Q4 2022 Arbor Realty Trust Inc Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 2022 Arbor Realty Trust earnings Conference call.
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I would now like to turn the call over to your speaker today, Paul Lineal Chief Financial Officer. Please go ahead.
Okay. Thank you Todd and good morning, everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, who will discuss the results for the quarter and year ended December 31, 2022 with me on the call today is Ivan Kaufman, our President and Chief Executive Officer before.
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 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 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.
Date or revise these forward looking statements to reflect events or circumstances after today or the occurrences of unanticipated events I'll now turn the call over to <unk>, 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 and an exceptional 2022 is a diverse business model continues to offer many significant advantages.
Everyone else in our peer group in fact that 2022 results reflect one of our best years as a public company and we believe we are well positioned for continued success. We are a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings well in excess.
Some of our dividend.
This has allowed us to increase our dividends three times in 2022 and in 10 of our last 11 quarters, all while maintaining the lowest dividend payout ratio in the industry, which was 70% for 2022.
And our performance is head and shoulders above everyone else in our peer group.
Almost all of which have been unable to increase dividends at all the last few years and some are even paying dividends of over 100% of their earnings.
We have strategically built our platform to succeed in all cycles and a result, we believe we're extremely well positioned to continue to outperform in this economic downturn, we have been very cognizant over the last 18 months preparing for what we believe would be a very challenging recessionary environment.
As a result, we have taken a patient and selective approach to new investments and had been heavily focused on preserving and building up a strong liquidity position. This has allowed us to accumulate over $800 million of cash and liquidity on hand, providing us with a unique ability to make remain offensive and take advantage of the many opportunities that will.
Exist in this recession to go on a premium yields on our capital.
We're also invested in the REIT asset class and strategically position ourselves with the appropriate liability structures highlighted by a significant amount of nonrecourse non mark to market CLO debt with pricing that is well below the current market, allowing us to go on a premium yields on our assets.
As we cannot emphasize enough, especially in the current environment the importance of having a best in class dedicated asset management function and experienced and tenured executive management team that have a proven track record of successfully operating for 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 in a row, turning now to our fourth quarter performance as Paul will discuss in more detail.
Quarterly financial results were once again remarkable we produced distributable earnings of <unk> 60 per share, which is well in excess of our current dividend representing a payout ratio of around 67%.
Financial results also continue to benefit greatly from rising interest rates, which has significantly increased in net interest income on floating rate loan book as well as earnings on our escrow balances and clearly with our extremely low payout ratio multiple predictable reoccurring income streams, we are uniquely positioned as one of the only company.
It's not space with a very sustainable protected dividend, even in a challenging environment.
Our balance sheet lending business, we continue to or maintained selective looking to replace our run off with higher quality loans with superior spreads in the fourth quarter, we strategically reduced our balance sheet loan book by $600 million on approximately $500 million of newer rate originations offset by $1 1 billion of run off.
This allowed us to recapture $150 million of our invested capital and continue to build up our cash position to take advantage of the many opportunities. We believe will exist in this downturn to generate outsized returns on our capital our level of returns on our fourth quarter originations came in at over 16% as we have.
Significant amount of replenishment capital at a low cost CLO structures that is meaningful meaningfully increase the returns on that capital. Additionally, we have participated in our first Friday Q series securitization in the fourth quarter, which demonstrates our strong social commitment to providing liquidity to the preservation of the.
Affordable multifamily housing market. This transaction also provides us with another low cost financing option, allowing us to reduce our warehousing debt by more than $350 million of loans into a nonrecourse non mark to market securitization vehicle and we now have nearly $8 billion in securitized debt outstanding Rep.
Presenting around 70% of our secured indebtedness at pricing that is well below the current market. We continue to place a heavy focus on converting our multifamily bridge loans into agency loans, which is a critical part of our business strategy.
Agency business is capital light and produces significant long dated income streams, we had tremendous success in the fourth quarter recapturing over $500 million around half of our balance sheet runoff into new agency originations a key component of talks assessed in this area is a unique opportunity that exists in today's market.
Given the inverted yield curve to go on a premium meals on a capital by refinancing certain of our balance sheet loans into agency product and provide mezzanine financing. This has allowed us to convert some of our balance sheet loan book into agency business with a long dated servicing income and repatriate a portion of our capital into mezzanine positions, but.
