Q1 2020 Earnings Call

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Ladies and gents I mean for standing by and welcome to the Q1 2020 Arbor Realty Trust earnings Conference call at the time, all participants are in listen only mode. After the speakers presentation. There will be question and answer session. SK question. During this said she would need to press star one or your telephone please be advised today that today's conference.

Me recorded if you require any further assistance. Please press star Zero I would now like that conference over to your speaker today Mr., Paul Elenio <unk> Oh. Thank you. Please go ahead Sir.

Okay, Thank India, and we apologize this morning for a little bit of delayed or call. It seems we have a tremendous amount of people trying to participate in dial in and it's having trouble getting everybody and so we're going to store and hopefully all those people will be able to join us as we go I'm. Good morning, everyone and welcome to the quarterly earnings calls or Realty Trust. This morning, we'll just.

Adjusted results for the quarter ended March 30, Onest 2020 with me on the call today's Ivan Kaufman, our President and Chief Executive Officer before we begin I need to inform you that statements made in this earnings call maybe deemed forward looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business financial condition.

<unk> 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 currently available to us factors that could cause actual results to differ materially from orbitz expectations. In these forward looking statements are detailed in our SCC 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 and circumstances after today, where the occurrences of unanticipated event.

I'll now turn the call of offers president and CEO Ivan Kaufman.

Thank you Paul and thanks, everyone for joining us on todays call. We hope that you and your families are safe and healthy. We appreciate your participation to earn needs very challenging times.

In this environment, we are realizing more than ever that our homes are castles, which is very relevant to offer at a multifamily asset class.

Before we begin I would like to acknowledges staffed and management team favorite offer for their outstanding effort. During this crisis.

Weve opened significantly impacted personally and professionally and the ability for our employees to warm remotely at such high levels on disease current circumstances as Vince truly extraordinary.

Today I want to spend some of my time discussing our first quarter results, which were largely pre cobot 19 and focus mostly on our outlook for the balance of the year with respect to our company and more specifically our core earnings.

Dividends.

Yes.

The significant decline in stock prices, which no one could control or predict has forced companies in our opinion to prematurely communicate in order to defend the values of their businesses.

We have been patient than our proche to communication as we're waiting for the dust to settle to properly evaluate not only the extent of the virus.

Which asset classes would be impacted and the stimulus packages that would be available as well as a political landscape.

We feel the timing of this call is appropriate as we have a lot more clarity about the pandemic and how it will impact our business going forward.

We have built a diversified operating platform that focuses on multifamily assets with very stable liability structures and an active agency business, which allows us to generate strong cash flow and consistent recurring core earnings and dividends and every month.

Market cycle.

Through this robust agency platform.

We have been very active in providing liquidity at a multifamily market.

We originated 1.1 billion in agency loans in the first quarter, which is up from 845 million in originations from the corps first quarter of 2019.

We also originated 600 million of agency loans in the month of April.

And we could produce 1.3 to 1.5 billion in agency originations in the second quarter.

And this unprecedented environment our agency platform offers up our premium value as it requires the limited capital and generate significant long dated predictable income streams and produces significant annual cash flow.

Our 20 billion agency servicing portfolio, which is mostly prepayment protected generates 90 million year and growing in recurring cash flow. In addition to the strong margins.

Strong gain on sale margins, we continue to generate from an agency originations platform.

Having the ability to originate and sell loans in the liquid market with minimal required capital and produce gain on sale income as well as new servicing revenues will not only allow us to retain our staff.

Most importantly contribute to stable core earnings and a consistent dividend.

As Paul will discuss in more detail our core earnings for the first quarter March 31 cents per share which were affected by approximately two cents per share from the Covance 19 pandemic.

The significant dislocation that has occurred has resulted in reduced interest income on an escrow balances and interest spreads on our agency inventory net operating losses from our Oreo hotel asset and Chris tail growth in our balance sheet portfolio.

Despite the significant impact of the pandemic, we believe based on our projected originations strong pipeline net interest spreads and significant prepayment protected servicing income that we can continue to produce a consistent baseline a predictable core earnings.

For the balance a year without relying on future growth and our balance sheet portfolio.

The strong core earnings outlook has allowed us to maintain our dividend of 30 cents per share for the first quarter, which reflects a 17% dividend yield based on yesterdays closing stock price.

