Q3 2022 Arbor Realty Trust Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the third quarter 2022 Arbor Realty Trust earnings Conference call.
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If you should need operator assistance. Please press star Zero I would now like to turn the call over to your speaker today, Paul Millennial Chief Financial Officer. Please go ahead.
Okay. Thank you Shelby and good morning, everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended September 30th 2022 with me on the call today is Ivan Kaufman, our President and Chief Executive Officer before we begin I need to inform you that statements made in this earnings call maybe deemed forward.
Statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business financial condition liquidity results of operations plans and objectives.
These statements are based on our beliefs assumptions and expectations of our future performance taking into account the information currently available to us.
Factors that could cause actual results to differ materially from arbor's expectations. In these forward looking statements are detailed in our SEC reports.
<unk> are cautioned not to place undue reliance on these forward looking statements, which speak only as of today Barbara undertakes no obligation to publicly update or revise these forward looking statements to reflect events or circumstances. After today with the occurrences of unanticipated events.
Now I'll turn the call the operators 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 another tremendous quarter as a diverse business model continues to offer many significant advantages over everyone else in our peer group.
We are a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings well in excess of our dividend.
This has allowed us to once again increase our dividend to <unk> 40, a share representing our 10th consecutive quarterly dividend increase of 33% growth over that time period, all while maintaining the lowest payout ratio in the industry.
We have also should trade quickly built a platform to succeed in all cycles and as a result, we believe we are extremely well positioned to thrive in this economic downturn.
And the REIT asset class with the right liability structures highlighted by over $8 billion in nonrecourse non mark to market CLO debt, representing nearly 70% of our secured indebtedness with pricing that is well below the current market. We also have no significant short term debt maturities and a well capitalized with currently around so.
$600 million in cash and liquidity, providing us with a unique ability to remain.
Sense of and take advantage of the many opportunities that will exist to generate superior returns with a market capital.
Additionally, our dividend is well protected.
With currently the lowest dividend payout ratio in the industry and we cannot emphasize enough the depth and experience of our executive management team.
Clothing are best in class dedicated asset management function that allowed us to successfully operate our business through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing REIT in our space for several years now.
Our view of the current environment is that we are in a recession with far away inflation I would expect the market to continue to be volatile and dislocated for the foreseeable future with dislocation comes great opportunity for us to gain market share in our core business platforms and generate superior risk adjusted returns on our capital.
As a result.
We're excited about how we strategically position the firm to take advantage of what we believe will be extraordinary opportunities in this downturn.
Turning now to our third quarter performance as Paul will discuss in more detail.
Quarterly financial results were once against remarkable we produced distributable earnings of 56 per share, which is well in excess of our current dividend representing a payout ratio of around 71%.
Financial results will continue to benefit greatly from rising interest rates, which has significantly increased our net interest income on our floating rate loan book as well as earnings on our escrow balances and clearly with our extremely low payout ratio and strong earnings outlook, we're uniquely positioned as one of the only companies in that space.
With a very sustainable protect the dividend even in a recessionary environment.
As we guided on our last call and this market, we are being very selective with our balance sheet lending looking to replace our run off with higher quality loans with superior spreads in fact in the third quarter, we originated $600 million of new multifamily bridge loans with an average loan to cost of around 72% and interest rates.
14 of $14 50 over the index, while a $600 million of run off we experienced during the quarter.
Along with the cost of around 79% with average spreads of around 390 over the index.
Result, we're able to widen our spreads on average by around 25 basis points, while substantially increasing our loan quality with a 7% reduction in lots of value. Additionally, we have a significant amount of replenishable capital in a low cost CLO structures that have resulted in a meaningful increase in the level of returns on these loans in fact a third.
Quarter originations averaged over 14% Levered return and the loans, we finance through our Clo's came to over 18%.
We have also placed a heavy focus on converting our multifamily bridge loan runoff into agency loans, which is a critical part of our business strategy as our agency business is capital light and produces significant additional long dated income streams in the third quarter, we successfully refinanced around 25% of our balance sheet runoff into new agencies.
Loans that produce strong gain on sale margins and long dated servicing income.
And again, our strategy is to preserve and build on our strong liquidity position to allow us to remain offensive and garner premium yields on our capital.
GSE agency business, we originated another $1 1 billion of loans in the third quarter October as originations came in at $215 million and we have seen some leveling off in the pipeline given the rise in the tenure despite the current rate environment. We believe we can close out the fourth quarter with a similar volumes of third quarter as again, we have a strategic.
