Arbor Realty Trust

to all sites on hold. We do appreciate your patience and ask that you continue to stand by. to all sites on hold. We do appreciate your patience and ask that you continue to stand by.

Please stand by. Your program is about to begin.

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

Okay, thank you, Madison. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 2024. With me on call today is Ivan Kauffman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed followed-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 beliefs, assumptions, and expectations of our future performance, taking into account the information that's currently available to us, Factors that could cause actual results to differ materially from Arbor's expectations in these followed-looking statements are detailed in our NCC reports. This is a caution not to place undue reliance on these followed-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these followed-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'm now turning the call over to Arbor's President and CEO, Ivan Kauffman. Thank you, Paul. Thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had a solid fourth quarter, closed out 2024. That's another very strong year despite an extremely challenging environment. We've executed our business plan very effectively and in line with our expectations. And despite tremendously volatile and elevated interest rate environment for almost three years now, we've managed to continue to help all our peers in every major financial category, including our dividend, shareholder return, and book buying preservation. We were well positioned for this location, but as we were going into the cycle, we had a large cushion between our earnings and dividends. We were well capitalized, invested in the right asset class, with the appropriate liability structures. This allowed us to outperform our peers and continue to pay our dividend while mostly all of our peers had to cut their dividends substantially, so multiple times during the cycle and also experience significant book buying erode. One of the guidance we have consistently discussed on our calls is how we felt that this dislocation would persist and result in a much slower recovery if rates remained higher for longer, which is something we were well prepared for. However, rates have not just remained elevated, they have actually increased significantly with the 10-year rise from 360 in September to as high as 480 in January, and now is hovering around 450 with the current outlook suggesting we'll remain at these levels for the near term. This is a material change in the market resulting in a significant headwind set that will affect everybody in the space. These elevated rates are creating a very challenging environment as it relates to agency origination volumes, and where we've experienced success over the last few years in getting bars and transition of fixed rate loans and recaptured deals, we expect that the environment will create a deceleration in this area as well. We have also seen a 100 basis point decrease in SOFR over the last 12 months, which is reducing the earnings on our escrow and cash balances. Additionally, we expect there will be a temporary drag on earnings from the REO assets that we reposition over the next 12 to 24 months, and that I will discuss in later detail. However, this will partially be offset by efficiencies we expect to generate from the new sub-bond costs in the securitization market and with our commercial banks, as well as growth in our service support portfolio. As a result of these changing macroeconomic events, we are revising our earnings outlook for the foreseeable future until we see improvements in the rate environment. Based on these factors, we are now estimating our earnings for 2025 will be in the range of 30 to 35 cents a quarter and will likely reset our dividends starting in the first quarter of this year in accordance with this new guidance. This outlook is reflective of the newly elevated rate environment. However, if there is a material change in short-term or long-term rates in the future, we will revise our outlook accordingly. It is important to note that we are the only firm in our peer group to set our dividend, to grow our dividend over the last five years by 43 percent, while every other company in our space has cut their dividends several times by 40 percent on average, with only one company keeping their dividend flat in the last five years. And we assume that we reset our dividend to the midpoint of our new earnings guidance. Our dividend will be approximately 8 percent, which again is compared to our peers who are down an average of 40 percent. Additionally, over the last five years, we have also grown our book value by 26 percent while recording significant reserves, which is an incredible accomplishment, especially considering that our peers actually experience a 25 percent perosia in their book values. We have done a very effective job, despite elevated rates, of working through our loan portfolio by getting borrowers to recap the deals and purchase interest rate caps. In 2024, we were able to successfully modify 4.1 billion loans, with borrowers committed to inject 130 million of additional capital into their deals. We also modified another 600 million of loans in 2023, bringing our total loan modifications over the last two years to 4.7 billion, or roughly 60 percent of the remaining legacy loan book. This is tremendous progress, especially in light of the elevated rate environment that has resulted in the large portion of our loan book being successfully repositioned and performing access within its collateral bias. We have also done an exceptional job of bringing in new sponsors to take over assets, either consensually or through foreclosure. In fact, in the last two years, we have brought in new sponsors to recap deals with substantial new equity on approximately 900 million of loans. This is a very important strategy that again successfully repositions assets with the appropriate capital, putting our loans in a much more secure position with experienced sponsors and creates more predictable future income streams. And again, are reflective of us recording the appropriate level of reserves on these expressed assets. And despite elevated rates, we also generated strong runoff over the last two years, with 3.4 billion of runoff in 2023 and 2.7 billion of 2024. An amazing accomplishment. We also continue to make strong progress despite the unprecedented move up in rates on the approximately 1 billion of loans that were passed through at September 30th. In the fourth quarter, we successfully modified 140 million of these loans, generated 151 million of payoffs, and took back approximately 120 million of REO assets, all of which we were able to bring in new sponsors to operate and to survive debt. This is strong progress in one quarter and has reduced the 944 million of delinquencies we had at September 30th down to 534 million at December 34th or 44% decrease. We did experience additional delinquencies during the quarter, approximately 286 million, and we were able to bring that total delinquencies at December 31st to approximately 819 million, which is down 13% in the quarter and down 22% from our peak, which is in line with our previous guidance, even in the face of rising interest rates. And our plans for resolving that remaining delinquencies take back as REO included bringing in new sponsorships, approximately 40 to 50% of this quarter, with the other 40% of 40 to 50% of these payoffs being modified in the future. This should put our REO assets on our balance sheet in a range of 400 to 500 million dollars, with another roughly 150 to 200 million that we will have brought in new sponsorship to operate. And this 400 to 500 million of REO assets will be on the heavy lifting portion of our loan book that we estimate will take approximately 12 to 24 months to reposition. The performance of these assets has been greatly affected by poor management and from being undercapitalized. Today, these properties have an average occupancy of 35% and an estimated NOI of around 7 million, which is very low and will temporarily affect our earnings. We believe there's great economic occupancy for us to step in and reposition these assets, and significantly more of the occupancy is around 90%, and NOI to approximately 30 million over the next 12 to 24 months, which will increase our future earnings significantly. We are working exceptionally hard to resolve another delinquency, which, as I mentioned, has been significantly affected by the current rate environment. If rates come down sooner, then we expect it will have a positive impact on our ability to convert non-interest earnings assets to income producing investments earlier, which will be creative for our future earnings. This is a challenging and demanding work, and despite these increasing headlines, I am very pleased with the progress we have made to date. In our balance sheet lending platform, we have had an active fourth quarter originating 370 million of new bridge walls and 36 million of preferred equity investors behind our agency originations. As we said in our last call, we have started to ramp up our bridge lending program to take advantage of the opportunities we are seeing in today's market to originate high-quality short-term bridge walls and generate strong revenue returns on our capital in the short term while continuing to build up a significant pipeline of future agency deals, which is a critical part of our strategy. Depending on the rate environment, we believe we can originate $1.5 to $2 billion of bridge walls in 2025 and enhance our level of returns, which is a good thing we are seeing in the securitization model with our commercial banks. Another major component of our unique business model is our capital light agency platform, which provides a strategic advantage allowing us to