Additionally, with an adjusted book value per share of approximately 9050 cents. We are currently trading and roughly 70% of book value and below some of our peers.

Prior to the pandemic, we were trading at a substantial premium to book value and well above our peers, we feel we're trading significantly below the value of our franchise, especially considering our multifamily focus strong agency platform and sustainable core earnings which.

Differentiates us from all of the trading mortgage rates.

From a liquidity perspective, we were very fortunate that we made a strategic decision prior to the spread of the Corona virus to this country to significantly increase our cash position, which put us in a favorable position heading into the pandemic.

We have also always operated our business with a heavy focus on the right side of our balance sheet, particularly in financing a large portion of our loans through non recourse non mark to market long dated CLL vehicles, as well as with longer term unsecured debt.

In the first quarter, we were very successful and closing at 800 million dollar COO with very favorable terms and issuing $275 million of seven year fixed rate unsecured debt to further strengthen the right side of our balance sheet.

Additionally in April we issued another 40 million of three year unsecured debt in an extremely challenging environment, which continues to demonstrate the value of our franchise and the strength of our investor relationships.

This has resulted in current cash and liquidity position of approximately $350 million, which we believe provides us with sufficient liquidity to navigate the current market conditions.

In any significant market dislocation liquidity is critical therefore, our daily objective will be to continue to manage and maintain adequate liquidity.

We also have a very strong balance sheet with a high quality portfolio and the appropriate liability structures.

At March 30, Onest, our balance sheet loan book was 4.8 billion and was financed with 3.4 billion of debt.

Approximately 2.6 billion or 76% of debt of that debt is non recourse non mark to market close and approximately 800 million is financed for warehouse and repurchase facilities that is secured by 1.2 billion in assets with eight different.

Thanks that we have long standing relationships with.

Additionally, the majority of the loans being financed these bank lines are also rated and see a low eligible.

And given the current environment, we will be very selective in originating new balance sheet loans in the near term as we continue to focus on capital preservation and on replacing any run off on our loan book.

As we discussed in more detail and our shareholder letter dated April 13, 2020, we had reduced our exposure to debt that is financing our securities and is subject to margin calls related to changes in spreads from approximately 235 million to $75 million.

Today, we are currently down to only $40 million of debt against 80 million of securities with margin call exposure and this is a very nominal amount of remaining debt that will be easy for us to manage.

With respect to our balance sheet portfolio. It is very important to highlight that over 90% of our book as senior bridge loans and more importantly, approximately 80 per 2% about portfolio is in multifamily assets, which has been the most resilient asset class in all cycles, we buy.

I'll leave the multifamily industrial and self storage will be only asset classes to hold their values through the significant dislocation as well.

In addition, we've not provided any loan modifications with rate concessions to date and most of the loans in our portfolio contain interest reserves and or replenishment obligation by our borrowers, giving us the ability to effectively manage our portfolio through this dislocation.

One.

We also have very little exposure to some of the other asset classes that they've been affected both in the short and long term by this crisis.

We have only two hotel loans totaling $91 million, both of which are financed in our COO vehicles with no mark to market provisions one material retail loan for $33 million that is unlevered and $60 million.

Legacy land development deal, which is also on Levered based on the current market environment. We feel it was prudent to book approximately 33 million of reserves against these assets in the first quarter to reflect the significant economic impact that pandemic has had on the value of these.

Assets and we believe our book value of 9050 cents is an accurate reflection of the current impact of the pandemic.

We also has seen positive trends relieving April payments in our agency business with only <unk>, 0.3% about $15 billion, Fannie Mae book, and 4% of about $5 billion, Freddie Mac book granted forbearance.

With respect to our outlook for May and June payments, we do think there will be some more economic stress. Although we also think it will be largely mitigated or offset by enhance unemployment insurance and other economic stimulus programs. The government this offering.

In addition, the average debt service coverage ratio and our agency portfolio based on the most recent data available is approximately 1.65, which means that borrowers could withstand an average of 20% economic vacancy due to the effect of the virus before impairs.

Our ability to meet their debt service.

With respect to servicing advance related to our potential forbearance claims as a Fannie Mae servicer, we are required to advance principal and interest payments for a period up to four months. We're pleased to report that we've come to an agreement in terms with one of our banking relationships to providing advanced facility.

At 100% advance rate of any outstanding advance requirements with the agencies and as a result, these potential advanced requirements will not be an issue for us.