Advantages and that we focus on the workforce housing part of the market that have a large multifamily balance sheet loan book that nice take feeds our agency business and again. This agency business offers a premium value as a requires limited capital and generate significant long dated predictable income streams and produce significant annual cash flows to this.
Point out 27 billion fee based servicing portfolio, which is mostly prepayment protected generated approximately $115 million a year and reoccurring cash flow. This is in addition to the strong gain on sale margins, we generate from our origination platform and a significant increase in earnings in escrow balances that we have.
Parenting as rates continue to rise, which acts as a natural hedge and is unique in our business.
And our single family rental business, we are gaining significant traction with a steady increase in deal flow in the third quarter, we funded $150 million of prior commitments and committed to another $450 million of new transactions.
As you know a source close to $1 billion in deals in 2022 to date, we have a very large pipeline of deals. We are currently processing and again, we love. This business is a generate strong levered returns.
<unk> offers us the returns on that capital through construction bridge and permanent lending opportunities.
In summary, we had another tremendous quarter and we're extremely well positioned to succeed in this environment.
Dividends is well protected with the earnings that significantly exceeded our dividend run rate, we have invested in the REIT asset class in a very stable liability structures, we are well capitalized and have no significant short term debt maturities, putting us in a unique position to take advantage of the many accretive opportunities that will exist in this market.
Confidence in our ability to continue to significantly outperform our peers.
I will now turn the call over to Paul to take you through the financial results.
Okay. Thank you Ivan as Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $105 million or <unk> 56 per share, which is up from $94 million or 52% per share last quarter. The increase was largely due to substantially more net interest income on our floating rate loan book and from higher earned.
On our escrow balances due to the increase in rates along with a few onetime losses recorded in the second quarter on some one off loan sales.
And our third quarter results translated into ROE of approximately 18% and once again, our quarterly distributable earnings of substantially outpaced our dividend with a dividend to earnings ratio of around 71%, allowing us to increase our dividend for the 10th consecutive quarter to an annual run rate of $1 60 a share.
As I mentioned earlier, we are well prepared for this downturn and our model offers many strategic advantages, giving us great confidence in the quality and sustainability of our earnings and dividends.
And our GSE agency business, we originated and sold $1 1 billion and GSE loans in the third quarter, we generated margins on these GSE loan sales of one 3% in the third quarter compared to $1 five 9% in the second quarter, mainly due to a greater percentage of FHA loan sales in the second quarter, which have a much higher margin.
As well as some overall general margin compression given the current rate environment.
We also recorded $17 6 million of mortgage servicing rights income related to $1 2 billion of committed loans in the third quarter, excluding $300 million of balance sheet loan sales, representing an average MSR rate of $1 five 1% compared to 148% last quarter.
Servicing portfolio was approximately $27 1 billion at September 30, with a weighted average servicing fee of 42 four basis points and has an estimated related remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $115 million gross annually, which is down slightly from last quarter.
The increase runoff in our Fannie Mae portfolio, mostly due to extensive sale activity again this quarter as a result of the runoff prepayment fees related to certain loans that prepayment protection provisions continued to be elevated with $11 million and prepayment fees received in the third quarter compared to $15 million in the second quarter and our.
Our balance sheet lending operation of $15 billion investment portfolio had an all in yield of 771, 9% at September 30, compared to $5 eight 2% at June 30, mainly due to the significant increase in LIBOR and sulfur rates.
The average balance in our core investments was $15 billion this quarter as compared to $14 6 billion last quarter due to the full effect of our second quarter growth and the average yield on these assets was up to six 5% to 7% from $5 two 6% last quarter again due to increases in sulfur and LIBOR rates.
Total debt on our core assets was approximately $13 9 billion at September 30, with an all in debt cost of approximately $5 three 3%, which is up from a debt cost of around 4% at June 30, due to the increase in benchmark index rates.
The average balance in our debt facilities was up to approximately $13 9 billion for the third quarter from $13 4 billion last quarter, mostly due to the full effect of our second quarter growth and from the new three year convertible note we issued in August .
The average cost of funds in our debt facilities was 449% for the third quarter compared to $3, 100% for the second quarter, primarily due to increases in the benchmark index rates are.