continue

to deal in our balance sheet and generate significant long-dated income streams, which is a key part of our business strategy. We have been a significant player in the agency business for 20 years and now have been a top-end, any May dust lender for 18 years in a row, coming in at number 6 in 2023 and an 8 for 2024. We had a very strong fourth quarter originating 1.35 billion of new agency laws, which as you remember was the top-end of the range that we guided in our last quarter's call. We explained that our origination targets were 1.2 to 1.5 billion of Q3 or Q4 depending on the rate environment. And despite the significant uptick in rates in the fourth quarter, we were well above what we had anticipated. We still managed to produce very strong volumes. We closed out 2020 forward 4.3 billion of GSC agency volume, despite a volatile rate environment throughout the year. With rates where they are today, we expect we are experiencing a very challenging origination climate. And if they continue to remain elevated, it's likely going to follow results in a 10 to 20 percent decline in our agency production in 2025 to a range of 3.5 to 4 billion, which will again be very trade dependent. We also did a good job converting our balance sheet loans into agency products in 2024 despite elevated rates. In the fourth quarter, we generated 900 million of payoffs and 530 million or 59 percent of these loans being refinanced into fixed rate agency deals for the full year 2024. We recaptured 65 percent or 1.6 billion of the 2.5 billion of all the family balance sheet runoff into agency production. This is on top of the 3 billion of multi-family runoff we generated in 2023 with a 56 percent recapture rate into agency loans. And as I stated earlier, with rates at these levels, it has certainly become more challenging for borrowers to obtain an agency takeout on our balance sheet loans. We continue to do an excellent job in growing our single family rental business. We had a strong quarter with 1.7 billion in new loans in 2024, which is our best year yet, and was well above our 2023 production of 1.2 billion. We have now equipped 5 billion of production in this platform today and we are very excited about the opportunities we're seeing to continue to grow this platform and make it a bigger contributor to our overall business. This is a great business as it offers us free terms on our capital through construction, bridge, and permanent lending opportunities, generates strong leaven returns in the short term, while providing significant long-term benefits by further diversifying our income streams. We will also continue to make staying progress on our newly added construction lending business. We believe this product is very appropriate for our platform, has offers free terms on our capital for construction, bridge, and permanent agency lending opportunities, and generates mint, high taint returns on our capital. We close our first deal in the third quarter for 47 million, a second deal in the fourth quarter for 54 million. We have a long timeline with roughly 200 million on our application, another 200 million in our allies, and another 100 million additional deals with our college trainings. And based on our deal flow, we are confident in our ability to originate between 250 to 500 million of this business in 2025. In summary, we had a strong 2024, once again, significantly outperforming our peers. We've executed our business plan very effectively and aligned with our objectives. Clearly the landscape has shifted significantly in the last 90 days and we expect there to be a substantial headwinds in the future. We do believe we will have some positive offsets from reduced bar across our bank line and greater efficiencies in the securitization market as well as we continue to fund up our bridge as a foreign construction lending business, which generates strong leverage on our capital. Additionally, a short-term and long-term rate decline further will mitigate some of the hedge money and current lay experiments and increase our future earnings. In the meantime, we will remain heavily focused on working through and managing our loan board while continuing to grow areas above business to increase the many diverse counter-civilic oil companies we've developed. We have a very seasoned experience management team that has operated effectively from multiple cycles, inter-workers with thoughts of the balance of the site with the location, and are confident we will continue our long-standing track record of being a top performer in this space. I will now turn the call over to Paul to take you through the financial results. Thank you, Ivan. We have a strong fourth quarter and full year of 2024, producing distributed earnings of $81.6 million or $0.40 per share for the fourth quarter and $1.74 for the year, which translates into ROEs of approximately 14% in 2024. As Ivan mentioned, due to the drastic change in the macroeconomic climate, adjusting our forecast of distributed earnings for 2025 to 30 to 35 cents per quarter. The elite rates have played a big factor in the value of earnings outlook, and future changes in the interest rate environment will more certainly dictate whether we can grow our earnings sooner than planned. We've also been affected by elevated legal and consulting fees as a direct result of the short-sale reports, which is something we expect will continue for the foreseeable future. We estimate these fees will be approximately $0.03 to $0.05 a share going forward, which is reflective in our new guidance. In the fourth quarter, we modified another 15 loans totaling $470 million. With approximately $206 million in these loans, we required borrowers to invest additional capital to recap their yields, thus providing some form of temporary rate relief for paying the full feature. The pay rates were modified and averaged to approximately 5.5%, with .3% of the residual interest due being deferred until maturity. $140 million of these loans, with the link with last quarter, are now current in accordance with their modified terms. In the fourth quarter, we accrued $18.7 million of interest related to all modifications to pay and approval features. $7.6 million is related to modifications that were completed in years prior to 2024, and $1 million is on MEDS and PE loans originated in 2024 behind agency loans that have obtained approval feature as part of their normal structure. This leaves $10 million worth of accrued interest in the fourth quarter related to modifications of grid loans in 2024, $1.5 million of which is related to our fourth quarter modifications. A table summarizing all of our 2023 and 2024 material modifications and the related accrued interest on these loans is detailed in our 10K, which we expect to file later this afternoon. Our total delinquencies are down 13%, $819 million in September 31st, compared to $945 million in September 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 and were not recording interest income on unless we believe the cash would be received. The 60 plus delinquent loans for NPLs were approximately $652 million this quarter compared to $625 million last quarter due to approximately $128 million of loans progressing from less than 60 days delinquent to greater than 60 days past due and $153 million of additional defaulted loans during the quarter, which was largely offset by $134 million of payoffs and modifications and $120 million of loans taken back as REF. The second bucket consisting of loans