We're very fortunate to have a 10 year proven senior management team that has a track record of managing and all cycles, including the 2008 financial crisis. This team has over 20% inside ownership will represent the highest inside ownership of any commercial mortgage rate aedis.

Finally, our management team a significant asset management expertise, which is invaluable in this current environment.

We have always prided ourselves on investing heavily and our servicing and asset management functions and these disciplines are embedded in our DNA and have always been reflected in our underwriting philosophy, which gives me great confidence and our ability to manage our portfolio to this impressive unprecedented dislocation.

In summary, we have built the diversified business platform that is multifamily centric and is capable of generating consistent sustainable core earnings and dividends in all cycles.

We also have sufficient liquidity the appropriate liability structures and the asset management expertise and track record to successfully operate in this environment.

We believe this puts us in a class by ourselves and an investment in our company at these extremely low levels will provide a tremendous long term return.

And as the largest shareholder my primary focus will be to continue to maximize shareholder value.

I will now turn the call over the Paul to take you through the financial results.

Okay. Thank you Ivan as our press release. This morning indicated we produced core earnings of 40.7 million or 31 cents per share for the first quarter, excluding reserves related to the new Cecil accounting pronouncement Cecil went into effect for non bank public companies on January Onest 2020, the adoption of this new standard resulted in an.

Serve of 32 million that was charged against retained earnings $17 million related to our balance sheet book and $15 million related to our Fannie Mae agency portfolio.

Recorded an additional 76 million of Cecil reserves through the income statement in the first quarter 22 million on our Fannie Mae loan book and $54 million on our balance sheet portfolio, which included the $33 million of reserves that we took against the assets Ivan mentioned earlier due to the significant adverse change in that project projected economic outlook from the cover 19.

Pandemic.

As Ivan mentioned, our first quarter core earnings were affected by approximately two cents a share related to covert 19. This was due to approximately two and a half million and reduced earnings on our escrow balances and net interest spread income in our agency business from reduced interest rates and the inverted yield curve that existed during the quarter.

More importantly, we believe we've been able to generate consistent quarterly earnings for the balance of the year. Despite the significant dislocation from the pandemic in large part due to our capital light agency business to generate significant core earnings and cash flow. We also have reduced our overhead and general and administrative expenses by approximately five to seven.

$1 million annually, which will increase our core earnings run rate by around four to five cents a share going forward.

Our adjusted book value at March 30, Onest was approximately $9.50, adding back our seasonal reserves on a tax effected basis. We believe that this adjusted book value more accurately reflects our economic value as the Cecil reserves are noncash and our unrealized.

Looking at our results from our agency business in the first quarter, we generated 15 million of core earnings at approximately 1.1 billion in originations and 950 million in loan sales the margin of on those first quarter sales was 1.49%, including miscellaneous fees compared to 1.55% all in margin on our fourth.

For the sales as Ivan mentioned, we also had a great start to our second quarter with 600 million of agency production in April and we believe that we in this current environment, we'll be able to continue to grow this platform.

We also recorded $22 million of mortgage servicing rights income related to 1.3 billion of committed loans during the first quarter, representing an average MSR rate of around 1.73% compared to a 2.32% rate for the fourth quarter, mostly due to a change in the mix of our first quarter loan production.

Our servicing portfolio was 20.2 billion at March 30, Onest with a weighted average servicing fee of 43.6 basis points and an estimated remaining life of 8.9 years. This portfolio will continue to generate a predictable annuity of income going forward around $88 million gross annually and growing which.

Only $4 million on an annual basis from the same time last year. Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions prepayment fees were approximately $5 million for both the first and fourth quarters.

And our balance sheet lending operation, we grew our portfolio, 12% to 4.8 billion in the first quarter on 850 million in originations are 4.8 billion investment portfolio had an all in yield of 6.35% at March 31st compared to 6.68% at December 30, Onest, mainly due to.

Higher rates on runoff as compared to new originations during the quarter and from a reduction in LIBOR, which was partially offset by.

By LIBOR floors, and a portion of our portfolio.

The average balance in our core investments was up to 4.6 billion from 4 billion at year end two to our first quarter growth. The average yield on these investments was 6.77% for the first quarter compared to 7.18% for the fourth quarter, mainly due to higher interest rates on runoff as compared to originations and from a reduction in LIBOR.

