters. The process of taking control and working to improve these assets and create more of a current income stream takes time, which, as I mentioned on our last call, will likely result in a low watermark for net interest income over the next couple of quarters until we have worked through this portfolio. This is what we expected, and it's consistent with our previous guidance that this would be the period of peak stress and the bottom of the cycle. In line with our strategy of taking back REO assets, we decided to break out our REO assets into a separate line on this quarter, which was previously included in other assets on our balance sheet. As Ivan discussed earlier, we took back approximately 77 million assets in Q3, 57 million of which we currently own and operate, which was accounted for as REO. and roughly $20 million that we had brought in new sponsorship to run and assume our debt, which was accounted for as a sale and a new loan in the third quarter. The other roughly $78 million in REO on our balance sheet at 930 were deals taken back in previous years that were included in other assets in the past. We also continue to build our CECL reserves, given the current environment, recording an additional $16 million in reserves in our balance sheet loan book in the third quarter. It's important to continue to emphasize that despite booking approximately $162 million in seasonal reserves across our platform in the last 18 months, $132 million of which were in our balance sheet business, we were still 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 are one of the only companies in our space that has seen significant book value appreciation over the last five years with 28% growth in that time period versus our peers whose book values have declined on average approximately 22%. In our agency business, we had a solid second quarter with $1.1 billion in originations and loan sales. The margins on our loan sales was up to 1.67% for the third quarter from 1.54% last quarter. We also recorded $13.2 million of mortgage servicing rights income related to $1.1 billion of committed loans in the third quarter, representing an average MSR rate of around 1.25%. Our fee-based servicing portfolio also grew to approximately $33 billion on September 30th, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $125 million gross annually. And this income stream, combined with our earnings on escrows and gain on sale margins, represents over 45% of our net revenues. In our balance sheet lending operation, our $11.6 billion investment portfolio had an oil yield of 8.16% at September 30th, compared to 8.60% at June 30th, mainly due to a decrease in sulfur during the quarter. The average balance on core investments was $11.8 billion this quarter, compared to $12.2 billion last quarter, due to runoff exceeding originations in the second and third quarters. The average yield on these assets increased slightly to 9.04% from 9% last quarter, mainly due to slightly more back interest collected in the third quarter than the second quarter from third quarter modifications, which was partially offset by some new non-accrual loans in the third quarter. Total debt on our core assets decreased to approximately $10 billion on September 30th from $10.3 billion on June 30th, mostly due to paying down CLO debt with cash in those vehicles in the third quarter. The all-in cost of debt was down to approximately 7.18% at 9.30 versus 7.53% at 6.30, mostly due to a reduction in sulfur. The average balance in our debt facilities was down to approximately $10 billion for the third quarter compared to $10.8 billion last quarter, mainly due to the unwind of CLO-15 that occurred late in the second quarter, combined with paydowns in our CLO vehicles from runoff in the third quarter. The average cost of funds in our debt facilities was up slightly to 7.58% for the third quarter from 7.54% for the second quarter. Our overall net interest spreads in our core assets was flat for both the second and third quarter at 1.46%, and our overall spot net interest spreads were down to 0.98% September 30th from 1.07% at June 30th, mostly due to less CLO debt outstanding, which has a lower cost of funds from paydowns during the quarter. We also continue to improve our financing sources, adding a new banking relationship with a $400 million warehouse facility that we closed in the third quarter. And lastly, but very significantly, 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 65% non-recourse, non-mark-to-market CLO debt with pricing that is still well below the current market, providing strong-leveled returns on our capital. That completes our prepared remarks for this morning, and I'll now turn it over to the operator to take any questions you may at this time. Jamie?

Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, simply press star 2. so that others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We will pause for just a moment to assemble the queue. We'll hear first from Steve Delaney with Citizens JMP.