that are less than 60 days past due came down to $167 million this quarter from $319 million last quarter due to $157 million of modifications that run off, $128 million of loans progressing to greater than 60 days past due, which was partially offset by approximately $133 million of new delinquencies during the quarter. And while we're making good progress in resolving these delinquencies, at the same time we do anticipate that we will continue to experience new delinquencies, especially in this current rate environment. In accordance with our plan of resolving certain delinquent loans, we have foreclosed on some real estate and we expect to take back more over the next few quarters, as I've been guided to earlier. The process of taking control and working to improve these assets and create more of a current income stream takes time, which is even more challenging in this climate. Additionally, we've been very successful over the last few quarters in collecting back interest owed when we would modify certain loans. A good portion of our remaining delinquencies are more of a heavy lift through foreclosure and repositioning over time, which will likely result in less back interest being collected going forward on workouts. These are some of the reasons we're guiding to reduce earnings in the near term. In the fourth quarter, we took back 120 million of REO assets. We've been highly successful at bringing in new sponsors on certain assets to take over the real estate and assume our debt. This strategy is a very effective tool at turning debt capital and the non-performing loan into an interest earning asset, which will increase our future earnings. In the fourth quarter, we accomplished this on two REO assets totaling about $70 million, which we're accounting for as sales and new loans. The other $51 million of REO is related to one asset that we took back in the fourth quarter that we subsequently decided to flip to a new sponsor and provided a loan. We closed on this deal yesterday and the purchase price was at our net carry value of $45 million, which is net of $5.7 million in specific reserves that we took on this asset in 23 and 24. As a result, we will have a one-time realized loss in the first quarter of approximately $6 million, which we've already reserved for and is reflected in our book value. We will now have a performing loan, which will add to our run rate of income. We believe we've done a very effective job of properly reserving for our assets over the last two years. We did not incur any material losses in 2024. We are expecting to have some realized losses in 2025 through similar executions on REO assets and by repositioning certain loans with new sponsors, which we expect will be in line with our prior reserves on these assets. The timing and magnitude of these losses is hard to predict at this point, but once we know a transaction is likely to occur, we will continue to signal that result ahead of time if possible. And again, please keep in mind that these potential losses reflect the reserves we've already taken, which demonstrates how prudent we've been in recording the right level of reserves on our loan book. As a result of this environment, we continue to build our CISO reserves, recording an additional $13 million in specific reserves on our balance sheet loan book in the fourth quarter. And again, we feel we've done a good job of putting the right level of reserves in our assets, which is evident by transactions we have been able to effectuate to date at or around our carrying values net of reserves. It's also important to emphasize that despite booking approximately $170 million in CISO reserves across our platform in the last two years, $135 million of which was in our balance sheet business, we saw a very nominal decrease in book value of around 2 percent. Our peers experienced an average book value decline of approximately 20 percent over that same time period. Additionally, we are one of the only companies in our space that has seen significant book value appreciation over the last five years with 26 percent growth during that time period versus our peers whose book values have actually declined an average of approximately 25 percent. In our agency business, we had the exceptional fourth quarter despite headwinds from higher rates. We produced $1.4 million in origination and $1.3 million in loan sales with very strong margins of 1.75 percent for the fourth quarter compared to 1.67 percent last quarter. We were also incredibly pleased with the margin to be generated in 2024 of 1.63 percent, which exceeds 2023's pace of 1.48 percent by 10 percent. And we recorded $13.3 million of mortgage servicing rights income related to $1.35 billion of committed loans in the fourth quarter representing an average MSR rate of around 1 percent, which is down from 1.25 percent last quarter to a higher mix of Freddie Mac loans in the fourth quarter which contain low servicing fees. A fee-based servicing portfolio also grew 8 percent -over-year to approximately $33.5 billion December 31st 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 income going forward of around $127 million gross annually. As Ivan mentioned earlier, the 100 basis point decline in short-term rates has reduced the earnings on our cash and escrow balances. We are now at a run rate of between $80 and $85 million at $1.125 compared to approximately $120 million that we earned in 2024 for a $35 to $40 million reduction which will affect our 2025 earnings. In our balance sheet lending operation, our $11.3 billion investment portfolio has an all-in yield of 7.8 percent December 31st compared to 8.16 percent at September 30th mainly due to a decrease in sulfur during the quarter. The average balance in our core investments was $11.5 billion this quarter compared to $11.8 billion last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield of these assets decreased to 8.52 percent from 9.04 percent last quarter mainly due to a reduction in sulfur which was partially offset by more back interest collected in the fourth quarter on loan modifications and pay downs. Total debt on our core assets decreased to approximately $9.5 billion December 31st from $10 billion September 30th mostly due to paying down CLO debt with cash in those vehicles in the fourth quarter. The all-in cost of debt was down to approximately 6.88 percent at December 31st versus 7.18 percent at September 30th mostly due to a reduction in sulfur which was partially offset by a lower rate debt tranches being paid down from CLO runoff and a new $100 million unsecured debt instrument being imposed in the fourth quarter. The average balance on our debt facilities was down to approximately $9.7 billion for the fourth quarter compared to $10.1 billion last quarter mainly due to pay downs in our CLO vehicles from runoff in the fourth quarter. And the average cost of funds on our debt facilities was 7.10 percent in the fourth quarter compared to 7.58 percent in the third quarter again from the decline in sulfur. Our overall net interest spreads on our core assets was relatively flat at 1.42 percent this quarter versus 1.46 percent last quarter. And our overall spot net interest spreads were 0.92 percent December 31st and 0.98 percent September 30th. And lastly and very significantly we managed to de-lever our business 30 percent during this dislocation to a leverage ratio of 2.8 to 1 from a peak of around 4.0 to 1 two years ago. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. Bye, everyone.