Total debt on our core assets was approximately 4.7 billion at March 30, Onest when all in debt cost of approximately 3.68% compared to a debt cost of around 4.35% at December 30, Onest, mainly due to a reduction in LIBOR.

The average balance on our debt facilities was up to approximately 4.25 billion for the first quarter from 3.76 billion for the fourth quarter, mostly due to financing our first quarter growth and the average cost of funds and our debt facility decreased to approximately 4.11% for the first quarter compared to 4.46% for the fourth quarter.

Due to a reduction in LIBOR and from lower borrowing cost associated with our new CFO up overall net interest spreads on our core assets decreased slightly to 2.66% this quarter compared to 2.72% last quarter, mainly due to higher interest rates on runoff as compared to originations in the first quarter, which was partially offset by the ERP.

Positive effect of LIBOR floors on a portion of our balance sheet portfolio.

And our overall spot net interest spread went up to 2.67% at March 30, Onest from 2.33% at December 31, mainly due to the positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing costs from Siloed 13.

Additionally, approximately 80% of our balance sheet portfolio currently have LIBOR floors above one which is a well above where LIBOR sits today.

And if LIBOR continues to stay at its current level. These LIBOR floors could have a meaningful positive impact on our net interest spreads in the future.

The average leverage ratio on our core lending assets, including the trust preferred and perpetual preferred stock is equity was up to 85% in the first quarter from 83% in the fourth quarter and our overall debt to equity ratio on a spot basis was also up to 2.9 to one at March 30, Onest compared to 2.5 to one at December 30, Onest, excluding the Cecil reserves and.

Unrealized swap losses that reduced equity in the first quarter. The majority of this increase was due to several timing issues during the first quarter, including a portion of the proceeds from our new 275 million unsecured debt issuance that we used to pay down secured debt in April the ramp feature on our new see low being fully deployed subsequent to March 31.

And from cash margin calls made in March related to the financing of our securities that were applied against these this outstanding debt in April.

Our Oreo hotel asset did produce a net operating loss for the first quarter due to the effects of the pandemic and at this point has been temporarily shut down and as a result, we're expecting this trend to continue for the near future.

Lastly income from equity affiliates increased during the quarter predominantly due to significantly more income from our residential banking joint venture as a result at the current interest rate environment. We do believe this positive trend could continue for the next few quarters and this income from this investment further emphasizes the diversity of our platform an income streams tackle.

Fleets, our prepared remarks for this morning, and I'll now turn it back to the operated take any questions you have at this time Nita.

Thank you.

As a reminder to SK question. Please press Star then the number one on your telephone keypad again that is star one on your telephone keypad withdraw. Your question first account team, we will pause for just a moment to compared to Q.

And your first question comes from the line of Steve Delaney with JMP Securities.

Hey, good morning, guys and congratulations on a strong quarter despite a very.

I would environment here, especially in March.

First on the strong agency originations that continued over into April that 600 million figure compares to a little over a billion in the first quarter can you comment if there any particular large loans that mega loans that are kind of kicked that figure up in April.

So there were no Omega loans, although we are working on a few big transactions Thats very typical for the type of business we've been doing.

But there were no no significant mega loans.

Okay. All right. That's helpful. Thank you and Paul on the Cecil Reserve refresh me.

I was trying to take notes, but there was a lot lot coming out.

In the structured business I think the first quarter provision was 53.9 call. It 54 million and I, even mention someone's couple of hotels the retail loan.

I just want to get the numbers right did you say 33 million.

54 million that was related to the loans that I Didnt mentioned.

That's correct, Steve Thats exactly the numbers 33 of the 54, we booked through the PL in the first quarter related to our balance sheet loans was the position. We took on a few hotel and retail assets that Ivan mentioned in his commentary.

Yeah, we took a very conservative approach on that Steve we looked at all our.

Non multifamily loans, we took a look at the impact of that pandemic, specifically on hospitality and retail and we tried to come up with a realistic assessment of the value impairment on those loans in our portfolio. So we'd have an appropriate reflection on food book value and.

It's probably a little different than the rest of the market, but we felt it was a prudent and since it was such a small amounts of our balance sheet was easy for us to assess.

And put a lot of time and effort and come up an appropriate response.

