Arbor Realty Trust

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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 need operator assistance, please press star 0. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay, thank you, Madison. Good morning, everyone, and welcome to the quarterly earnings call for Auto Realty Trust. This morning, we'll discuss the results for the quarter and year-end of December 31st, 2024. With me on call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on 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 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. Arbor 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 now turn the call over to Arbor's President and CEO, Ivan Kaufman. Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had a solid fourth quarter and closed out 2024 as 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 a tremendously volatile and elevated interest rate in including our dividend, shareholder return, and book value preservation. We were well positioned for this location. Going into the cycle, we had a large cushion between our earnings and dividends. We're well capitalized, are 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 One of the items 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, 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 borrowers to transition to fixed rate loans and recapped their deals, we expect this environment will create a deceleration in this area as well. We have also seen a 100 basis point decrease Additionally, we expect there will be a temporary drag on earnings from the REO assets that we repositioned 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 reducing bottom costs in the securitization market and with our commercial banks, as well as growth in our service and portfolio. 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 dividend starting 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's important to note that we will be the only firm in our peer group to set five years by 43%, while every other company in our space has cut their dividends some multiple times by 40% on average, with only one company keeping their dividend flat in the last five years. And we assume that we set our dividend to the midpoint of our new earnings guidance. Our dividend will be approximately 8%, which again is compared to our peers who are down at an average of 40%. Additionally, over the last five years, we've also grown our book value by 26% while recording significant reserves, which is an incredible accomplishment, especially considering that our peers actually experience a 25% erosion in their book values. We've done a very effective job, despite elevated rates, of working through our loan portfolio by getting borrowers to recap their deals and purchase interest rate caps. In 2024, we were able to successfully modify 4.1 billion loans, with borrowers committing 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 4.1. This is tremendous progress, especially in light of the elevated rate environment that has resulted in a large portion of our loan book being successfully repositioned to performing assets with enhanced collateral values. We've also done an exceptional job in bringing in new sponsors to take over assets, either concessually 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 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, $2.7 billion of 2024, an amazing accomplishment. We also continue to make strong progress despite the unprecedented move up in rates on the approximate $1 billion of loans that were passed due at September 30th. In the fourth quarter, we successfully modified $140 million of these loans, generated $151 million of payoffs, and took back from all of which we were able to bring in new sponsors to operate and assume our debt. This has formed progress in one quarter and has reduced the $944 million of billing costs we had at September 30th down to $534 million at December 34th, or a 44% decrease. We did experience additional delinquencies during the quarter of approximately $286 million, bringing up total delinquencies at December 31st to approximately $819 million. And our plans for resolving our remaining delinquencies take back as REO, including bringing in new sponsorships. Approximately 40 to 50 percent of this pool, with the other 40 to 50 percent of being paid off or being modified in the future. This should put our REO assets on our balance sheet in the range of $400 to $500 million, 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, the heavy lifting portion of our loan book, 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 $3,500. affect our earnings. We believe there's great economic occupancy for us to step in and reposition these assets and significantly lower the occupancy to around 90% and analyze to approximately $30 million over the next 12 to 24 months, which will increase our future earnings significantly. We are working exceptionally hard on resolving our delinquencies, which, as I mentioned, Rates come down sooner than we expect and will have a positive impact on our ability to convert non-interest earning assets to income-producing investments earlier, which will be creative top future earnings. This is a challenging and demanding work, and despite these increasing headwinds, 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. 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're seeing in today's market to originate high-quality short-term bridge loans and generate strong leverage 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 in bridge loans to the product in 2025 and enhance our lending returns to increase the efficiency we're seeing in the securitization market with our commercial banks. Another major component of our unique business model is our capital life agency platform, which provides a strategic advantage allowing us to continue to deliver our balance sheet and generate significant significant player in the agency business for 20 years, and now in the top 10, Annie Mae Duslander for 18 years in a row, coming in at number six in 2023 and eight for 2024. We had a very strong fourth quarter, originating $1.35 billion of new agency loss, which, if you remember, was towards the top end of the range that we got in our last quarter's call. We explained that our regulation targets were 1.2 to 1.5 billion of 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 with 4.3 billion of GFC agency volume, despite a volatile rate environment throughout the year. With rates where they are today, we are experiencing a very challenging origination climate, and if they continue to remain elevated, it's likely going to result in a 10% to 20% decline in our agency production in 2025 to a range of $3.5 to $4 billion, which will again be very, very dependent. We also did a good job converting our balance 900 million of payoffs and $530 million, or 59% of these all is being refinanced into fixed rate agency deals for the full year 2024, we recaptured 65%, or $1.6 billion of the $2.5 billion of multifamily balance sheet runoff into agency production. This is on top of the $3 billion of multifamily runoff we generated in 2020. 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 eclipsed $5 billion of production in this platform. We also continue to make sustained progress on a newly added construction lending business. We believe this product is very appropriate for our platform as it offers free terms on our capital for construction, bridge, and permanent agency lending opportunities and generates mid- to high-teens returns on our capital. We closed our first deal in the third quarter for $47 billion, our second deal in the fourth quarter We have a long timeline with roughly $200 million under application, another $200 million in LOIs, and $800 million of additional appeals for the current restraining. 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 have a strong 2024 once again. We expect there to be a substantial headwind in the near future. We do believe we will have some positive offsets from reduced product costs on our bank line and to greater efficiencies in the securitization market, as well as we continue to fund up our bridge SFR and construction lending business, which generates strong leverage on our capital. Additionally, if short-term and long-term rates decline further, we'll mitigate some of the engineering increase our future earnings. In the meantime, we remain heavily focused on working through and managing our loan block while continuing to grow areas of our business to increase to many diverse countries as we develop. We have a very seasoned and experienced management team that has operated effectively through multiple cycles. Their work has been taught through the balance of the location and are confident over to Paul to take you through the financial results. Okay. Thank you, Ivan. We had a strong fourth quarter and full year of 2024, producing distributable 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 forecasted distributable earnings to 2025 to 30 to 35 cents per quarter. Early 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-sell reports, which is something we expect will continue for the 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. On approximately $206 million of these loans, we required borrowers to invest additional capital to recap their deals, thus providing some form of temporary rate relief for repaying the pool feature. The pay rates were modified on average to approximately 5.5%, with 2.3% 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 pay and accrual features. $7.6 million is related to modifications that were completed in years prior to 2024, and $1 million is on MEDS and P.E. loans originated in 2024 behind agency loans that have a pay and accrual feature as part of their normal structure. This leaves $10 million worth of accrued interest in the fourth quarter related to modifications of BRID loans in 2024, $1.5 million of which is related to our fourth quarter modifications. The table summarizing all of our 2023 and 2024 material modifications and the related accrued interest on these loans is detailed in our 10-K, 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 who are not reporting interest income unless we believe the cash will be received. The 60-plus delinquent loans, or 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 payoffs and modifications and 120 million of loans taken back as REO. 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 in 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, the same time we do anticipate that we will continue to experience new delinquencies especially in this current great 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 ivan 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 going to reduce earnings in the near term. In the fourth quarter, we took back $120 million of REO assets. We've been highly successful. and bringing in new sponsors on certain assets to take over the real estate and assume our debt. This strategy is a very effective tool, turning debt capital and a 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 provide a new 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. in our book value, and 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 CECL reserves, recording an additional $13 million in specific reserves in 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%. All our peers experienced an average book value decline of approximately 20% 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% growth during that time period versus our peers whose book values have actually declined an average of approximately 25%. In our agency business, we had an exceptional fourth quarter despite headwinds from higher rates. We produced $1.4 billion in origination and $1.3 billion in loan sales with very strong margins. of 1.75% for the fourth quarter compared to 1.67% last quarter. We were also incredibly pleased with the margin to be generated in 2024 of 1.63%, which exceeds 2023's pace of 1.48% by 10%. 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%, which is down from 1.25% last quarter, to a higher mix of Freddie Mac loans in the fourth quarter, which contain low servicing fees. Our fee-based servicing portfolio also grew 8% year-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 had an all-in yield of 7.8% on December 31st, compared to 8.16% at September 30th, mainly due to a decrease in SOFR 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% from 9.04% last quarter, mainly due to a reduction in SOFR, which was partially offset by more back interest collected in the fourth quarter on loan modifications and paydowns. Total debt from 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% at 1231 versus 7.18% at 930, mostly due to a reduction in SOFR, which was partially offset by lower-rate debt tranches being paid down from CLO runoff and the new $100 million unsecured debt instrument being closed 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 paydowns in our CLO vehicles from runoff in the fourth quarter. And the average cost of funds on our debt facilities was 7.10% in the fourth quarter compared to 7.58% for the third quarter, again, some of the clients so far. Our overall net interest spreads in 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've 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, and I'll now turn it back to the operator to take any questions you may have at this time. Bye, Senator.