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

Good morning, Ivan and Paul. Thanks for taking the question. And look, for starters, just really appreciate you guys being up front with us today about your expectations for the dividend in 2025. It's just a lot easier for the market to hear that today than, you know, in March when you have to declare first quarter. So thank you for that clarity. Ivan, you talked about some resolutions involving outside money. I'm curious, you know, this opportunity that starts with your stress bridge loans and eventually just it rolls into REO. So I think we're talking about the same investment opportunity. Are you seeing institutional money, you know, cut big money, fresh money, looking at this space, you know, as a unique maybe once in a decade opportunity? Is that money coming in? And if it's not coming in, you know, do we do we need that to get this problem cleaned up in the next one to two years? Thank you. So I'm going to bifurcate my response because you have and add a little color to it. Number one, in the third quarter, fourth quarter, when the tenure and the five years considerably, you were seeing a real level of activity reentering the space. And then right prior to the election, you know, the tenure jumped from 360 to 480. I think everything went on pause. There's a bit of a pause period, but there are two types of collateral that we're looking at. I mentioned in my comments, the ones that we effectively transitioned to these sponsors. There's a lot of demand for that and there is plenty of capital and plenty of entrepreneurial capital for that. A lot of it is people with access to institutional money or network, but they're all networked. And there's plenty of activity every time we have an asset. The more difficult part is the ones where the heavy lift areas, which is kind of where it takes time to get your hands on those assets. Sponsors are kind of rascals. They steal the cash flow, don't manage those assets, and they get brought down to a level where we need to bring in our own capability, get those up to speed. Once they're up to speed, there'll be a lot of demand. But I think there's a little bit of a pause in the market and that's really reflective of our comments. I'm not sure why everybody's so excited. I went to NMHC about a month and a month and a half ago and I was shocked at how people were thinking they're going to have a great year in light of the increased rate environment. So I think a lot will have to do with where rates settle in. Clearly we're all running on $250. If you see rates go down to where they were, you'll see tons of money flood back into space and obviously we've had some of our experience on our last quarter's call where the refinance volumes and the activity was stock and pickup. So it's already much greater than it was in my opinion. So I'm hearing you say the outside money right now as you sit today, you rework a bridge loan and there's new sponsors. There's people willing to step in there. The heavier lift, if you've got an REO, 30% lease, needs further renovation, whatever, that's something you feel like your team at Arbor is better equipped to take that property over, manage the property and then look to sell that property in 12 to 24 months. Am I hearing you clear on that? That's correct. Every time we get our hands on it, these are the ones where it's more difficult to get your hands on, as I said, these sponsors are bad players in the market using the legal system to delay the process, to steal the cash flow and manage the assets. So every single asset that we take back, as we're taking it back, we have a 24-month plan. We're able to really show how we can get it from where it is today, monthly, monthly, monthly, increase the annual life, put in the right capex, get the stuff to speed. And I'm guessing we're going to be able to sell those assets somewhere between 12 and 24 months for great valuation once we stabilize it. Okay, thanks. Paul, a quick one for you to close out. In December, STICH upgraded Arbor's primary servicing rating

to

CPS2+.