And agency loans at lower Ltvs in fact in the fourth quarter, we successfully refinanced around $200 million of balance sheet runoff into new agency loans and funded 20 million of mezzanine loans on these transactions, which are generating 13% unlevered on our capital. This is strategically this.
This strategy, we believe in and again it is somewhat that is unique in our business and we have both a top balance sheet lender and operate in a very large agency platform.
And our GSE agency business, we had a very strong fourth quarter originated wanted to have billions of new loans.
These numbers include a few large deals in December that were accelerated in order to close by year by year end, resulting in a light start to 2023 with approximately $150 million of originations in January however, our pipeline remains strong, giving us confidence in our ability to produce similar volumes in 2020.
Three eight.
Additionally, we have a strategic advantage and that we focus on the workforce housing part of the part of the market and have a large multifamily balance sheet loan book that nationally feeds our agency business. In fact, we are one of the leading agency lenders and achievement of affordable housing goals and as a result, we will continue to be viewed.
Very favorable very favorably by the agencies.
And again this agency business offers a premium value.
And it requires limited capital and generate significant long dated predictable income streams and produces significant annual cash flow.
To this point, our 28 billion fee based servicing portfolio, which is mostly prepayment protected generates approximately $115 million a year and reoccurring cash flow. We've also seen a significant increase in earnings on our escrow balance as rates continue to rise, which acts as a natural hedge.
Against interest rates.
In fact, we are now earning in excess of 4% on approximately $2 billion of balances of roughly $80 million annually and.
And combined with our servicing annuity, we are generating $195 million of annual cash earnings or approximately a dollar a share before we even turn the lights on everyday. This is in addition to the strong gain on sale margins, we generate from our origination platform and again something that is.
Is completely unique in our platform, providing a significant strategic advantage over our peers.
In our single family rental business, we had an outstanding year as we continue to grow out that platform and garner increased market share in the fourth quarter, we funded $160 million of prior commitments and committed another $350 million of new transactions, putting a total deal flow at 1.2.
<unk> billion in 2022.
We also have a very large pipeline of deals. We are currently processing again, we love this business as it generate strong levered returns and it offers us returns on that capital through construction bridge and permanent financing opportunities.
And reflecting on 2022, we had another exceptional year and once again clearly outperformed our peer group, we are well positioned with earnings and significantly exceed our dividend run rate are invested in the REIT asset class and a very stable liability structures. We've also focused heavily on.
Building up a strong liquidity position, which has put us in a unique position to take advantage of the many accretive opportunities that will exist in the market.
It is great confidence and 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. Thanks, Ivan as Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million or <unk> 60 per share. We also had a record year with distributable earnings of $2 23 per share in 2022, 11% increase over our 2021 results.
These results translated into industry high ROE of approximately 18% in 2022, allowing us to increase our dividend three times to an annual run rate of $1 60, a share reflecting a dividend to earnings ratio of around 67% for the fourth quarter and 70% for the full year 2022.
Fourth quarter results beat our third quarter numbers, and our internal projections largely due to substantially more net interest income on our floating rate loan book and higher earnings on our escrow balances due to the increase in interest rates. We also experienced significantly more gain on sale income from stronger fourth quarter agency volumes and the early settlement of a few large agency loans.
To help meet agency affordable lending caps. Additionally, we benefited from no current tax provision this quarter in our Trs mainly due to year end timing differences and adjustments that resulted in a lower 2022 full year current tax expense that was chewed up through the fourth quarter provision.
Our fourth quarter results also contains a few large items that are worth noting.
Reported $7 4 million and a onetime expense related to the settlement of a litigation we had outstanding for several years. This was the only material litigation. We were involved in and we're pleased to have resolved. This item as we were spending several hundred thousand dollars a month in legal fees on this case, which will now reduce our operating expense run rate by two five to $3 5 billion a year.
Year going forward or a penny a share. We're also very pleased to have resolved the only significant nonperforming loan in the fourth quarter with a full pay off of a $20 million alone on a student housing asset as part of the payoff, we received $8 million in back interest and fees that we did not have a crude resulting in a substantial increase to our net.
Interest income for the quarter.