Thanks. Good morning, Ivan and Paul. Thanks for the helpful additional details on your MPLs and loan mods in the press release. That's very helpful. I was wondering, you know, you've obviously built CECL reserves. I think Paul said, you know, whatever it was, $180 million over the last 18 months. One thing that's not in your release, and I guess we could find it in the reconciliation of your loss reserve, could you comment about the actual amount of realized losses that you've taken this year, you know, as you work through the whole process? Do you think about it that way, Ivan, that there's paper, reserves, but at some point in time, there's a real loss? And that's kind of what I'm getting at, if you could give us some idea of what the real losses look like compared to the lost reserves. Thank you.

Ivan Ustinovich. Sure. So, Steve, thanks for the questions, Paul. So, we haven't really had really any realized losses during the year. I think we had maybe a $1.5 million realized loss in last quarter or the first quarter, I forget, on a small loan that we took back. But for the most part, some of the REO we took back during the quarter. We had some reserves on, and we took those back at fair value. So until we dispose of those REO assets, You don't have a gain or a loss. So we've not seen any real significant realized losses or any material realized losses. As you know, the $162 million that I guided you on the call that we booked in Cecil Reserves, $132 million in our balance sheet is already reflected in our book value. But as you said, it hasn't been realized. And it may, we don't know how much, if any, will be realized. And it takes time to work through those assets and dispose of them. But at this juncture, we just haven't had any significant realized losses at this point.

Got it. That's helpful to understand. Thank you, Paul. And just note, we noted the, in the press release, the $100 million three-year note issue at 9%. Could you comment on the purpose and use of proceeds? You know, just on the surface, it looks like expensive capital. But I'm just curious what your thought process was with that.

Well, we felt it was appropriate price capital for what it is. You know, it's three-year capital. We didn't want to go out too long term. And, you know, certainly, you know, it was equated relative to where our dividend was, and it was an easy piece of capital to put in place. We're also seeing some pretty good opportunities in the mid-teens returns. So we thought it was properly priced given where we were in the cycle. And it was also important to us to not go out five or seven years, to go out three years. and not be too short. So it's just an easy piece of capital to put in place. Yeah, and Steve, I'll just add to that. I think that was our thought processes. We don't really have any pending maturities coming up on any of our unsecured debt, you know, other than a convert that's coming due at the end of 2025, which is easily replaceable. But Ivan's view is correct. I mean, as we said in our commentary today, we're starting to ramp back up our bridge lending opportunities. We have the SFR business that funds over time. of our construction business we're starting to see real real solid opportunities to market to get mid-teens return so we looked at that as still cheaper capital than common and and in our view that's accretive capital cost yeah and i think in my bad remarks about our um sfr and construction lending business you know that's mid to high change returns that we put in place and keep in mind that that's going to fund up substantially next year, right? It's in place. It's slow to fund in the beginning. That will ramp up, and, you know, we'll get to leverage that up. But having, you know, 9% capital, and that's the team's returns, and knowing it's going to be in place and not having to put too much on and doing a small deal is very appropriate for us.

Yeah, makes sense. Thank you both for your comments this morning.

Thanks, Steve.

Next, we'll hear from the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. I want to follow up on Steve's question there on the capital. You mentioned the construction opportunities. Ivan, you mentioned your prepared remarks. Some of the best loans over the years have been done at kind of this point in the cycle as far as the bridge loans. Can you talk about how that pipeline builds in the next year? And as you need more capital, uh, you know, how much more insecure debt are you comfortable raising without equity? Or were you look at hitting the, you know, tapping the ATM a little bit curious to, to get your thoughts on, on how you'll raise capital to fund the growth opportunities. Okay.