Thank you. And as a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. And we'll take our first question from Steve Delaney with Citizens J&P. 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 distressed 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, 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, 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 And then right prior to the election, as you know, the tenure jumped from 360 to 480, and I think everything went on pause. So there's a bit of a pause period. But there are two types of collateral that we're looking at mentioned in my comments. The ones that we effectively transition to being sponsors, there's a lot of demand for that. And there's plenty of capital and plenty of entrepreneurial capital for that. A lot of it is network, but they're all network. And there's plenty of activity, and every time you have an asset, you have multiple bidders on those assets. So those are good. The more difficult part is the ones where the heavy lift already goes, 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 they're off 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, you know, rate environment. So I think a lot will have to do with where rates settle in. You know, clearly, we're all running around $250. If you see rates go down to where they were, you'll see tons of money flood back into the space. And I'll give Zuber and some of our experience on our last quarter's call where, you know, the refinance volumes and the activity was starting to pick up. So it's very much restricted, 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 on hand, and these are the ones where it's more difficult to get your hands on, because as I said, these sponsors are a bit of bad players in the market, using the legal system to delay the process, stealing the cash flow, and not managing the assets. So every single asset that we take back, as we're taking them back, we have stabilize it. Okay, thanks. Paul, a quick one for you to close out. In December, Fitch upgraded Arbor's primary servicing rating to CPF2+.