Our overall net interest spreads on our core assets decreased slightly to two 8% this quarter compared to $2, one 6% last quarter, mostly due to less acceleration from early runoff in the third quarter and our overall spot net interest spreads were up to 186% at September 30 from 182% at June 30th mostly due to positive.
<unk> of rising rates on our floating rate loan book.
And as we've stated before 97% of our balance sheet loan book is floating rate, while 88% of our debt contains variable rates.
Further enhancing the positive effect on our net interest income spreads as rates increase in fact, all things remaining equal a 1% increase in rates would produce approximately 10 cents a share an additional annual earnings.
Additionally, as we mentioned earlier, we have $8 billion of CLO debt outstanding with average pricing of 163 over which is well below the current market and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations.
And lastly, as rates are predicted to continue to rise. We will also earn significantly more income from the large amount of escrow balances. We have from our agency business and balance sheet loan book. These earnings will grow substantially as we have approximately 2 billion in escrow balances that are now, earning almost 3% or around $60 million annually effective <unk>.
Number one which is up significantly from a run rate of approximately $25 million annually at June 30.
As I mentioned earlier. These features are unique to our business model, giving us confidence in our ability to continue to generate high quality long dated recurring earnings in the future.
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 Shelby.
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We will take our first question from Steve Delaney with JMP Securities.
Good morning, Ivan and Paul I.
I would congratulate you on another great quarter, but I think the fact that ABR shares were up 9%. This morning says it much better than I could but congratulations Mike.
Our response.
So obviously a lot of talk about the CLO market that had been a very important.
And building your your bridge portfolio.
We know it's Jim.
Located right now we're starting to read just in the last four to six weeks about Freddie.
And there are Q series.
Theory shelf that seems too frankly, I hadn't heard about it until the last couple of months and you hear about case series, obviously, but Q O Q with.
But I think the deal got done in October I'm, just curious if for you for Arbor and the business you do is that program viable.
As an alternative to.
Your normal CLO shelf.
Sure. So let me respond to that Steven and once again. Thank you for your positive comments and the great relationship that we've enjoyed over the years.
Thank you.
Where freddie seller servicer, we've evaluated the Q series and it is a viable program. It is really geared towards affordability to enhance their affordability numbers.
And we think it's an important program because it offers the ability to access securitization to the government for those types of products. So that's right in the wheelhouse.
So it's something that.
Don't be surprised if we're a participant in that program.
Great to hear and we could be talking about affordable I think in a couple of weeks at our conference hopefully.
But I was glad I figured if anybody was going to be involved at what's your relationship with Freddie that you probably would.
Paul jumping over to you when you were talking about your CLO I think you were talking about reinvestment of Clo's you mentioned a figure of 18% is that the your estimated return on capital on reinvestment with fresh coupons going in.
Yes. So it is exactly that Steve, but we are saying is because we have these low costs locked in cielo is at $1 63 over and we all know where spreads have gone and all the CLO that are left have reinvestment periods.
What we're doing is where loans are running off we're originating new loans at higher spreads and financing them through those vehicles with the Replenishable capital in what we're doing that we're getting greater than an 18% Levered return on those new investments is exactly what's happening and it's really meaningfully moving up the levered returns on our model.
I am sure Ivan can comment, but very unique to our situation in the way we've structured our deals and the way we had the foresight prior to the market dislocation to go out and do two securitizations this year and really lock in those low cost.
Fantastic and the.
Replenishment terms on the two that you just did this year, how many months or years do you have left on those two to reinvest.
Yes, So let me give you some color so we have almost.
Almost $10 billion of assets sitting in our CLO with $8 billion of debt roughly about 82% leverage one of the vehicles comes out of replenishment period. This month, so exclude that vehicle we have.
Have.
We will call it seven $5 billion of CLO debt.
And about $9 $5 billion of CLO assets that are sitting in 1234567 vehicles that still have replenishment and of those seven vehicles I would say about $2 billion of that that comes out of replenishment.
In the middle to end of 2023, it's all staged and another $5 5 billion of that that doesn't come out of replenishment until middle to late of 2024. So we have lots of time in room on a lot of these vehicles, which is really helping our returns.
Fantastic Okay. Thanks, and one final quick question and I'll turn it over.
The rest of the the animals.
I read that you did a deal in Brooklyn on 22 Chapel Street, leading a recap commercial observer had a feature on it.
Was curious that because of that.