I'm going to meander a little bit because we've made a very strategic decision to put our effort into the, uh, into the, uh, bill to rent or SFR business and construction business for a couple of reasons. Number one, the spreads were very outsized, and there wasn't a lot of competition as regional banks really got dried up, and we really become a dominant lender in that space. We were lending in the, I would say, 350 to 450 spread. And, you know, we were able to get a lot of commitments knowing that would be something that would be funding up in 2025. So it was a good way to look at our business. We opted not to jump into, and it's also a very low loan-to-value business. I think our average loan-to-value on that's like 65% or 60%. i thought that the bridge lending on multi was a little too aggressive at that juncture and it was higher loan to value and um i wasn't as comfortable and we had the optionality of really putting our capital into that space which we did i will tell you with clarity that spreads have tightened over the last 60 to 90 days by 75 basis points So we have embedded value in that pipeline. Now, what's really happened in the marketplace is that securitization market has come rolling back. And maybe a year ago, you really couldn't get an effective securitization done. The CLM markets are not as tight as they were in the heyday. They're not that far off. Maybe they're three-eighths out. So there are a lot of efficiencies that have been drawn. And I think ramping up right now on the British lending platform, especially with cap costs coming down and securitization costs coming down, we like that business. You know, about a year ago, spreads were in the $4 to $4.50. Cap costs were a fortune. And I didn't like the matrix in that business, so I stepped away from it. Now you're seeing spreads, you know, in 275 between a quarter range with CLO leverage being, you know, coming in, you know, 75 basis points to where it was. And those deals make more sense. So we'll be looking to really get more effective on that side of the bit. I think the securitization market will be much more efficient and we'll be able to tap that in the first quarter, which will be very effective in the way we leverage our balance sheet. Now, we've got to manage all of this with where the interest rates are because, as I mentioned in my prepared remarks, interest rates have a lot to do with our runoff. and we'll manage our runoff and our liquidity on a moment-to-moment basis based on where rates are. We could see if rates come back down at 375 basis points, we could see an accelerated runoff on our balance sheet, which generates enormous cash. So we'll pay attention to all those factors, and we'll tap the different avenues to increase our liquidity. based on how all those other features toggle. Yeah, and Steve, to add to that, our whole approach on capital has been exactly what Ivan laid out. I think we've proven over time, as big insider owners, we've been tremendous stewards of capital. So we're sitting on a nice amount of liquidity. We tapped a three-year debt instrument we thought was appropriate and accretive. As Ivan said, we manage based on interest rates. If we're going to see a lot of runoff, we're going to generate capital. If we see tremendous opportunities on the bridge side, the construction, the SFR, we'll look to access liquidity in the ways we always have, which is a barbell approach between equity and debt. And right now, we're pretty low in leverage. So, we like our spot. A lot depends on interest rates, but we'll continue to approach the capital markets like we always have and really focus on not being diluted. yeah and just to jump back into one other item not not only are the npls uh important for us to manage through from an interest standpoint if you have a billion dollars of non-interest earning assets how you can do the math is we return that back in in into capital but the leverage on those assets is much lower so we'll generate a lot of cash as we resolve that as well so we'll keep our eye on the path to resolutions

Thank you for the color on that, and it really leads to my follow-up question. Paul, I know in your prepared remarks you mentioned kind of a low crossing on the earnings here in this quarter, next quarter, kind of near term. As we look back after next year, is it fair to assume we're going to get a decent amount of earnings lift between the NPL resolutions, recycling capital, and then resolutions on those REO assets as well? Is that the right way to think about earnings kind of ramping next year?

I think that's correct, but let's go over it in pieces. I think you've got to look at things a little bit longer term than one or two quarters, right? That's what we talked about. So we're at the bottom. I've guided to a low-order mark on interest income because, as Ivan said in his prepared remarks, we're doing a great job of resolving our delinquencies, but we do expect new ones to pop up. Our goal is that our resolutions will exceed the new delinquencies and we'll continue to continue to have our total delinquencies come down, hopefully in a similar fashion that they did in this quarter. Obviously, SOFR, where SOFR goes, obviously affects the model as well, as you know. But I think over a longer period of time, a longer outlook, that's correct. that, you know, as rates move in favor and we're able to resolve our NTLs and our agency business originations go up, all those things move in our favor, right? There's some things that move against you short-term when rates come down, and there's things that move with you as the cycle progresses. So I think I look at it and Ivan looks at it as a more long-term view, and in a more long-term view, we think over the next, 10 to 12 months, we start to really see a lift from those non-performing loans getting resolved, as long as we don't have significant additional delinquencies. We see a lift from rates being more cooperative and launching our origination business, our SFR business, our bridge business, but it's over a longer period of time, Steve.