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. uh steve that the majority of that rating is not all that has to do with how we're servicing the agency book uh it may have some impact on the balance sheet 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 um you know should not be overlooked as you just mentioned i'm glad you pointed that out getting back to your comment that was just reflective the assets that we've put to the sponsors, and the level of improvement is remarkable. You're taking assets that were probably having occupancies in the mid-70s and well on their way to 90s. The cosmetics improvements are remarkable. So when we're able to transition to new ownership, capital we're lacking. The stuff that we retain, our goal is to get these assets in that position in 12, you know, 18 months or 24, whatever it is, and then bring in those sponsors so we can get the right valuations and, you know, more reflective of where we think the times are. We have a great track record on it. In fact, we had a loan we took back two years ago. 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, Stephen.

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 2025? Were those modifications you know how many were somewhat reliant on some relief from rates over the course of 25 and and how do you expect um 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 um i think it's important to have a little bit of an overall view keep in mind

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 bring 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 bought white caps. are doing a good job, and whether he has a capability to improve the performance of those assets. And in the majority of those times, the super majority of the times, we track their performance and they're doing extremely well. There are periods of time when they don't quite do what they're supposed to do, and they could resolve an additional problem with these paybacks. But on the whole, the strategy has been extremely effective in terms of improving the performance of those collaterals. Keep in mind that almost all our loans have recourse provisions with multiple sponsors. So it's not like people can just hand back the keys as an alternative. They are being put in a 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.

Appreciate the comments there. And Paul, could you touch on the servicing escrow balances again? I think you said $80 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 in that, what the components are driving that reduction.

Sure. So when I speak of earnings on our escrows and cash, it's two components. We lump it into one, but we can break it out. So we're sitting with, you know, $1.5 billion of escrow balances right now. And we have, you know, at year end, we had about $500 million of cash between cash on hand and cash in the CLOs. So that's calling $2 billion. And right now, so far it's at, you know, under 430. We're earning slightly below that, probably about 415 is what we're earning currently. So if you take that 2 billion, multiply it by 415, 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 escrows. Last year, we earned 120 million between earnings on escrows and earnings on cash for two reasons. one SOFR was higher. 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've used some of our cash to run our business. So that's the two components that are driving 120 versus the 85. The one thing I will say is that's a number that's bad. 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 servicing portfolio that will partially offset that. But that's the math. Great. I think I want to add to that. I want to add to that 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, at the 475 or 480 level, the numbers will be more like 1 and 1 half. However, if we go back to the interest rate environment that we had, we'll revise up our numbers and run off to about 3 million. That's a material difference. And that material difference will result in a real rise in the rate. And the real inflection point is really going to be the 5 and the 10-year. If we see the 10-year and the 5-year get back around that 4% level, you'll see the same trend that we were seeing in the third quarter, fourth quarter, that we were experiencing originations around all. And, Steve, one of the things I want to add is, you know, we were obviously very aware SOFA was dropping, and we knew it would have an impact on our escrows and our 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 calls, we knew, and you could 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, you know, a pretty big offset in the fact that the 10-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 Ivan 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 silver dropping, but we also thought we'd have a lower tenure, 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 the quarterly distributable earnings, you know, are you going to base the dividend on that or will you look at kind of distributable 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 PIC. 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. 2.4 billion of those have pain and cold features. But we're only accruing on 1.7 billion of them. So there's another 500 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 distributable earnings. But again, none of this has been decided yet. 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 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 was just a guide that can't close unless the 10-year drops to the four or four and a quarter range. So I'm glad it couldn't change to the upside. and how that affects our business. That makes sense. Appreciate the comments this morning. Thank you. Thanks, Stephen.