Well was to do that it look there's there's a lot of Cecil noise this quarter might as well get unit throw at all so everything but the kitchen sink in it. So you won't have that noise going forward. So commend you for that and Paul what on the general the general par to see so at March 31 for the structured business can you give me that figure so the initial plus the the increase.

Mental state the actual balance sheet allowance.

Sure. So so as I mentioned spot one one we had to do an adjustment because of Sicad being adopted on one one and that was around $17 million of a general reserve on our balance sheet.

And then in the first quarter, we took an additional 21 million in general reserves on our balance sheet business because of the change in the economic outlook as you run. These models. They make you stressed them based on the economic outlook as I'm sure you've seen in all of the other companies in our space. So those are the numbers of how we came up with the the 71 million.

Related to structured for the quarter was 17 opening to 33 that Ivan mentioned related to those assets and another 21 general. So it was about 38 million of general cease all related to the rest of our book.

Right and if I took the 38 I took your structured book into took away those assets that I have to 33 I can look up the principal balance that would give us a percentage that would reflect sort of and basis points. What's your reserves is relative to the principal balances alone would that sure did that is correct. So I think if you looked at it that way.

Steve and I think Thats, the right way to look at it. If you. If you took the 21 and the 17 that we book do you have to is 38 and you pulled out about and I have the number somewhere you pulled out those those assets. We mentioned that Ivan was talking about in his commentary, which probably reflected about I would say 200 million of asset.

So now you've got 38 million on a 4.6 billion dollar portfolio.

Morgan Stanley Goldman Morgan Stanley looks like they got to deal done this week and kind of inside the a the original whisper talk.

Any thoughts as to whether.

Your private label transaction might be viable over the next few months or should we just think longer term on that.

Well our market is returning a much much quicker than ever thought penny execution of the deals done. This week are really significantly inside where they thought us having a multifamily only pool.

We may consider going to market, we'll see how the next deal gets done, but we can can come in considerably tied to that.

And the performance on those assets as a 100% not one single forbearance or defeasance in those long so and they will all recently rated I think there were rated.

Last week, so we got confirm ratings, so we're ready to go.

In the near term if the market continues to tighten so we'll see it all matter whether marketers.

Great. Thanks to the comments you also stay safe and be well.

Thank you see it.

Your next question comes from the line of Jade Rahmani with KBW.

Good morning, everyone. This is Ryan on for Jade Congrats on our navigating through the quarter and good to speak with all of you.

Nice to hear the favorable stats on the forbearance and rank collections in April.

But just based on your viewpoint now how are you expecting the portfolio underperform into May and June.

And are there any stats you can provide.

On may today collections in both the multifamily balance sheets is what was the servicing portfolio.

So as we enter May we were expecting there to be.

Significantly greater number.

And when you mean, a significant rate another when your 0.3 on your Fannie Mae.

We were expecting to maybe come in below 2%, we're seeing outstanding collections and we're seeing very few forbearance request. So we're looking at them very very favorably.

As I mentioned earlier, our private label with another single forbearance request.

They are all current.

Balance sheet.

Very little and our agency book.

We are below the expectation of forbearance request. So we're seeing very very very favorable trends.

And you mentioned the obvious benefit that tenants are receiving today from extended unemployment benefits, which I believe our are set to expire in July so how worried are you about the.

Floor that these economic stimulus programs are.

Our providing and the risk if those go away later in the summer.

That.

The collections could dropped materially and Forbearances spike and separately if there are any.

Stats you can provide with respect to the employment profile of those tenants and also the maybe a geographic exposure on the secondary and tertiary side.

Yes, it's a lot of detail, which we don't have at the present time, but.

Sure Paul can provide that off line with you, but right now we're seeing very very very small drop off.

Less than we anticipated on rent collections across the portfolio.

We're seeing very very positive trends and Mike My comment in my introduction, stating that our homes or our capsules or apartments rock castles, there's a certain psychology that we're seeing.

Which is people are really spending all his time in their homes and that's the place and Thats the place to protecting so there's a bit of psychology that we didnt expect due to their pandemic that they are valuing their homes.

And therefore, they are going to make sure that their homes are safe.

And all the initial discussions about.

Brent forgiveness, that's pretty much off the table, Brent forbearance and evictions is something thats out there, but people are really looking at pay their rent we instituted a specific program.