It looks like a large focus of that was on your agency servicing. But to any extent did that servicing upgrade reflect the work you were doing

on the bridge loans in your CLOs? I don't have the definitive answer, but I do believe you are correct, Steve, that the majority of that rating is not all that has to do with how we're servicing the agency book. It may have some impact with the balancing book, but we were just upgraded because of the quality of servicing shop we have. We've made a lot of investment in that division, both from a technology perspective and staffing perspective. And our rating just keeps getting better and better, which I think should not be overlooked, as you just mentioned. I'm glad you pointed that out. Steve, getting back to your comment that was just reflected on in terms of the assets, we tried very well the assets that we put to the sponsors. And the level of improvement is remarkable. You're taking assets that were probably having occupancy in the mid-70s, they're well on their way to 90s. The cosmetics and the improvements are remarkable. So when we're able to transition to new ownership, we end up with an asset that becomes extremely more valuable in a very, very short period of time. Because we're able to bring our expertise to the table with that expertise and capital we're lacking. But the stuff that we retain, our goal is to get these assets in that position in 12, 18 months, 24, whatever it is, and then bring in those sponsors so we can get the right valuations. The more flexible we think the clients are, we have a great track record on it. In fact, we had a long-term back two years ago, which was 70% occupied. We're just selling it right now for probably closer to more than the debt. We've got the occupancy up to 93% and almost where it needs to be. So that's kind of standard for how we run our business. Thank you both for the call this morning. Thanks, Steve.

Thank you. And we will take our next question from Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning. I wanted to touch on modifications from last year. I think it was around $4 billion, a lot of which was done in the early part of the year, maybe when borrowers and everybody had a different interest rate outlook. Can you talk about how you expect those modified loans to perform over 25? Were those modifications, how many were somewhat reliant on some relief from rates over the course of 25? And how do you expect, you know, are those modifications typically 12 or six-month duration extensions? Or how do we think about those modified loans maturing over the course of this year?

I think it's important to have a little bit of an overall view. Keep in mind that we have run off in our portfolio over the last two years of almost $6.1 billion, and that's either through refinance or sale or all the people taking them out. So the amount has been dramatic. With respect to the modified loans, keep in mind, grid sales are short-term loans of nature. And they have a lot of tests, so it's very, very normal to modify a loan in this kind of rate environment and give people a little bit more runway to take a bit more capital. There was a period of time when sulfur was sitting at 530 when it dropped. It was a lot of relief for bars who were out buying caps and their lifeline to give them more opportunity. So when we look at a modification of a loan, we take a look at whether the sponsor could bring more capital, the sponsor doing a good job, and whether he has a capability to improve the performance of those assets. And the majority of those times, the supermajority of times, we track their performance and doing extremely well. There were periods of time when they don't quite do what they're supposed to do, and they could resolve an additional problem with these and take backs. But on the whole, the strategy has been extremely effective in terms of improving the performance of those collateral. Keep in mind that almost all our loans have recourse provisions with multiple sponsors. So it's not like people could just hand back the keys as an alternative. They are already in put position where they have to bring capital to the table. And there are many circumstances where we do take over ownership. We still have access to those personal financials and judgments as well. So our goal is always to improve the collateral, get into a better position, specifically in markets that are experiencing a little bit of softness or delays in courts and things of that nature. So for the most part, we have seen tremendous improvement in the analysis of

the

properties that

we

want

to find. Appreciate the comments there. And Paul, could you touch on the servicing SRO balances? Again, I think you said $80 million to $85 million, but I want to make sure I understand the new level we should think about and kind of what's driving the change and what the components are driving

that reduction. Sure. So when I speak of earnings on our SROs and cash, it's two components. We lump it into one, but we can break it out. So we're sitting with a billion and five of SRO balances right now. And we have a year end, we have about $500 million of cash between cash on hand and cash in the CLOs. So that's pulling $2 billion. And right now SOFR is at under $4.30. We're earning slightly below that, probably about $4.15 is what we're earning currently. So if you take that $2 billion and multiply it by $4.15, you're probably at $85 million both in earnings on the cash that we have on our balance sheet and in the vehicles and on our SROs. Last year we earned $120 million between earnings on SROs and earnings on cash for two reasons. One, SOFR was higher throughout the year. And remember SOFR has been dropping, so the full effect of the drop in SOFR is not in the 24 numbers. It will be in the 25 numbers. And our cash has come down obviously as we use some of our cash to run our business. So that's the two components that are driving the 120 versus the 85. The one thing I will say is that's a number and that's math. The one thing I'll say that will partially offset that is we are expecting, even though we're guiding to lower agency volume today, if rates stay where they are, we still believe our agency volume will eclipse our runoff in the agency business. So we will have some growth in the servicing portfolio that will partially offset that. But that's the math. Great. I think I want to add slightly and reflect on a comment that I've given you before. We experienced $3.4 billion runoff in 2024. That was a certain interest rate environment that existed. In today's interest rate environment, we're forecasting it to remain at this 450 level to 475 or 480 level. Numbers will be more like one and a half. However, if we go back to the interest rate environment that we had, we'll revise up our numbers of runoff to about $3 billion. That's a material difference. And that material difference will result in a real rise in our agency business as well. So our outlook is really reflected in this elevated interest rate environment and how it impacts our business. And we would see a similar run rate as we did last year if rates go back to where they were. And the real reflection point is really going to be the five and the ten year. If we see the ten year and the five year get back around that 4% level, you'll see the same trend that we were seeing in the third quarter and fourth quarter. We were experiencing a rich nation's runoff. And Steve, one of the things I want to add is we were obviously very aware SOFA was dropping and we knew it would have an impact on our escrow and cash. But I think the real fundamental change over the last 90 days that was a little bit surprising to us, and we talked about this on Prior Falls, we knew, and you can look at our filings, it shows what the shock would be if rates go down or up on our cash and escrows and our portfolio. But we thought there would be a pretty big offset in the fact that the ten year would be low and we'd have significantly more origination volume on the agency side. That is not happening right now. It may change, as I've said, with the rates. But that's the big change. So it's not a surprise to us that escrows and cash earnings go down with SOFA dropping. But we also thought we'd have a lower ten year, which is where we were last quarter, and we'd have a much more robust origination platform to offset that.