And our GSE agency business, we had a very strong fourth quarter with $1 5 billion in originations and $1 7 billion of loan sales. The loan sales numbers were significantly above our third quarter sales of $1 billion mainly.
Mainly due to a large portfolio deal that closed in December that also settled in the same month in order to help the agencies meet their affordable lending caps the margin on our fourth quarter sales were 133% compared to $1, 300% in the third quarter. We also recorded $17 million of mortgage servicing rights income related to a $1 billion.
Half of committed loans in the fourth quarter, representing an average MSR rate of around 112% compared to $1 five 1% last quarter, mainly due to reduced servicing fee on the large portfolio deal we closed in December .
Our fee based servicing portfolio grew 4% in 2022 to approximately 28 billion with a weighted average servicing fee of 41, one basis points and an estimated 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 relatively unchanged.
From last quarter, despite very strong volumes and less early run off in the fourth quarter. This again was due to the closing of a large portfolio deal in the fourth quarter with a 12 basis point servicing fee.
Did substantial we did see substantially less accelerated runoff in our agency loan book in the fourth quarter due to market conditions, which has resulted in prepayment fees leveling off as well in the fourth quarter received $5 6 million in prepayment fees as compared to $11 2 million in the third quarter in January prepayment fees were around $1 million.
And given the current rate environment, we are estimating that prepayment fees will run between two and $4 million a quarter going forward.
And our balance sheet lending operation of $14 5 billion investment portfolio had an all in yield of 842% at December 31, compared to seven 5% at September 30, mainly due to the significant increase in LIBOR and sulfur rates and from higher yields on new originations as compared to run off during the fourth quarter the.
Balance in our core investments was $14 8 billion in this quarter as compared to $15 billion last quarter due to run off exceeding originations in the fourth quarter.
The average yield on these assets increased to eight 2% from $6 five 7% last quarter, mostly due to the $8 million in back interest we collected on the repayment of a nonperforming loan and increases in the sulfur in LIBOR rates, partially offset by less acceleration of fees in the fourth quarter.
Total debt on our core assets was approximately $13 3 billion at December 31, with an all in debt cost of approximately six 5%, which was up from a debt cost of around 533% on September 30, due to the increases in the benchmark index rates.
The average balance in our debt facilities was approximately $13 7 billion for the fourth quarter compared to $13 9 billion last quarter. The average cost of funds in our debt facilities was $5 80 for the fourth quarter compared to $4 49 for the third quarter, primarily due to increases in the benchmark index rates and from the convertible and unsecured debt issuances, we did in.
The third and fourth quarters.
Our overall net interest spreads on our core assets, excluding the $8 million of default interest we collected in the fourth quarter increased to one 1% this quarter compared to $2 eight last quarter and our overall spot net interest spreads were up to 192% at December 31 from one 2% at September 30, again, mostly due to the <unk>.
The effect of rising rates on our floating rate loan book and highest spreads on our new originations.
Lastly, we believe it's important to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high quality long dated recurring earnings in the future. One of these features is the continued growth we'll see in our net interest income spreads as rates rise and our floating rate loan book in fact, all things.
Winning equal a 50 basis point increase in rates 20 basis points of which has already occurred since year end would produce approximately five cents a share annually in additional earnings.
Actually we have approximately $7 6 billion of CLO debt outstanding with average pricing of 167 over which is well below the current market and has allowed us allowed us to meaningfully increase the levered returns on our balance sheet loan originations and very significantly our substantial escrow balances will continue to produce tremendous earnings as rates.
Predicted to continue to rise these earnings have grown substantially as we have approximately $2 billion of balances that are now, earning around 4% or $80 million annually effective February one which is up significantly from a run rate of approximately $7 million annually at the same time last year.
And as Ivan mentioned earlier. These features are unique to our business model, giving us confidence in the quality and sustainability of our earnings and dividends 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 Todd.
Thank you Sir.
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Our first question from Steve Delaney with JMP Securities.
Thanks, Good morning, Ivan and Paul obviously, congratulations on great results.
What was it much more challenging environment last year, so good job.
Looking forward, which we have to do.
Last year, despite the fed taking rates up 400 basis points, you were able to grow the structured portfolio by 19% on $6 billion of originations as you mentioned Diamond you know the world has changed for sure and you are being more selective I think that was your word.