Right. Well, appreciate the comments this morning. And you guys have been a great job kind of managing through a pretty difficult environment the last year. And, you know, we'll show the successes you've had managing through that. So appreciate the comments and stay here.

Thanks, Steve.

Let's appreciate it, Steve.

Next, we'll hear from the line of Rick Shane with J.P. Morgan. Please go ahead.

Thanks, everybody, for taking my questions this morning. Just a couple of things. Ivan, you talked a little bit about the backlog associated with the agency business. And given the run rate through July, which I think last quarter you guys had said was about 360 million, we were surprised not to see an acceleration there. I'm curious, how this actually works from a pipeline perspective. Do your borrowers lock rates? So is this just a deferral? Or if they didn't hit that window where rates were below 4% for two months, which you sort of signal is the big number, is that basically lost opportunity until the next time we see rates tick lower?

Okay, I think it's a great question, and I'm intimately involved in it because, you know, it's a little bit of a new quirk that the agencies would be so backlogged, and normally things would move much quicker. When agencies don't turn around your loans, you can't rate lock them, right? So there was a period of time where you were eager to rate lock these loans. They worked well, but you couldn't get in position. that cost us roughly um you know in my estimation you know two to three hundred million dollars worth of loans that if the rate locked in would have closed now unfortunately rates moved against us so loans that would have worked at four percent or 375 don't work today okay so the question is are they lost are they not lost we have a billion eight pipeline roughly and you have normal fallout. We gave a range based on where interest rates are and where they could be. And our range is a billion and a quarter to a billion and a half. So that number of 250 to 300, what I mentioned earlier, which is interest rate sensitive, is the toggle feature of loans that are in the pipeline that if rates come down, will close. So we think if rates stay, you know, 425, 420, you know, 420, that will hit 1.2 billion for the quarter, 1.250 billion. If rates migrate down to 4, 390, 380, that 300 million, which was previously on the drawing board for those rates,

which don't make sense because bars have to put cash back in those will only happen if rates come down so that's how we look at it great it's very helpful context i appreciate that um just pivoting uh quickly to distributable income paul when we look at that number And think about the mods and the loans that are picking. I am assuming with the way you report numbers that pick income is included in distributable. And I apologize, I'm bouncing around a lot this morning. If you mention this, how much pick income was there that was reported that is non-cash in the third quarter?

Sure. Good question, Rick, and you're right. We are including the PIC interest on the MODS in distributable earnings because there's a high probability of collecting it and it's timing. To answer your question, for the third quarter, there was $15 million of PIC interest in our numbers, but I want to break that number out for you to give you a little context. So of the $15 million that was pick interest for the quarter, $3 million was related to a group of assets we modified in a prior year that we have substantial guarantees from the equity behind that we feel very, very strong we're going to collect. On top of that, another couple of million dollars of that was MES and PE, which part of our MES and PE product, whenever we're doing MES and PE and we're doing it behind agency, that always has a PIC feature to it. That's just normal cost. So you have a pay and you have a call. The rest of it, which is about $10 million, was related to mods that happened in the first and second and third quarter of this year, with $4 million coming from our third quarter mods and $2 million coming from our second quarter mods, and $4 million coming from our first quarter mods. That's the breakout of the numbers for the third quarter, if that's helpful to you.

It's very helpful. And I'm scanning the second quarter transcript as you were speaking. That $15 million, I can't find the number in the transcript at the moment. Is that comparable to, I think you said, $9 million last quarter?