Our Albarado relief program in conjunction with our landlords. So were working first hand, but a lot of our tenants directly to our bars and the attitude is we do want to payout brand. We're gonna payout rent we may need some assistance, we may need some rental assistance, we're not looking not to payout rents. So.

So the attitude is very very positive throughout our tenant base now borrower base so were fairly optimistic.

And certainly we were prepared for the worse and expecting the best and we're really getting the best.

So we hope that continues.

Okay, and then Paul just considering all the puts and takes you mentioned.

Can you give us a sense of what you believe as a reasonable range on a run rate quarterly earnings.

For the balance of the year and then Ivan as a follow up to that can you say, how the board plans to approach the dividends for the rest of the year.

So I think those those questions our combined I'll handle the front end to that and and Ivan and I will handle the second one I think what we've laid out pretty clearly in our commentary is that we are extremely fortunate to be one multifamily focused and to to have this large agency platform and we've always said on all of our call.

Of that the diversity that platform and having that capital light agency business really drives a significant amount of our core earnings. So as the pandemic has hit and certainly there have been effects to that pandemic to our business.

The Oreo asset, having a little less income going forward balance sheet growth being curtailed as we're going to preserve capital and be very selective we're very very happy to be able to say that the agency business is is functioning very well, we had 600 million dollar quarter. As we mentioned, we expect that business to grow and in our view.

Although it's early and a lot can change we think as we said we can put up pretty consistent numbers for the balance of the year now whether that every quarter as a 31 or 30 or 32, it's hard to say, but in our mind relatively consistent numbers for the balance of the year, which would be a tremendous accomplishment considering what has gone.

On in this market Ivan on if you want to add some color to that and then talk about the dividend well I think you really have to focus on our asset class, which is a multifamily asset class and the fact that that is going to be probably the most desired asset class in the market I think people are going to continue to invest and as our prediction.

That you can access the cap rate compression in the multifamily asset class squishy can invest in retail you can invest in hospitality, you very suspect and office.

And therefore.

People are going to continue on this asset class and it's going to be very viable.

On one hand.

On the other hand.

When looking at our portfolio and as big a dividend as feedstock core earnings.

Well, what we're seeing is very very few requests for forbearance and keep in mind forbearance is just a deferral of your payment. Okay. That's all it is and since most of the multifamily borrows treasure their access to the agency.

Platform they cannot now pay their forbearance back and Thats why they are actually pain, because if you don't pay of forbearance back or if you default then you're no longer a viable borrowing the multifamily market. So they have resources and if they have to I believe they will support that so it speaks to where our earnings are we don't.

Have a lot of non multifamily assets and I would be concerned and it doesn't really impact us when you have a potential deterioration of asset value and when you have a substantial amount of loan put it on pain accrual. We havent had a single pane accruing loans, so getting back to our core earnings and dividends.

We have multifamily assets they are performing in an outstanding manner based on the core Foundation I think they'll continue to perform and therefore as they perform they'll continue to contribute towards our earnings. In addition, the agency access is the viable liquidity in the market we.

Weve indicated we have had a great first quarter. We've told me, where we think the second quarter is going to go our pipeline is strong as vibrant it's growing so we're very very comfortable.

With what we've spoken about day, which as I mentioned in my comments and puts us in a class by ourselves and that's what really distinguishes us.

From the traditional mortgage repayments, we have an operating platform that produces stable core earnings and as Paul's mentioned in his comments and I have we have over $90 million of servicing revenue.

That comes in each and every year and it's a growing part and it represents a very substantial amount of our core earnings.

So thats kind of a summary of how we feel and how the board fields.

Great. Thank you for all that color I've been involved.

Youre welcome.

Your next question comes from the line of Stephen laws.

And Jane.

Hi, good morning.

Hey, Steve how are you.

Good good to hear from your hope all are well on your end by both Paul and Ivan and everyone else.

Wanted to touch base spend a little more detailed agency business, Paul and I wanted to touch later on the call but.

The margins you know where should what should we think about that.

Factors, plus or minus kind of going forward as where we see the MSR margin in the.

Ebay services income margin headed.

As we move forward from here.

Sure I think Thats, a great question and given the landscape I think what we've been impressed with and I will touch a little bit more on the market and spread is we've been impressed with is that we've been able to hold our margins really really well and so we put up a 150 or 149 margin. This quarter I think they'll be I think there'll be fairly consistent throughout the throughout.