How should we feel about the outlook for the structured business in 2023.
III and is there potential for additional growth or should we think more just flatline there. Thank you.
So we have a variety of different business lines, which we're focusing on.
I would say that as mentioned in my comments were really in love with the single family build to rent business.
And we're expecting to really dominate that business many of our competitors have fallen away.
Because of the nature of having three turns on our capital.
Yeah.
The growth in that space, we're putting a lot of effort into growing that part of our business and being very successful at it.
With respect to bridge loans and structured loans.
With an inverted yield curve, it's very difficult to bridge loans.
When you're borrowing at 9% and you're buying assets at five and a half caps. We don't understand the guide is a growing area. However, with that said.
The inverted yield curve gives us a lot of different opportunities if people want to borrow.
Oh, sure five or 10 year basis.
Lower levered deals and use some of our balance sheet, providing medicine prep, which we had been active actively doing.
So expect a mezz impressed to be more active expects the agency book to be used more effectively on those type of transactions and also expect us to be working on all the solutions.
Provide for transitional loans.
Via product with a good use of Mezz Empress I think that's a sweet spot right now.
But we're not overly concerned wanted to comments if in pulse commentary is.
For us we have these low liability costs so.
It has to really be effective in putting our capital out and to opportunities with the levered returns on our capital given our existing liability costs are very very favorable.
All accumulating cash.
And being selective in our opportunities is something that we are uniquely positioned to have given the fact that we have $8 billion of below market liability structures in place.
Yeah, Paul Hey, good morning, it's Paul so.
Honestly I haven't took you through.
The market data and I'll, just give you a few numbers so I think.
The way we look at it is as Ivan said, we'll be very selective in the balance sheet side, given the inverted yield curve I think we did a 175 million of fundings in January we did see a little bit more run off which where we love we did see $480 million run off so the book shrank a little bit again in the first quarter.
We are obviously very.
Im very interested and very excited about the <unk> business and we will continue to grow that but as you know that takes time to get to your balance sheet because it goes on funded for a little bit we're sitting with about $1 billion on our balance sheet. So we did see a little bit of a decline in the first quarter at least in January on our loan book, but I think we're modeling like you said that somewhere around flat because we think the mezzanine.
And opportunities will be greater in the <unk> business will continue to build.
Great.
<unk> been on the Mezz impressed I mean, do you actually see opportunities to take equity interest in some of these financings and sort of be more of a merchant banker than just a banker just a lender.
I think it is a combination of everything depending on the leverage.
At a low leverage basis, it's more of a coupon into higher leverage you. Go then you start to get a higher yield which is a combination of pay and participation.
Well. Thank you both for the comments.
Thanks, Steve.
Thank you we'll take our next question from Stephen laws with Raymond James.
Hi, good morning.
Congratulations on a very solid quarter of pretty strong numbers across.
The board looking versus my estimates.
To follow up on the Mezz, how big of an opportunity is that I think you may have mentioned in the prepared remarks, a $20 million of investments on $200 million of agency.
Volume can you talk about how big of an opportunity that is or how much how large will we see that get on your balance sheet over the coming couple of years.
I think it varies.
We're looking right now I think we did Paul I think we did in the fourth quarter about $20 million as well right.
We did we did we did $20 million of Mezz Island behind agency product that we brought over from our balance sheet.
We're looking at depending on how much you want to juice it up between 15% and $40 million a month that would be the level.
And then.
Yeah.
Really depends on the market the yield curve, where the purchases start to pick up.
So those are the factors but.
I I would forecast.
Conservatively 20 $20 million per month.
Great Thanks for that color.
Paul as you think about margins I know the mix impacted the MSR margin a little bit in Q4, but when you think about those margins looking out. This year is there a is there a range you see those playing out between over the next few quarters.
Yes, I think Thats a good question, Steve certainly the larger transactions as I mentioned in my commentary that we did the portfolio deals really weighed down on the MSR, because youre getting a lower servicing fee, but a bigger bigger transaction done.
I would say that we've been running anywhere from $1 30 to $1 35, and a gain on sale margin I still think that holds I think we've done a nice job there, even given where interest rates have gone and I would say on the MSR side was certainly lower this quarter than it normally would be without big portfolio deals like that.