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

I missed Mark's call because I had a conflict with another company. I jumped off their call. But, you know, unless there's something said differently about 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. You know, what's your confidence in your book value? Number one, Secondly, were you willing to use liquidity to buy back equity if it drops below 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 book value, I'm glad you asked that question because we've had a tremendous success and track record in terms of taking distressed laws, bringing in new sponsors. and either having proper reserves or even taking back a little bit. So we're really comfortable with it. When we modify our loans, which are always the loans which have the biggest highlight on them, we're forced by account if any major modification to do 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 with the reserves that we've taken. But that 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'll 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. And our track record has been that it hasn't. moved down significantly over the last two years in a very difficult market. As far as returns on equity, I think Yeah, 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%. On the high end of the range, we're 12% return on equity, right, Ivan, given where it is. So we did a 14 for 2024. I think we did similar for 23. I think 10% to 12% 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, right, Ivan? You know, in terms of buying back stock at each point, 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. A construction lending business, we have to fund to 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 $1.5 billion of runoff, and we'll use some capital to not run off. It's going to be yield returns on a new business in the mid-teens, which is very creative. 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 a 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 terms of 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 did a very good job. And the short sellers over here shaking themselves for not understanding the quality of the earnings and the 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 their time can look up the history and the problems of the short sellers and their founders. 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 accordingly.

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

Thank you. And we will take our next question from Rick Shane with J.P. Morgan. Please go ahead.

Hey, guys, thanks for taking my questions this morning. Sort of two lines. First, a little housekeeping. Paul, you mentioned $500 million 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 PICC? 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, so the three to five cents is annually. You know, we've run We've run probably 2 cents to 2.5 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 ramping up until the second quarter. So I would say that it's 3 to 5 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, you know, 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'll 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. 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 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 on 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 $0.30 to $0.35 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.

Okay, 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 MES-97 for the year. 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. So the $97 million that you referred to, if not all, the vast majority are not new investment opportunities there. PrEP and MES were putting behind agency loans that are 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, he'll be short capital because of the restrictions in 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 MEDS and PE behind him, which puts us in a better spot, right? Because if we were 80% LTB on a bridge loan and struggling, and now he has a 70% LTV loan on the agencies. He had a kick in 5%, we had a kick in 5%. Our PE and MEDS is behind 70, not behind 80, right? So, and then they usually get about a 14% return And then there's a pick on it because you have to give, you have to have the current pay has to be a debt cover of like 110 through your MES and PE. So it's just a calculation of like some of the ones we did this quarter were 9, 10, 11% pay, and the rest was picked because we had good coverage through our PE. I wanted to just add to that. That's been a long course of business, correct?

I really appreciate the clarification on that. It is helpful. And if I can just pivot 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, you know, 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.

Okay. Every case is different, Rick. Not all properties decline. Some improve. we evaluate the capital income put in, how the assets perform, and how we're going to improve. So each one's different.

Okay. Got it. Hey, guys, thanks. I always appreciate you taking my questions. Thank you. Thank you.

Thank you. And we will take our next question from Jade Romani with KBW. 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 had great relationships with our lenders. In fact, Ivan could probably give some color that the market for commercial banks and securitizations really, really strong right now. So, we're not – 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 partnerships 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 we should have some real positive impact on our income streams going forward, which will be an offset 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. a vehicle, and then you relever it. So there's always timing on why those cash numbers move. But we're sitting at about $450 million in cash and liquidity today. And obviously, we've used some of that cash to grow the platform.

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?

Yeah, it's all fungible. You just, the agency business obviously generates cash, it's capital light, and then it gets, you know, moved up to the, 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 was one. Walker and Dunlop talked about what they've received. Be helpful to hear if you've received any loan putbacks.

We have not. We have not had a putback or had a buyback 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 in the fourth quarter, highest level 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 about one and a half to two billion for the year and we expect it to look fairly evenly over the year i think if short-term rates crop you can see that number going up considerably but that's the level that we think 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? You know, certainly the first quarter or two, maybe on the lower end of that range, 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, and then we expected 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 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 is 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 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, our compliance, and all those kind of factors. So we are working extremely hard. Our auditors are doing their

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

Ivan Coffman Okay. Well, thank you, everybody, for your time. We expect next year to be a little different given this carbon rate environment. We appreciate your participation and call. I think we may as well go in our favor. Thank you.

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