Property, I think theres an opportunity zone.
Can you just comment on the attractiveness of that type of property for a developer and also the opportunity for the lender.
In terms of I guess tax benefits to the developer and how defense, but when you look at that property is it.
More likely to perform better in a economic slowdown in a recession than maybe some high end properties that may not be absorbed as quickly I'm just curious your thoughts about that.
That property.
Both as an investment and as alone. Thank you.
I must say I'm not familiar with the details of that transaction, which is unusual which must remain it must have been done in a normal course of business.
So in general anything that is affordable.
There's just huge demand for that product.
Anything in the New York area, that's affordable we don't.
We don't project any real rent increases because it's all regulated but you have a very very very low.
Very very low.
Occupancy changes as more like a utility.
I am not familiar with that particular one okay.
Thank you both for your comments.
Thanks, Steve.
Yeah.
We'll take our next question from Stephen laws with Raymond James.
Hi, Good morning, Ivan and Paul a very nice quarter, another dividend increase so congratulations on that.
Thanks, Steve.
Yes.
Quickly touch base, Paul maybe a quick number but repayment income can you talk about what youre seeing in repayments are you guys.
Everyone have been expecting to slow, but they've remained stubbornly high you can talk about early repayment income contributions for the quarter.
Yes. So in my prepared remarks, I had mentioned that we did see a fair amount of runoff in our Fannie Mae book This quarter again that we've seen as you know Steve over the last several quarters that runoff was about $1 billion of transactions and we had earned about $11 million in prepayment penalties I think on the last quarter I guided you.
That should come down significantly.
Was a little surprising to me that we have that much in repayment penalties and I've done some work on it and it really has to do with the fact that the market is lagging right. There's a little bit of a lag on one rates and two on sales volume and we did see a little bit more sales volume in the second quarter than maybe we expected the market has changed since then.
So we are expecting that to start to really slow down given where rates are and maybe maybe more importantly, it's very binary right. So our Fannie Mae book has probably an average interest rate a coupon rate of about 4% that doesn't mean, we don't have 5% and 6% mortgages, we do and we have three and four.
5% mortgages that weight to about a four and where rates are today. The five seven and 10 years above that even though there's a lag if loans were to repay today and I guess my mind loan repayments will slow naturally given the environment.
There really isn't much yield maintenance, if any because it just goes away right because the rates are exceeding the coupon rate. So it's a binary process. It hasnt happened yet because things are on a lag, but we do expect it to start having said that we did have $200 million 200 plus million of run off in our book in October and we got about $3 million a prepayment fee.
Already in October I am modeling, maybe another $1 million for November and December . So maybe we will get the $4 5 million, but I do think that after that it gets to a very small number maybe it's a $1 billion a month, maybe it's half a million a month I don't know, but its not $11 million, but on the flip side of that what's happening when runoff slows and rates rise our service.
<unk> portfolio is staying intact and of course, we love that because those servicing fees are long dated and it's an annuity so we'd rather have the servicing.
And the other side as we mentioned in our prepared remarks is our escrow balances will stay elevated and where rates are going.
Our escrow earnings a substantial I mean look at the numbers. So that's a great hedge against rising rates and I think that's how this plays out over the next few quarters.
That's helpful. Thanks, very much for that.
Yes.
Investors continue to do a lot of work on on loans and portfolios and frankly, you know looking into sponsor quality.
Can you talk about the typical sponsors of your bridge loans.
You know how large they are well collateralized do you have any concentration among sponsor exposure with multiple loans with the same people you know, maybe some metrics or general commentary around your typical borrower.
We tend to have borrowers who do a significant number of transactions with us and we.
We generally.
Traffic in the 25 to say $150 million loan loan range and it's not unusual to have a number of transactions with a specific sponsor and theres a lot of tenure with us we're.
We're not the lender who would typically do a one off loan to garner a piece of business. We generally like to do loans with somebody who we think we're going to have a long term relationship.
So that speaks to the kind of operator, we have.
We went through a period of time and you could see it in the market, where a lot of sponsors, especially the big ones are very syndicated wave a mixture of all types of borrowers, but typically we have borrowers who.
A lot of family and friends money, they do have some institutional money, but it varies.
In reviewing our portfolio in fact, I met with one of our top sponsors where we have close to $1 billion.
<unk>.
Bridge loans with with that sponsor this week.
And I will tell you that they are well capitalized they have good access to capital. They are on top of the details of the specific loans.