I'd say, we're running probably.
From $1 25 to $1 45 is what I think I am estimating going forward, depending on deal size and on the tiers of credit we have seen a little bit of.
Backing off on the servicing fee in Fannie may a little bit lower than where it's been but it's still really strong we're still seeing servicing fees on new Fannie loans anywhere from a low of mid <unk> to a high of mid forties. So I still think we will get some nice servicing strips and put on some nice MSR is but I think 125 to $141 45.
It is probably inappropriate range.
And any large deals.
I appreciate the color on that Paul Thanks, very much for your time to small no problem. Thanks, Steve.
Thank you we will take our next question from Rick Shane with J P. Morgan.
Hey, guys. Thanks for taking my question and I apologize if this is redundant.
Like many of my peers bouncing around between calls this morning.
Just wanted to talk a little bit.
The migration between the structured business.
On the agency business to the extent.
Historically, you put loans on balance sheet worked with borrowers.
<unk> COO.
Complete the projects and then.
Securitize those are sold them to the agencies.
I'm curious if you think in this environment.
There is.
That compares to other commercial mortgage REIT models were.
The ultimate take out is in the private term markets as opposed to the government term markets.
So.
As you know our business model on every bridge loan we do is for an agency takeout that's how.
We are built that's how we're structured that's how the economics of the firms really flows and that's the value of our franchise.
So each and every loan that's in our portfolio was underwritten accordingly.
So in this kind of yield environment, when you have an inverted yield curve.
No.
Many of the borrowers have a decision to make.
Do they buy it.
Do they pay higher interest costs when their caps.
Turn off.
Can a cash in their caps and use that as equity and recapitalize some of their assets.
Go with a fixed rate if you're floating rate individual you're paying.
Anywhere between the low of eight.
Of nine and a half.
When you factor in the capital cost of cap costs.
You may have a great opportunity.
Go into a 10 year fixed rate.
And we were putting people into 10 year fixed rates.
The low fives on an IL basis, and the savings are so considerable.
And the stability.
<unk> is so significant.
People were willing to come out of pocket with cash lowered their principal balance and go into agency debt.
And certain of those circumstances.
Later on some preference on which has been.
Very accretive for us as well.
So that's our business model it works very very well.
Some borrowers like to ride it out.
Borrowers are more conservative so it's a whole mixture.
But unlike our competitors.
Our model is built in that manner, it's multifamily debt.
Agency eligible.
And that's that's one of the primary exits every time, we do alone.
Got it very helpful. Thank you guys.
Thanks, Rick.
Thank you. Our next question comes from Jade Rahmani with K B W.
Hi, This is actually Jason <unk> on for Jade. So question, we're starting to see a few cases of what looks like strategic defaults from borrowers in order to extract concessions from lenders.
Since they know that lenders don't want a foreclosure on their hands for example, Blackstone.
This large multifamily beyond New York, you said special servicing and we know that Arbor's borrower relationships are unique and tend to be repeat.
But can you comment on whether youre seeing that trend at all.
It's definitely a trend in the market and.
In a competitive lending environment.
Many lenders strip away.
Certain structures on that alone.
And without those structure on alone.
If the asset value.
As close to the debt.
And the lenders don't want to take back those assets. It gives a lot of strategic advantage to the borrowers if they care if they don't care about.
<unk> profile.
For us we have a long history.
Originating loans, and we have tremendous structure on our loans and.
Within the industry.
We're treated a lot differently than other people because we were very prudent when we make these loans.
The borrowers need to come work with us for a variety of reasons.
One of them is the structure on the loans and the second is the number of loans, we do at particular borrowers.
So it is in the asset class itself. So it is very common.
In today's environment.
If the borrowers.
We want to support the loans that are going to hand back to Keith because they have no economic incentive.
Blackstone with us and affect your reputation.
In our case, it's just very very different we're involved I'm involved every day.
Borrowers and.
They come to the table, which they have to come to the table.
And if they are willing to be reasonable and we've been able to work out.
Good solutions.
Keep in mind that we have.
A deep and seasoned.
Asset management group.
We are well positioned and if we have to we will take back an asset we haven't had to do it.
But we always have that skill set and capability.
Take back that asset manage it capitalize it and continue without remedies against those borrowers.