Yeah. I think it was about 10 million last quarter. That's right. So it's just up a little bit because it's up a little bit because the first quarter mods, I'm sorry, the second quarter mods are fully in the third quarter now because some of them were modded mid-quarter, and then you've got your third quarter mods, and then those third quarter mods will have a bigger impact in the fourth quarter if they were modified late in the third quarter. So you're correct. It's about 10 million. Now it's 15, and then we'll see where it goes going forward. Great. Thank you, guys, for taking my questions today. In addition to that, though, I just want to point out, Rick, that there are a certain amount of loans that we have modded with a pay in accrual that we've chosen not to book the accrual and not track the accrual. And that's a couple of million dollars that's owed to us that's not in these numbers as kind of an offset if we get it.

Okay, great. And actually, Paul, you're going to regret keeping talking because I will ask one last question that occurred to me. Please remind me your policy on REO. We've noticed this differs company to company. Do you realize any loss when you take property REO?

So it depends on what the value is. So the way REO works in the accounting world is you take back an asset. The time you take back the asset, you have to do an appraisal, and you have to allocate the value between land and building. And if you're carrying the loan at X and the appraisal comes in at Y, then you either have a gain or a loss for accounting on your REO. But for us, that gain or loss is X. is not a realized loss until you dispose of the REO asset or gain. Okay.

Got it. Thank you. You're welcome.

And we'll turn now to the light of Jade Ramani with KBW. Please go ahead.

Thank you very much, and really great to get all those answers to pick. Very helpful. I know investors have a lot of questions about that. I wanted to ask on cash flow performance. It dipped in the third quarter. If we exclude timing of agency originations and loan sales, operating cash flow was $68 million, down from $94 million last quarter. I know there's some seasonality. Again, this excludes timing related to the agency business. But it is below the dividend. Typically, you do have a pickup in the fourth quarter. So can you just talk to the cash flow operations outlook and if the dividend you expect to be sustained?

Sure. Let's talk about the cash flow. I don't have the numbers you have in front of you, Jade. I think you're doing it on a quarterly basis. The Q, which was filed this morning, has a nine-month cash flow of $415 million cash from operations if you adjust for the timing of the health of sale loans and adjust for the timing of the changes in other assets and other liabilities. It's at $328 million. The dividend for the nine months would have been $265, so we cover. There are dips and there are increases. Obviously, it depends on cash collection. There are certain loans that, you know, pay historically late, and you get those cash, you know, in the subsequent quarter. But we do feel like we have adequate cash flow from many, many sources to cover the dividend.

Great to hear. Regarding liquidity, How much liquidity do you expect to use of the $600 million to take back the 250 REO that you mentioned you expected? And also, I assume there'll be further modifications.

Yeah, I think that, you know, we're in the thick of it now. You know, as I mentioned, that a lot of these NPLs are very lowly levered relative to the rest of the business we've done, which has impacted our cash. But it's going to be a turning event. You know, there are many loans that we have REO, that we have slated borrowers for, and once you have a slated borrower, you can re-lever those loans up. There are a lot of loans we're seeing dispositions on, and that's pure cash. So at the moment, I think that it'll be somewhat consistent with what we've done. And I think where we are is a pretty good outlook based on being in the bottom of the cycle.

Thank you very much. I also wanted to ask about loan putbacks from the GSEs. I think one of your competitors has had putbacks and another made some disclosure, but I don't believe there's been any disclosure from Arbor. Have you experienced any of that?

No. No, we have not.

Thank you very much. Lastly, just because investors asked about it, is there any comment or update you could provide regarding the DOJ inquiry that was reported?

No, we've covered everything in our remarks before. As we've said, we don't comment on it. Thank you.

Next, we'll go to Crispin Love with Piper Sandler. Please go ahead.

Thank you. Good morning, everyone. You mentioned in the prepared remarks that now could be the time to start ramping up the bridge lending program. So just looking at this quarter, originations are down to around $15 million or so, which have come down in this environment, which completely makes sense. But they were $100 million in early 2023 and significantly higher than that previously. So curious on what you're seeing right now, how the demand is from borrowers right now. Just how some of those conversations are going and how you might expect originations to trend down the bridge side. Thank you.