And they have a good grasp on them.
<unk>.
They they I believe at least the people we have a generally really good operators, who can execute very well execution is really critical.
And more significantly we have a good enough relationship with them.
If they run into an issue, we'd like to be able to sit down with them and figure out how to manage that issue with them.
So far to date.
Looking at our portfolio.
We're always.
Head of schedule in terms of evaluating assets sponsors.
Portfolio knock on what is in great shape. It doesn't mean that we're immune to the complexities that exists in a rising interest rate environment and decrease real estate values, but it's how you manage the sponsors and have you ever relationship for more importantly.
The kind of structures you have and your loans I spoke about it repeatedly over the last number of years.
We have a lot of structure in all loans, it's not just a real estate.
It's the provisions to keep our loans in order in terms of interest rate replenishment.
Rebalanced requirements and things of that nature. So we don't just looks at a real estate, we look to the sponsor we look to the financial capability to sponsor and the commitment of our sponsor and we put that all together in one potion and Thats, how with great asset management, we're able to keep our book.
In very good shape.
I appreciate the comment by them and Paul If you got some great day.
Thanks, Steve.
We'll take our next question from Rick Shane with J P. Morgan.
Thanks, guys for taking my questions. This morning, and I apologize. If this has been covered were bounced around a little bit of calls this morning.
One of the things that we're starting to realize as we move through earnings season is that sponsor behavior.
Is increasingly influenced by.
<unk>.
What I would describe as <unk> as factors, how they're financed on the debt side time maturities type of financing.
Within your portfolio are you seeing that.
How do you manage that risk so that.
You don't sort of get.
Okay.
Defaults or.
Credit issues related to structure versus the underlying fundamentals of the properties.
Okay, let's first start by recognizing.
Were multi.
Multifamily.
Oriented with over 90% of our assets may even higher on the multifamily side.
It's also realize that were senior lender primarily.
We're not doing them preferred equity and mezzanine and things of that nature.
So those are big qualifiers.
And we're also a cash flow lender.
Right those are the basic premises. The second is as I've mentioned earlier.
Many lenders in this environment.
We're very lax on their documentation.
And very life on their on their requirements in terms of.
Sponsor recourse and responsibilities.
We have been in this business longer than anybody at this point, we've been through multiple cycles and documentation relative to our loans and the liability of the sponsors is very straightforward. Unlike other lenders.
Top of that we have default rates in our loans typically at 24% where other people have very mild default rates.
So I would say, it's our experience in terms of how we document all loans, how we asset manage all loans that puts us in a primary position.
We also have the experience and the capability to.
To take back and manage any asset.
And we're not afraid to do that we also have a deep pocket of sponsors who love to take on opportunities. If there is a transition from an asset.
So we have the depth we have the distribution we have the experience and we have the capital to manage these particular circumstances in the REIT asset class and that's what's puts us in a great position. It doesn't mean, we won't have our issues with our sponsors and we always do it.
It's just a matter of how you're able to manage them and where you have the leverage and typically when sponsors have no recourse no liability.
<unk>.
Then they have the leverage but when we structure our loans typically we have the leverage.
More significantly we're not looking to take their assets from them if they run into an issue remember they have other assets. We're looking to work out a solution. That's in the long term our view and our history is in multifamily every highest followed by another high right.
If you look at the charge if you look at multifamily if you look at rents were in a downturn what rising interest rates, we want to help our borrowers positioned themselves to succeed in the long run there's one for the factor, which is very important to note.
If you're a multifamily borrower default right.
Then you closed down your borrowing abilities with the agencies. If you can borrow from Fannie Freddie.
Then you basically out of business. So if the borrower wants to step out of the industry by defaulting.
Very very very very very tough choice. So.
They have to make decisions if theyre going to have difficulty to bring more capital will either come to us for different capital solutions. So that's it in a holistic sense and Thats, how we manage our book and also first and foremost asset management skills and capability people and now scrambling to bring that to bear we've been in there.
This business, we've beefed up our asset management, well ahead of our growth in our portfolio, we are well positioned to manage our assets.
Not only look forward to where theyre going to be issues work with our borrowers sit down with them and come up with solutions with them and that's a very important skill set to have so that's kind of how we view the market and why we're well positioned in the market to manage through this dislocation and we only think where we are.
At the bottom yet we're getting there.
First quarter second quarter.