Haven't been in that position, we've been well positioned.
And so far we've.
We've done extraordinarily well in working with our borrowing base.
Great. Thank you that's very helpful. For my second question on the single family rental side are you guys at all concerned about the recent uptick in built around supply.
We've always been concerned in that market, because there's a very very big difference and COO.
Core locations versus.
Remote locations.
So a lot of the supply will come.
In areas that.
Warren.
Investment.
So we're selective.
With the projects that we're doing.
So if you're in the right core area and the right school districts and the right traffic patterns.
Good.
But a lot of people are just buying land building them and having the attitude of build them they will come.
We have tremendous discrimination in terms of who we're doing business with.
Got it got it.
Thank you we'll take our next question from Crispin Love with Piper Sandler.
Thanks, Good morning, everyone.
First on securitization markets, how do you would see securitization markets to be functioning right now you've been very active there and your history, but have you seen signs of stress and securitization market securitization markets continue in recent weeks to start 2023 are you seeing any improvements.
They are improving significantly the CLO market is improving there is no product and.
The fear and dislocation, which occurred immediately is starting to subside. So the market's improved a lot.
Over the last three months and we think it will continue to improve a little bit.
<unk> need product, there's no new product, so, it's a demand and supply imbalance.
And the existing structures of proven from a credit perspective to work well for our investors.
So we believe the CLO market.
It is not far from where we would do and execution.
It's close.
The issue with the CLO market into an execution is creating new product.
Good for existing inventory.
And to create maybe some economies.
And how.
How we finance, our existing product, but creating a new vehicle for new product.
Is it a little bit difficult. So we would look at using the securitization market to improve our funding.
Current funding, which is upside for us.
So that's how we look at it but it isn't.
It has improved and it looks like it's going to continue to tighten up a bit.
Thanks that's.
That's all helpful color and then just one last question for me on maintaining the dividend and dividend in the quarter can you speak to the key reasons why the board.
Do that after I believe 10 consecutive increases just on the surface looking at your results, which are really strong with GAAP and core earnings pantry covering the dividend would have seemed like a dividend increase what would make sense, but I'm just curious how the board thinks about that and does that say anything about the cautious outlook.
Listen, we always have tremendous discussions of maintained.
Maintaining raising and how much we've raised them.
We've had such a huge cushion and.
Our performance has been outstanding.
I think the board discussions and Paul can comment on as well is we just don't get.
We just don't get the credit.
And the market and at this period of time, there's really no upside.
In the market to raising to raising the dividend everybody else's lowering their dividend and.
The board felt the credit is really everybody's dropping a dividend paying it out.
Out of capital and clearly the cushion we have in.
That's all it was there was no real benefit to it Paul you want to give a little color on that yes, I think thats right, Chris but I think our view is as you know we have a lot of cushion and easily could have just done it again, but we look at we look at when you come into these markets and we've been as Ivan said in his prepared remarks, we've been.
Strategically looking over the last 18 months and what we think would be a challenging recession.
Our assets in our portfolio are in great shape, we're in the right asset class. We have a lot of structure. We do a lot of deals that repeat borrowers having said that when you come into challenging environments.
Cash and liquidity is crucial and we've been we've done a great job of accumulating a really.
Mark Piling a war chest of cash and at this point, we just don't see a lot of value and increasing that dividend today and that May change, we may see where our earnings go and we will continue to evaluate it with the board on a quarterly basis, but again raising it three times. This year 10 of the last 11 quarters and when I look at the peer group is I think only one peer group that actually.
One person in our peer group that actually raised our dividend it was nominal over the last three years. So we just feel like the.
Credit isn't there at this point and we will continue to evaluate.
Evaluated.
And when we're trading at a similar dividend.
Two.
Hello.
All of Us and our peer group and they havent raised their dividend payout ratio was close to 100%.
And.
The board just said well, what's the benefit of increasing the dividend and let's see how that goes where such an outperformer.
And paying out 67% or 70% increasing your dividend.
What.
As a market even going to cure and that was kind of a consensus.
Thanks, I haven't followed that all makes sense to me and I. Appreciate you taking my questions.
Thanks Kristen.
Thank you we'll take our next question from Lee Cooperman with Omega family Office.