The rest of the year on our gain on sale, we do some larger loans may be it comes down a little bit in up in a given quarter. That's for the most part I think those margins are going to hold the second thing we've seen as our servicing fees are holding so we are seeing the agencies hold the servicing fee high and so we don't expect to servicing fee to really dropped much if at all go.

A mix, we had a little bit more on our committed loan Steve in Freddie Freddie conventional as a percentage of our total book and F.B.J. a little bit of private label. Therefore, those servicing fees are a little lighter on an M.S.R. perspective and Fannie.

So that mix really drives and this omis our rates going to go if we're doing more fanny that <unk> going to rise if we're not than the alma saw rate comes down but it doesn't affect our servicing fee in my mind or servicing fee will hold the second thing that affects MSR values today is devalue the escrows and that's something we talked about in our comments.

Areas that even despite the the net interest income going down pretty substantially for where interest rates went on our escrows, we're still able to in our opinion generate consistent quarter earnings which is attribute to the platform, but those reduce earnings on escrows going forward do hit the M.S.R. capitalization rate a little bit.

It's a part of the value of the servicing you're putting on day one.

That's great. That's helpful. Thank you for the detail there could you touch base get almost servicing I was writing things down as quickly as possible I think you sort of servicing advanced facility, 100% advance rate, it's not going to be an issue for us, but <unk>, what's their size of that facility or did you quantify.

Anything in your comments around that so.

So our servicing advance for April was $300000 200 that 200 channels, it's really nominal yeah. So we don't we initially when you know there was a tremendous amount of fear there'd be a lot of forbearance.

Everybody scramble around and thought that number wouldn't be a big number we immediately contact because one of our banks. We've had a number of banks wanting to all for us to servicing advanced facility, so where in the process of putting it in place for no fee.

Terms of been agreed upon and that'll provide 100% of the advances that we have to make so we'll have no capital outlay on that.

Great sorry to have you repeat it but I appreciate making Charlotte clearly, but that's great to hear thanks for the time.

Thanks.

And your next question comes from the line of Ricocheting J.P. Morgan.

Hey, guys. Thanks for taking my questions they Rick.

Appreciate the clarity and sort of outlook on the agency volumes going for I am curious I'd love to hear sorta structurally how underwriting works in this environment in terms of due diligence and appraisals et cetera.

Yeah.

Sure so.

What what what the real paradox here is that loans that would generating on the agency loans are probably the best loans, we've ever generated for two reasons.

Number one more conservative underwriting number two there's less competition and number three every single loan is being under it and and funded with interest preserves.

Deserves a generally six to 12 months. So if there is any shortfall and they have a problem and you walk actually have insurance that you're going to have those payments made car and keep in mind, a 12 month interest is or even in very draconian circumstances. If a profit doesn't perform will last over too.

Years. So those are all the enhancement center put in place and I must say that <unk> was a front runner and working with Fannie Mae and we started put we wouldn't close alone when depend demick started unless we had an interest reserve and we were actually architect with Fannie Mae and.

Place. So I think the quality of old ones are outstanding in terms of the appraisals in the inspections and that whole technical process I I'm personally not that Grand your limit I worked our technical staff work with the agencies to make sure that we had the right spectrum processes.

Initially there was some issues, but I believe that the ability to praise and inspect has all been put in place and all the all the right fundamentals are there.

Great. Okay. Thank you I I appreciate both the the physical explanation in the structural loan explanation as well one question.

On the balance sheet business, you guys walk through the C., So reserve and I'm sure. It's in the K. Irks me in the queue and I've just got to get there <unk> at this point, but were there any realize losses netted against the reserve.

In provision that we should be aware of in the corridor.

Yeah. So no rack that we're not we have a zero realize losses in the quarter and none of the reserves as you know where realize no realized losses were netted against that and that's one of the reasons. We are adding it back to our book value is we spoke is these are all just Cecil reserves general in nature and none of them have been realized.

And hopefully now we've been conservative in our approach we feel like we have been and we'll see where the market goes and how we end up with those reserves. Yeah. It's interesting you just provoked a thought for with a lot of people in order to get liquidities whole somebody along that securities and have a lot of realize losses to great that liquidity. Fortunately, we had sufficient liquidity.

And we didn't felony loans, nor do we have any realize lost some sets an excellent point I should have mentioned that we have not sold the single alone at any stress distress value.