Yep. Yep. Appreciate the comments on that. And one last question regarding a new dividend level being determined. You know, I know the 30 to 35 cent guide for quarterly distributive earnings. You know, are you going to base the dividend on that or will you look at kind of distributive earnings less pick income and think about the dividend closer to a cash earnings level? How do we think about or how will you and the board think about determining that new dividend level? Thank you.

Yeah. So I think we will look at it as distributable with pick. But again, we adjust as we go. Right. Just to give an example, we've modified 4.7 billion of loans in the last two years, as Ivan said in his commentary. Two point four billion of those have pain and cold features. But we're only improving on one point seven billion of them. So there's another five hundred million that we've decided not to accrue on. So we make decisions as we go along and we adjust as we go along on whether we think we still should be accruing this or not based on value. But the ones we are accruing, we feel really confident we're going to receive. So we have those in distributive earnings. But again, none of this has been decided yet with the board. We need to see what we've done today is give you as of today where we think the short term guidance would be. We need to see where the first quarter comes in. We need to see a couple of more months of this market. And by May, when we're on our first quarter call, we'll have three months in the books and another month of market data. And we will base our dividend on what we think it looks like going forward, not just for one quarter. So we'll look at it out 12 months and we'll say, where do we think we get it to and where are we comfortable today? Which is just a guide of a range of what we're seeing right now. I mean, just to give you a concept, we're sitting with a billion dollar worth of bonds in our pipeline that are interest rate sensitive. That can't close unless the 10-year drops to the four to four and quarter range. So I'm a guy that couldn't change to the upside with the change in interest rates. But to be realistic, we don't want to mislead anybody. That's right. We want to take into consideration where this new elevator range may stay. There's huge volatility with the election, as we know. And it seems like we're in a range, whether it be a quarter, two quarters, three quarters, or four quarters, we're not sure. We'll adjust accordingly. But we think we're just responsible by laying out where this current interest rate environment is, which is different than where it's been, how that affects our business. That makes sense. Appreciate the comments this morning. Thank you.

Thanks,

Steve.

Thank you. And we will take our next question from Leon Cooperman with the Omega Family Office. Please go ahead.

I missed most of his call because I had a conflict with another company. I jumped off their call. But, you know, unless there's something said differently, let me just say that I think that you guys have done a terrific job in managing through a difficult environment. And I personally am offended by the cost of dealing with these short sellers. You know, because I think you've been extremely transparent in your dealings with the investors. No surprises here. I think you've done a very good job of navigating the environment. But let me ask you some questions rather than give you a shout out. What's your confidence in your book value? Number one. And secondly, were you willing to use liquidity to buy back liquidity if it drops below the state of book value? And what kind of return do you think you should earn on a recurring basis on your book in a normal environment?

So relative to what I am glad you asked that question because we've had a tremendous success and track record in terms of taking distressed loans, bringing in new sponsors, and either having proper reserves or even taking back a little bit. So we're really comfortable with it. We modify our loans, which are always loans which have the biggest highlight on them. We're forced by a county for any major modifications or reappraisals. Based on those reappraisals, we're forced to take whatever reserves are necessary. We've been right on the mark. So I'm extraordinarily comfortable with the reserves that we've taken. But the track record speaks for itself. Paul, you want to address something? Yeah, I just think the book value where it is today, Lee, if the market stays where it is today, we may have to take some more level of reserves on certain assets as we move through this higher for longer scenario. And it may ding book value a little bit. But we don't think it will be material because we think we have provided the right level of reserves to date. So I think it could go down a little bit, but I don't think it goes down significantly. I think the thing in our track record has been that it has moved down significantly over the last two years in a very difficult market. As far as returns on equity, I think it depends on where we set our dividend. But if you look at our range, on the low end of the range, we're probably 10 or 11 percent. On the high end of the range, we're 12 percent return on equity. I've been given where it is. So we did a 14 for 2024. I think we did similar for 2023. I think 10 to 12 percent is realistic. And I think there's upside on top of that if this market doesn't stay where it is longer than we're expecting. In terms of buying back stock and things of that nature, keep in mind that we have a very, very vibrant business, specifically on the SFR side, generating outside returns. We have to fund that business. We have to fund the condition. We're expected to do $1.5 to $2 billion of bridge loans. So we have a $5 billion worth of growth business, which is important to us. Surely we'll have about a billion and five of runoff. And we'll use some capital to not run off. But we have to be sensitive to keep our business growing. We've done an outstanding job of that. And that's where our focus is going to be, to heal returns on a new business. In the mid-teens, which is very creative business we're doing. So we'll continue to focus on growing our business. And then, of course, managing some of the legacy

issues we have. What does it mean? If the stock got down to $10, $11, you would not buy it?

