Q1 2023 Arbor Realty Trust Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the first quarter 2023 Arbor Realty Trust earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this period you will need to press star one on your telephone.
You want to remove yourself from the queue. Please press star two please be advised for today's conference is being recorded if you should need to operator assistance. Please press star Zero I would now like to turn the call over to your speaker today Paul.
I Dunno Chief Financial Officer. Please go ahead.
Thank you Britney 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 March 31, 2023 with me on the call today is Ivan Kaufman, our President and Chief Executive Officer before we begin I need to inform you statements made in this earnings call maybe deemed forward looking statements that are subject to risks and uncertainty.
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 tomorrow or is X.
Spectation 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.
Undertakes no obligation to publicly update or revise these forward looking statements to reflect events or circumstances. After today or the occurrences of unanticipated events I'll now turn the call over to Arbor's, President and CEO Ivan Kaufman.
Thank you Paul and thanks to everyone for joining us on today's call.
After coming off our best year as a public company in 2022, we've had a tremendous start to 2023 with another example of a quarter.
Our diverse business model continues to call for many significant advantages over everyone else in our peer group.
With a premium operating platform with multiple products that generate many counter cyclical income streams.
And that's to consistently produce earnings well in excess of our dividend.
This has allowed us to increase our dividend another 5% or two cents a share to 42 cents, reflecting our 11th increase in the last 13 quarters or 40% growth over that time period, all while maintaining the lowest payout ratio in the industry, which was 68% for the first quarter.
Our performance continues to be head and shoulders above everyone saw peer group, none of which had been able to increase their dividend at all in the last few years and in fact several of our peers continue to cut their dividend in this market. While all of those are paying dividends of over 100% of the earnings. Additionally, very significantly.
We've grown our book value per share by 45% over the last three years from just under $9 a share to almost $13 a share even with 11 dividend increases during that period, while many of our peer groups have not grown their book value at all despite cutting their dividends or best only keep me.
Their dividend flat, yet, we still trade at similar dividend yields and price to book values as the rest of the space. Despite our unquestionable outperformance.
Which is why we strongly believe we're completely undervalued and has never been a better time to make a significant investment in our company.
As we discussed on our last earnings call. We have been laser focused over the last 18 months and preparing for what we felt would be a very challenging recessionary environment.
Currently we have all seen the negative press around the financial markets banking industry and real estate sector, which has created additional uncertainty and volatility in the market.
We are operating our business with the expectation that this environment will persist for some time and the result, we're very pleased on how well positioned we are as a firm to take advantage of what we believe will be accretive opportunities to grow on a premium yields on our capital.
We've taken a patient and selective approach to new investments that have been heavily focused on preserving and building up the strong liquidity position. This has allowed us to accumulate approximately 900 million of cash and liquidity on hand.
Which again provides us with a unique ability to remain offensive.
I have always said there are tremendous opportunities in down markets to make a significant return on your capital properly position.
One of the best opportunity we have seen in recent months is the ability to repurchase our stock at significant discounts to book value and generate high double digit returns on that capital, we repurchased approximately $37 million of stock at an average price of $10 53, which is a 17 put sent discount to our book value and generates a current dividend yield of <unk>.
16% and a yield of approximately 20% on a distributable earnings.
This is a tremendous return on that capital and again, it's something we're able to take advantage of it puts a well position how firm is to be opportunistic in a volatile environment.
We have also a best in class dedicated asset management team with tremendous expertise a little workshops and debt restructuring, which is something that is a key part of our business model extremely valuable and unique to our platform.
A lot of misinformation has been published lately about a group of loans.
Totaling.
[music].
Totaling $229 million that we had in Houston, Texas.
In order to exercise all remedies, we proceeded to foreclose on these assets and wanted to have one of the existing investors who is deeply committed to the project recapitalized and restructure the debt with the appropriate guarantees putting out loans in a much more favorably protected position we recorded no loss on the original debt recovered all the <unk>.
Outstanding interest solid towards this part of the restructuring this was an extraordinarily successful debt restructuring, which clearly demonstrates the incredible depth and experience of our asset management team.
Unlike others in this space, we've been conducting ourselves is how we've been in recession for the last four quarters and although we believe the bottom has near we are well aware of the challenges that lie ahead.
We feel we are doing it.
Outstanding job in managing through this dislocation between our multifamily centric portfolio, the quality and structure of our loans, our asset management skills set and tenured senior management team and a track record of managing through multiple cycles and the strength of our balance sheet and the first meals the versatility of our free.
<unk>.
Before I talk about the first quarter results and the highlights I want to take a few minutes to address the significant amount of false and misleading information that has been recently published about our company through a short seller report.
The report is replete with factual misstatements, although patently false information and in U N does that is cloaked in the form of opinion and a transparent attempt to mislead the investing public.
It's clear to us and it should be clear equally clear to everyone who has been diligent in following the progress of our company for more than a decade.
What was written by somebody who apparently neither understands our business no. One has a sense of appropriate accounting treatment for certain transactions and who is motivated solely to profit a net short position through the dissemination of false and misleading information.
It will not go through a back and forth on every false and misleading allegations by the so called research company.
It should be obvious to everyone. At this point that there are poison attempt to capitalize on fear instead of rational thought.