Okay, great in and just so we can think about it from a housekeeping perspective. The plan on core going forward would be to add back provision, but to deduct any defaults are charge offs correct. So we that weight, that's where the credit will run through the core number.

Correct. So when we're trying to be like everybody else here, because we feel like our our if if I was a little bit of an outlier core earnings is how people look at the business. That's how you support you dividend and I agree with you. So.

You book General reserves, they get backed out if you do have a realized loss will then that's a real loss right. That's a cash loss and then it therefore it would charge against your your <unk> that's exactly how we are we're approaching it.

Terrific great guys. Thank you very much.

Thank you right.

Here next question comes from Milan.

Yeah, what's your name.

Hi, Good morning, everyone thinking been taking my question Hope girl, while I'm just to follow up on bricks question and appreciate the color on it.

Six to 12 months and preserves and you know you loans you mentioned are.

Well look more attractive today that some of that type of source misgivings competition declining some of the other factors you mentioned.

In terms of no yields on these loans you know maybe L.T.V.'s have those change meaningfully you know in the in the current environments I'll just to what they look like choir. So so all of us are correct.

<unk> they have I think in terms of cash out refinances those are being cut back significantly and also loans of being on the written into their current economic.

<unk> collection, so if collections are all 3% to 5%.

They're being under written off at today's so let's assume you typically have a wall and that sort of 95% occupancy backed up to 92.

<unk> underwriting off 95, you're writing it off <unk> off the car level, which is just the temporarily impaired level. It's not permit. So I think you getting a reduced loan in addition to lower the L.T.V.

The less of a reserve so you're going to see people, who don't want a post 12 months in six months, perhaps go for a lower L.T.V. So I think we'll have a lower L.P.Z. in in actual that's lower and then if you take into consideration that this impairment on your rent collections is.

Temporary then it's even further than that so I would say at least 5% across the board I expect and perhaps a little bit more.

Great. Thank you that's helpful color appreciate the time today.

<unk>.

And your final question comes to <unk> I'll make a family outfit.

Not so much of a question do I do have one but I I think you deserve a shadow.

T which is unusual for me.

Yeah.

And nobody thinks like an owner.

<unk> and the fact that you guys run over 20% of the company.

<unk>.

Scenario, where the view that nobody thinks like an older.

The last year now you've been focusing your remarks.

Streamed in conservative outlook.

Thing you were concerned if some of the competitors.

Doing foolish things I think you've kept a company 'cause severally focused on workforce housing.

Given your profitability you a validated a book value.

My only regret this is the question is.

Have you probably didn't get enough stuck it except for but you're precisely student refer to anything in stock purchase I have not gotten to your 10 q. yet, but did you do anything you stopped repurchase in the quarter.

So Paul why don't you indicate what we did buy back and I'll get some color in terms of what I thought process was sure. So the the math is simply we bought about a million shares back at just around $4. We spent about $4 million of our capital on the plan and I don't know myself can give you the dialog around that but I haven't if you want to take a crack at.

Certainly in retrospect would've liked to have bought more but we had two issues number one given the pandemic and not knowing how people would go.

And what further strains that were put on liquidity, we couldn't have a free for all buying and second of all we have that into a blackout Perry. So we have to enter into a program buying what ranges, so fortunately or unfortunately, and I would say unfortunately, we didn't get to buy more portion of the a lot more liquidity and.

Endemic I you know only lasted a certain amount of time in terms of how it affected our business.

And being in a position where we couldn't go in daily imbibe or subject to a a preconceived formula that's all we're able to get and we're adding a blackout period now stock is higher so it's a different environment, but it was definitely our intention to buy but given the circumstance.

That's what we're able to come up with but we did by.

Address where you don't have very good job in a very difficult environment congratulations.

Thank you actually a nice via support thank you.

They are no further questions at this time I'll tend to call they come into the house.

Well, we we definitely appreciate all shareholders support.

It's been a very trying period of time.

A team here as I mentioned that my Mark remarks at <unk> have worked remotely and tires <unk> tirelessly and perform a level beyond my expectations. We feel we are well throw it in good standing and very optimistic about our franchise.

And <unk> ability produce core earnings in a consistent dividend so stay healthy be well look forward to our next call and everybody have a good weekend.

And this does conclude today's conference call. Thank you for your participation.

<unk>.

Yeah.

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