It would be a strong possibility. I think what you have to do is if you ask me if I would buy it, listen to what I say and watch what I do. So I've always been very forward in covering my own actions. I'm the largest shareholder of the REIT. And if there's an opportunity if the stock drops, you will see me and I'm sure plenty of management be active in the spot and in the stock.

Well, good luck and congratulations. You've done a very good job in the short sales of your shaggy sales. So better understanding the quality of the earnings and quality of the management.

Well, you know, Leon, you said a lot more than I could usually say about the short sellers. But anyone who cares to take the time can look up the history and the problems of the short sellers and their founders. And, you know, they can look at them and see the issues they've had with the regulators and the courts around the world. And they can take their comments for what they're worth. You've done your research. I've done mine. And we'll make our investments in quarterly.

Well, good luck. Thank you very much. Appreciate your performance. Thank you.

And we will take our next question from Rick Shane with JP Morgan. Please go ahead.

Hey, guys, thanks for taking my questions this morning. I sort of two lines. First, a little housekeeping. Paul, you mentioned 500 million dollars of non-accruing loans. Can we just go through in the 30 to 35 cent guidance? What's the drag from non-accruals? What's the contribution from PIC? And was the three to five cents that you cited for legal and regulatory quarterly? And can you help us sort of understand the context of that expense?

Yeah, no. So the three to five cents is annually. You know, we've run probably two cents to two and a half cents already in 2024. And we're expecting that number will just be the same number, but for a longer period of time because it really wasn't wrapping up until the second quarter. So I would say that it's three to five cents for the year on the cost between consulting, legal, administrative, related to the short sellers if it continues. That's our view. And then, you know, as far as the drag on earnings, I think we have $819 million of loans earning zero. What we've commented is that we do think in this environment we'll resolve some and we'll have some new ones. I think our track record has been that we still think even in this rate environment, we'll be able to make progress in the 10% range. We did 13% this quarter, which we were impressed with. But it will also impact us on the REO side because I think the big temporary drag, Rick, is that, as Ivan alluded to, we already took back 100 million of loans in the first quarter. And we have 50 million on our books right now that aren't legacy. We have 100. To look at the numbers, we have 176 million in REO on our balance sheet. 45 million is a loan we flipped yesterday that I mentioned. So now you're down to 131. 80 million of that are legacy assets we've had on our books before the crisis. And we're working through to try to dispose of them. So about 50 to 55 is due for this crisis. We took back another 100 in January already. So we're up to 150. And as Ivan said, we're probably going to end up between 400 and 500 million. So the drag is that 400 to 500 million has an NOI of about 7 million, but certainly not nearly what it would have been had it been paying a current interest rate. And then that's going to be temporary until we can reposition those assets. And then hopefully we'll have a significant upside in the future. But that's probably 24 months out. So I think the drags from where we are now to where we're guiding to 30, 35 cents are these are the components. Reduced agency origination volumes, which obviously hit earnings, right? The full effect of SOFR on your escrows and your cash balances offset slightly by servicing. The full effect of the delinquencies for a longer period of time than they've been outstanding and the drag in the REO assets. Will we have some positive offsets? Yes. We'll probably be largely more efficient through the securitization markets. And obviously if rates change, we can pick up volumes and have a better performance on our assets. But those are kind of the

components. And how much of the quarterly 30 to 35 cents is from PIC?

I don't have those numbers here, but I would say it's probably going to be similar to what we've had. It's probably 10 to 15 million a quarter.

OK, great. Thank you. And then pivoting, that was sort of the housekeeping stuff. In the quarter, you guys did 35, almost $36 million of preps and mezz 97 for the year. Are those part of, is that loans on outside investments opportunistically or is that related to the structured portfolio where you're providing additional capital to existing borrowers? And I'd love to relate that to some extent to the $130 million of capital contributed on the mods during the year.

Yeah, so I think they're a little different. We may be combining concepts. But so the 97 million that you referred to, if not all, the vast majority are not new investment opportunities there. Preps and mezz were putting behind agency loans that are keeping taking off our balance sheet. So what happens? The guy has a balance sheet loan and he wants to convert it to a fixed rate loan. And depending where rates are, he'll come to the table, give a short capital because of the restrictions and the agencies on the debt cover and the LTB. And he'll bring to the table some money and we'll put some money in the form of mezz and PE behind him, which puts us in a better spot, right? Because if we were 80% LTB on a bridge loan, then struggling. And now he has a 70% LTB loan on the agencies. He had a kick in 5%. We had a kick in 5%. Our PE and mezz is behind 70, not behind 80, right? And then they usually get about a 14% return. And then there's a pick on it because you have to have the current pay, has to be a debt cover of like 110 through your mezz and PE. So it's just a calculation of like some of the ones we did this quarter with 9, 10, 11% pay and the rest was picked because we had good coverage to our PE. I wanted to add to that. That's been a long course of this. Yeah,

I really appreciate the clarification on that. It is helpful. And if I can just put it to my very last question. So during the year you guys modded 4.1 billion, you took in 130 million of additional capital associated with that, which equates to about 3%. Can you put that 3% additional capital in the context of what you see the decline in property values? How does that sort of match up in terms of how much property is actually down?

I don't understand your question.

So you had borrowers put in 3% in order to modify loans. And I think anecdotally property values are down substantially more than that. So I'm kind of curious how you think about how much additional capital a borrower needs to put in in order to maintain an LTV.