And we've already dealt with a lot of borrowers understanding where they may run into issues and we're ahead of the game, we're not playing catch up on top of our assets when managing through solutions, and we're being proactive and that's the way we manage our business.
Look it's a very helpful response, and I appreciate the context, I think one of the things that.
We're starting to think about and hear more about is both.
The recalibration of cap rates.
Coincident with.
Some.
<unk> in terms of or more pressure in terms of rents.
<unk>.
Sponsors starting to run into issues where.
Their pro forma rent increases are less likely to come through so that's that's the other thing. We're just trying to understand as we get through all of this and it sounds like.
Youre approaching is exactly the same way.
Yeah, I think what's important to note on that which is very relative you've definitely had cap rates increase from <unk>.
Let's say four to five as a general number.
But during that period of time going back 15 months ago 18 months ago. You've also have rents increased by 15% to 18% so to a large extent you've had the rent increases.
Catch up a little bit and offset the change in cap rates, but you're right. We do not expect under any circumstances to be that kind of rent growth going forward at all and we've been that way for quite some time.
Our outlook starting about nine to 12 months ago was exactly that as rates went up we started to look at exit cap rates and we started to really take a look at that if we are going into a recession, you're not going to see that kind of rent growth. So we're not expecting rent growth right, if you're flat to up a little bit that's fine.
We are expecting in the recession different than everybody else, we're going to expect some economic Weil.
They can see because people can't pay their bills and pay them on time, you also have a record number of units being delivered on the multifamily side, so youre going to see some concessions on the new product coming on board. So all of those are the headwinds that we're facing you can't ignore them and you got to manage to them. So we're prepared for that and that's our outlook.
I appreciate the answer thanks Heather.
Okay.
We will take our next question from <unk>.
Jade Rahmani with K B W.
Thank you very much just wanted to confirm are you expecting a flattish.
Trend in transaction volumes for Arbor, both on the GSE side and the bridge lending side.
So I think.
On the on the GSE side, all has to do with.
Two factors were the 10 year is and where cap rates go to if cap rates.
If cap creates adjust appropriately and people could buy opportunities.
And the 10 years and the reasonable level of the yield curve I think youll see.
Some decent purchase activity.
We'll see that so.
I would say going forward next year.
I think we'll be in the range of what we did this year, maybe a little down in terms of bridge activity I think thats going to be dictated where we see the bottom when we want to get aggressive.
I think that it may be the first quarter and maybe the second quarter, but when we are close to the bottom we will get extremely aggressive at that point in time and if he is going to be in the first quarter of the second quarter. We're not sure when and then we will resume a fairly active level and it also depends on where sulfur is because.
Depending on.
Where we.
So for us and where people have to borrow what will dictate where the bridges. We do think there's going to be an extraordinary amount of opportunity to provide recapitalization capital are very attractive returns and we're working on that very effectively we think we can recap borrowers and get adjusted returns of between <unk>.
20%, which would be a good use of our capital and also could position people back into the agency business if that if that works well. So I think a little patients right now we've been really patient to last six months. What can you continue to be patient through the first quarter.
Wait till where we feel the market is really adjusted we think the market will over correct. We think a lot of the data that we're seeing is lagging.
And there'll be a point in time, when we can get real aggressive it's not right now.
Hey, Jade its Paul.
<unk> comments, which are on the longer term side, which is great, but just to help you with your model a little bit as we had mentioned in our prepared remarks, we did $2 50 250 million in October in the agency business. We did 1 billion won in the third quarter. We still think we can come in similarly, maybe it's 950, maybe it's $1 billion I don't know where it comes in but.
We're not thinking it's going to be materially different.
Just on the short term and in the in the balance sheet business.
I think we did.
October was a little bit lighter I think we did $50 million of bridge and we did another $50 million $60 million in fundings on our <unk> business and we had about 180 of run off in October of <unk>.
Which we recaptured into agency, 50% of that runoff, which was great. That's our model but.
But I think we're projecting and we talked about in our commentary that we're looking right now at least in the short term to match our run off with new originations.
So we are expecting that to be flat in the portfolio for the fourth quarter, whether that's 400 $500 million $600 million of new volume, we're not sure yet, but we think that runoff is going to be equal to the originations at least in the short term.
Sure.
Thank you I was wondering also if youre seeing any opportunities.
M&A in the commercial mortgage REIT space. Thanks.