Thank you I have three question before I ask my question I just wanted to give you guys, a well deserved shout out I've been an investor I think from the date of the IPO.
Oh, well over 10 years, you guys have done a absolutely sensational job in managing the figures of the company.
I want to congratulate you on that and I want to thank you for that.
My three questions are number one.
No.
You said in your press release, we have a best in class return on equity of 18%.
Our view is that sustainable at the current time, where do you think that we're over earning a number two I need a little bit of an education. There are certain tax laws that require you to pay out a percentage of your taxable income as a REIT based upon your budget. This year do you think you'll be forced to pay an additional dividend before the end of the year.
We're a nut and third I think the answer is self evident.
We don't have any need for any additional equity here because you have plenty of equity on the balance sheet.
Sure.
Yeah, So, let's take let's take them.
Try to take them in order the first.
Let's answer the second question first as far as the tax code goes you rightly.
You are required to distribute 90% of your taxable income as a REIT and if you don't distributed 100, Japan corporate tax on the difference between 90 and 100, so thats leakage I think the advantage we have over everybody else in the spaces that we have a what we call a REIT over a trs. So we have a taxable REIT subsidiary that pays taxes on the agency business.
And because of that we're able to retain that capital. After you pay tax and not have to dividend. It up. So that's one piece of it to your question what we have to pay a special dividend for the end of the answer is no, but we will continue to evaluate where our taxable income goes both in the REIT and the Trs going forward and that will certainly be one of the contributing factors to where our dividend goes.
In the future of our right now we have the ability to retain capital.
I'm not running a file of those REIT rules.
As far as the third question on capital we've done I think a masterful job as you said Lee and we really appreciate your comments.
Really looking at this world correctly, and knowing that you have to be properly capitalized when you enter into these challenging environments and.
So we've done a really good job of accessing capital, we're probably one of the companies one of the only companies in the space that has access to different levels of capital both in debt and equity because of our reputation because of our brand and mostly because of our performance. We are viewed best in class by a lot of investors. So thats really helped us will just a.
Valuate It right now as you said was sitting with a bunch of cash I think we're in a really strong liquidity position.
And we'll just continue to evaluate whether there is a need for capital going forward, but at this point, we like our position right Ivan.
We do we will evaluate all run off first of all originations because run off exceeding our originations creates a lot of capital for us.
Given the benefit of a low liability structures. It puts us in a position to continue to have you know.
Standing earnings.
If we leverage our existing liability structures.
With assets, we have a real cushion and a real benefit there are a lot of firms in the industry that walk up their liabilities, which we think is not the right way to run our business. We don't do that we get the benefit of having higher earnings on those assets and especially Replenishable vehicles.
So I think we got to wait and see.
Now each each month goes and where the yield curve is and where the opportunities are but we're sitting in a pretty good position right now.
And to your first question Lee about the return on equity certainly our return on equity has been unprecedented as you said a lot of that has to do with obviously the run up in interest rates and earning more on our capital I think everybody in the space is seeing that we're seeing a significant increase in the escrow earnings because of where rates have gone and obviously our.
C business is capital light and therefore, the ROE on the agency business is much higher than on the balance sheet business to answer your question of whether we think that's sustainable that will depend on a lot of factors. It will depend on the mix between the balance sheet basis in the agency business and if we can keep pace, we'll keep close pace to where the agency business was last year I think that will be a meaningful contributor.
<unk>, but it also will depend where rates go because obviously if rates at some point down the road and I don't think it's happening in 'twenty four others have a different view if rates start to come down then you start to get a less a lower return on your cash and your escrow balances and on your floating rate loan book, but I think for <unk> for 2023, I see that.
As a relatively attainable goal of close after that we will just have to see where the market goes.
Thank you guys. Congratulations on a very well deserved shout out you guys have done a fabulous job.
Folio supposedly.
Thank you at this time, we have no further questions in queue I'll turn it back to Ivan Kaufman for any additional or closing remarks.
Well. Thank you everybody for your support in 2022 is clearly the best year that the.
Firms had in what is a very.
Very challenging environment.
Our management team has done a great job of borders kudos credits, great support and thanks to all our investors for their contribution and support our franchise.
Everybody have a great day, and a great weekend take care.
Okay.
This concludes today's call. Thank you for your participation you may disconnect at anytime.
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