OK. Every case is different, Rick. Not all properties decline. Some improve the performance. So I can't answer your question in the macro. We take each situation. We evaluate the capital income put in, how the assets perform and how it improves. Each one is

different. OK. Got it. Hey, guys, thanks. I always appreciate you taking my questions. Thank you. Thanks,

Rick. Thank you. And we will take our next question from Jade Ramani with KPW. Please go ahead.

Thank you very much. Can you discuss the lower cash balance in the structure of the business? What drove the quarter on quarter decline? And also, did you experience any margin calls?

Sure. So we did not experience any margin calls. We have great relationships with our lenders. In fact, I would probably give some color that the market for commercial banks and securitizations is really, really strong right now. So maybe it's a good time to comment on that. I'm sure you're aware that the CLO market and the bank lending market has improved dramatically. And those are some of the benefits that will offset some of these other factors. The CLO market, I'm sure you've seen, deals are getting done in the 150 to 175 range as opposed to deals that two years ago couldn't get done and then expressed. We've seen a lot of The commercial banks, our partners and relationships we've had, they've been more and more aggressive at higher advance rates and lower spreads. And these things will translate to better margins for us going forward. It's a lagging effect. It's all beginning over the last couple of months. And as far as the cash balance dropping, it's math, right? We had put on, as you saw, 377 million of bridge in our new product that we love. We funded up our SFR business, which continues to grow. So that requires cash. And obviously the runoff has partially offset that. There's also timing on cash, right? When you are taking back an REO asset, you may have to buy it out of a vehicle and then you re-lever it. So there's always timing on why those cash numbers move. But we're sitting at about 450 million cash in liquidity today. And obviously we've used some of that cash to grow the flashmob.

And then just the agency business cash balance when you break out the different segments, is that more akin to corporate cash? How fungible is that cash?

It's all fungible. The agency business obviously generates cash. It's capital white. And then it gets moved up. It's just the way you break out the segments. But when you look at a company like ours and you're managing cash, all of that cash is fungible. And all of that is corporate cash.

Lastly, just on the GSE side, have you gotten any putbacks? I know JLL closed one. Walker and Dunlop talked about what they've received. It would be helpful to hear if you've received any loan putbacks.

We have not. We have not had a putback or had to buy a back loan.

Thanks a lot.

Thanks. Thank you. And we will take our next question from Crispin Love with Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. First, you had $307 million-plus of bridge originations the fourth quarter, high flow in a long time, in line with your guys from last quarter. Can you speak to expectations going forward in bridge as rates have backed up since September? And then do you have an outlook for agency originations for the first quarter? Thanks.

Yeah. The $370 million of bridge is a good quarter. As I mentioned in my comments, we're expecting to move out one and a half to two billionth of a year. And we expect it to move fairly evenly over the year. I think if short-term rates crop, we can see that number going up considerably. But that's the level that we think it's rated by. And as far as your second part of your question, Crispin, yeah, the reason we've given a 30 to 35-cent kind of guidance per quarter is it won't be linear, right? Certainly the first quarter or two may be on the lower end of that range, and then it will grow from there. And a lot has to do with the fact that the agency business, given where rates are, is off to a slow start. So we're expecting a much lower first quarter in the agencies than we expected to build from there for two reasons. One, historically, the first quarter is usually a slower quarter because a lot of people close all their loans at the end of the year. And two, the backup of rates has put some people on the sidelines. We've got a big pipeline. We've got a lot of loans ready to go. It's just a matter of convincing borrowers to transact at these levels. And a lot of them are still patiently waiting to see where the 10-year goes. So we are expecting the numbers to be much lighter in the first quarter and then hopefully grow from there. What you did see is a strong fourth quarter, not only with Auburn, but all agency vendors and the agencies themselves. And if you look at the comments I had, we would have even done more, but the agencies were backed up. And when rates jumped, we have this huge pipeline sitting on the side. So the first quarter is going to be a little light because so much was done in the fourth quarter. And where the rates are today, there's just a ton sitting on the side of the balance sheet on the pipeline. And if you do see a meaningful move for the 10-year down, you'll see that number increase substantially. Yeah, and it wouldn't be surprising if the agency business for the quarter was, you know, $600 million to $800 million. It all depends on what's going to happen. Great.

Thank you. I appreciate all the color there. And then just last one for me. Can you provide any update on the DOJ SEC investigation from last year? And you mentioned legal fees related to short seller reports and your prepared remarks. Does that also include legal fees related to these investigations as well?

Well, as you know, we don't comment on regulatory inquiries with respect to the elevated costs. We, as you know, go through extensive audits and re-audits. We've had to step up the auditing process, the expense with respect to auditing, compliance and all those kind of factors. So we are working extremely hard. Our auditors are doing their double and triple of what we work. We've had to step up our compliance and all our procedures and processes. So that's what we estimate the costs are going to be for work in this environment.

Thank you. And it appears that we have reached our allotted time for questions. I will now turn the program back to Ivan Kaufman for any additional or closing remarks.

Okay. Well, thank you everybody for your time. We look forward to 2024. We expect next year to be a little different given this current rate environment. We appreciate your participation in the call. I think we'll be raised to hold this call without favor. Things will look a little bit more favorable. However, even with this adjusted interest rate environment, we still expect our performance to be extremely strong. And now from all of you in this space, we don't even have a great weekend.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.