I think there will be I think there is going to be a liquidity squeeze.
People got a really really aggressive on their originations even late in the cycle. When we were backing off nine months ago people were thinking that was an opportunity to gain market share and I think that was a real mistake.
A lot of people have never managed CLO before don't have asset management skills.
And I think there could be some real opportunities.
We're in a period now of capitulation on cap rate changes in values of rent growth. It's interesting that we spoke about it on this call. We've been speaking about it for nine months everybody has been looking at us like when nuts.
And.
I definitely think we've had a different view than everybody else theres a bit of a cap catch up. So I think that will occur I think theres going to be plenty of trouble.
The people who have been extraordinarily aggressive the last nine months.
Thank you.
Thanks Jade.
And again, if you would like to ask a question. Please press star one.
Star One if you would like to ask a question.
We'll take our next question from Crispin Love with Piper Sandler.
Thanks, Good morning, everyone.
You telegraphed last quarter, you pulled back meaningfully and bridge multifamily originations. This quarter was that primarily just your conscious decision there or was there a drop off.
In demand as well from borrowers just given for cap rates and that cost currently for borrowers.
It was a conscious decision for a multitude of reasons number one we had a significant pipeline.
Earlier in the year that we actually didn't close because we required an adjustment to valuations based on the changing marketplace. So that was.
An unusual thing that occurred.
Another significant pipeline and.
The change in interest rates did not reflect that.
The change in values. So that was immediate that was a conscious underwriting decision borrowers didn't like it but numbers don't lie facts are facts. So.
We had a lot of fallout in our existing pipeline, we were very aggressive in changing our underwriting grids in our pricing to reflect the market.
So we stepped out of the market.
Based on where we saw the market and where our competitors for the market. Those two factors and the third was an eye towards liquidity, we were very conscious of maintaining our liquidity.
Managing our liquidity and putting out more money not knowing where the market was going so that really led our direction. In addition, you have to look at the way our company is structured it.
At this point in time with these low liability structures that are in place when we have run off and we can replace it with existing inventory, it's better leverage on our capital. So we don't have the necessity to go out right now, especially when cost of capital is higher so if you take all those factors.
It was a it was a strategic direction of the company to be exactly where we are today.
Great. Thanks.
That makes sense and then just one on credit quality credit quality was really stable in the quarter.
No change in nonperforming loans or the alliance, but can you just speak a little bit to the credit outlook from your point of view and if youre starting to see any issues, whether it be enbridge multifamily space or elsewhere away from your portfolio, just especially considering your comments earlier.
But do you believe that we're just we're in the mail.
Element recession right now.
Yes, I think theres going to be stressed in the system and I think people are going to have access to capital to pay for higher debt costs and potentially to put new caps in place when we hold caps expire.
I think there's a lot of benefit right now for existing caps in place I had mentioned I met with a borrower who we have close to $1 billion of loans. He is strike prices on his caps between 50 and 150 basis points. So he is well protected right. So there's a lot of that protection out there when that protection wears off either people are going to have to.
Put lower caps in place attract capital to buy lower caps or somehow converting to fixed rates, which for lower carrying costs and bring more equity to the table that's going to be the point in time, when borrowers have to reposition and access.
Other equity and the equity checks could be between five.
5% to 20% of the capital structure and be putting a priority position that's going to be the point in time, and it's going to happen. It could happen a year from now and all will depend on where the yield curve is at that point in time of where we are in the cycle, but there's a little time for that it'll leak and gradually.
But.
I think that's where the stretch will be we put a very aggressive campaign in place when the treasury started going over two to convert a lot of our floating rate book into some agency loans are fixed rate business and we were fairly effective with that and our borrowers are very thankful for that so I think we will look at where treasuries go with us.
The dip in treasuries, how to convert some of our portfolio.
And manage it day by day based on where the yield curve comes in the access to liquidity that our borrowers have.
Thanks.
Taking my questions and congrats on a great quarter here.
Thanks Christian.
It appears that we have no further questions at this time I will now turn the program back over to Ivan Kaufman for any additional or closing remarks.
Well, let me conclude by thanking everybody for their participation and once again it was a remarkable quarter.
And.
We do express.
Expect stress in the system, but the company has multiple different revenue streams that act differently in different environments.
Very pleased to have delivered the kind of results. We have so everybody have a great weekend and have a great day take care.
Take care everyone.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
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