So, I think what we're looking at, to some degree, is a lot of the loans with construction loans, which are getting CMOs and lease help, we kind of like that business. And that's where we're putting a lot of our attention. I mean, the math didn't work for me before when spreads were you know 400 over a 450 and sulfur was a five and a quarter and people had to buy caps and their costs were enormous spreads and we just did a bunch of loans at 275 over um and you know sulfur was lower and cap costs were substantially lower so i think we closed about 80 million and we have another i would say that you know i'd like to see about three to four hundred million um closed on the bridge lending side between now and year end and then ramp up that pipeline um we're also going to continue to do the the built around the construction lending so you have to look at it in its totality um in addition we are putting a lot of money out on the prep and mes And that's been a, you know, 14% business, and that's been a very attractive business. So we have a lot of flexibility here in terms of, you know, where we want to put our capital. But with the securitization market returning and with rates on the short end going down, you know, we think that will be more viable.

All right, thanks. I just want to make sure I got that. Did you say that you'd expect 300 to 400 million abridged originations between now and year end? About $300 million is what we're expecting.

We did $84 million in October, as Ivan referenced, and then we had $240 million of funding in the third quarter from our SFR business, which, as we had in our prepared remarks, our committed volume is very, very high. So we've got $1.8 billion outstanding on our balance sheet in that business, and that continues to fund up. So we do expect that to ramp up. and plus we did $84 million already, and hopefully we'll do a couple hundred million more by the end of the year. That's kind of the way we're looking at it in the different product lines. On top of that, as Ivan said, we're active in the construction lending side. We did our first deal, $47 million this quarter. Again, that funds over time, so it'll take time to fund, but we could have a few more committed volumes closed by the end of the year on that. I think it will be impacted if you see – Short-term rates come down 50 basis points. I think that business will see a lot of growth, and the first quarter could be very substantial if that moves in the right direction.

Great. Thank you. I appreciate all that, Claire. And then just one last question for me. Just curious on your confidence in the current dividend level. You've been covering it with DE. DE has softened a little bit. It seems like there could be some near-term pressure there, but kind of more confidence as you look out 10 to 12 months, as you said. So just curious on how you and the board are feeling about the current 43 cents dividend in the environment right now. Thank you.

So, you know, we have a pretty diversified business and very resilient business. And There are a lot of things that go up and down in our business. You know, clearly, you know, if rates come down a little bit on the 10-year side, you'll see a dramatic growth in the agency business, which produces a substantial amount of revenue. On the other side, we'll see a little bit of decline on our escrow balances. So they kind of offset each other. If rates do come down, I think you'll see the NPL's resolutions know really um you know really decline and that will be a great contributor to the way our our future income comes um so so those are the kind of factors that that we'll look at very strong so there's some b some offsets some benefits and some negatives um so i i think we're in a pretty good position based on where rates are today but if rates continue to decline i think you can see you know a little bit more optimism on those numbers even though there'll be a decline on interest earning escrows now also keep in mind the securitization market has come roaring back and there'll be a lot of efficiencies on our borrowing costs um if we do decide to issue uh $250 over to $275 over. I think the securitization market, you can see $50 to $75 basis points of improvement on our borrowing costs waiting and looking at. And Christmas, Paul, I haven't laid out all the macro different scenarios of what goes up and what goes down. And you and I have talked about this in the past. Timing is never perfect, right? Some things may go down earlier and stuff goes up. But the way we look at it, the way the company and the board looks at the dividend is the you look at it more of a long term you don't look at one or two quarters at the bottom of the cycle so we're confident we have things that will offset um it could be over a period of time um but we're real confident where we are today that over a longer period of time um that's sustainable great thank you i appreciate you both take my questions

And ladies and gentlemen, that will conclude today's question and answer session. I'd like to turn the floor back over to Ivan Kaufman for any additional or closing comments.

I just want to thank everybody for their participation. This has definitely been, you know, a very challenging time for us and most people in the industry. I think we've outperformed our peers, and I really appreciate your support and your commitment for the company. Thank you, everybody.

Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time and have a wonderful rest of your day.