And what is so ironic is that they took one of the most successfully restructured transaction a history that was highly lucrative tie shareholders have to try to turn into a negative. Most importantly, we have reaffirmed with our auditors that all our accounting for the periods in question is correct as evidenced by.
The filing of this morning first quarter 10-Q with no material changes.
I urge our shareholders any investment public pay no attention to just noise and is clearly coming from a buyer source lacking in credibility and instead of focusing on the fundamentals of our business a tremendous operating results and in fact, what we are a leader in our space and contain a massively outperform our peers.
Turning now to our first quarter performance.
As Paul will discuss in more detail our quarterly financial results were once again remarkable we produced distributable earnings of 62 cents per share, which is well in excess of our current dividend representing a payout ratio of around 68% and clearly with our extremely low payout ratio.
Multiple predictable reoccurring income streams, we're uniquely positioned as one of the only companies in that space with a very sustainable protected dividend even in this challenging environment.
And our balance sheet lending business, we continue to mean very selective focusing mainly on converting a bridge loans into agency product.
I went to recapture a substantial amount of our invested capital.
Two significant long dated income streams in the first quarter, we had a tremendous success in this area with another 1 billion of balance sheet runoff over $400 million of which was recaptured into new agency loan originations.
Adult we're able to recoup $200 million of our invested capital and continuing 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 and this strategy is a critical part of our business model and is unique to our platform and we have both.
Top balance sheet lined out and operate a very large agency business.
And I just see agency business, we had a strong first quarter originated $1 1 billion of loans capped off by a very strong march with over $530 million in originations.
And with the current yield curve.
And a very little activity in the market for balance sheet lending, we are seeing a significant increase in our agency pipeline, giving us confidence in our ability to continue to produce very strong agency volumes going forward. Additionally, we have a strategic advantage that we focus on workforce housing part of the market and have a large multifamily balance sheet loan book.
That actually feeds our agency business.
In fact, we are one of the leading agency lenders and the achievement of affordable housing goals. As a result, we continue to be viewed very favorably by the agencies and again. This agency business offers a premium value as it requires limited capital generate significant long dated predictable, but it's kind of strange and producing significant annual cash flow to this Paul.
Our 29 billion fee based servicing portfolio, which grew 3% in the first quarter generates a profit of $117 million a year in reoccurring cash flow.
We also see a significant increase in earnings on our escrow and cash balances out rates.
Arisen conceptually, which in fact is a natural hedge against interest rates.
We are now, earning approximately 4% at around 2.8 billion a balanced AR balances were roughly 100 million island annually, which combined with our servicing income annuity totals over $217 million of annual cash flow or over a dollar a share. This is in addition to the strong gain on sale.
And as we generate full originations platform and again, it's something that is completely unique to our platform, providing a significant discrete strategic advantage over our peers.
We continue to grow our single family rental business as we are one of the only remaining lenders in this space, allowing us to produce as much business as we want we remain committed to the business that office three turns on our capital food construction bridge and permanent lending opportunities and generate strong levered returns in the <unk>.
Short term, while producing significant long term benefits by further diversifying our income streams and allowing us to continue to build our franchise.
In summary, we are off to a fantastic start in 2023 with an exceptional first quarter. Once again demonstrates our ability to generate strong earnings and dividends in all cycles, we understand very well the challenges that lie ahead in this volatile market I feel that we are very well positioned in the best positioned company.
Our space to succeed in this cycle.
Earnings significantly exceed our dividend rate.
First in the REIT asset class with very stable liability structure is highlighted by a significant amount of nonrecourse non mark to market CLO debt with pricing that is well below the car market were also well capitalized with significant liquidity, which has put us in a unique position to take advantage of the many accretive opportunities that.
Will exist in this environment.
And again that best in class asset management capabilities and a seasoned executive team. We are very confident that when the smoke clears, we will continue to be the top performer Comping a space.
Difficultly outperforming our peers I will now turn the call 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 $122 million was <unk> 62 per share. These results translated into industry High ROA ROE is once again of approximately 20% for the first quarter, allowing us to increase our dividend to an annual run rate of $1 68 a share.
Reflecting a dividend to earnings payout ratio of around 68% on those first quarter earnings.
First quarter results significantly beat our internal projections largely due to approximately $16 million of income received from equity investments in the first quarter, which included a large equity kicker we had related to a loan payoff and a distribution from our electrode investment. We also experienced higher gain on sale income from increased so loan volume, mainly due to a stronger origination.
Volumes in the latter half of the quarter than we anticipated and we continue to see increased earnings on our floating rate loan book and our cash in escrow balances in the first quarter from higher interest rates.
We also recorded an additional $20 million in seasonal reserves on our balance sheet loan book during the quarter as a result of using more conservative assumptions in our model due to a decline in the macroeconomic outlook for commercial real estate. These reserves are general in nature and do not affect distributable earnings as we have not experienced any realized losses this quarter.
<unk> sheet loan book continues to perform well in this market with no increases in defaults or delinquencies in the first quarter and as Ivan mentioned earlier, we believe we are well positioned given our multifamily focus strong liquidity position and our best in class dedicated asset management team with tremendous experience getting giving us confidence in our ability to success.
We manage through this cycle.
And our GSE agency business, we had a strong first quarter with $1 1 billion in originations and $800 million alone sells the loan sale numbers were less than our fourth quarter sales as we mentioned last quarter 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 first quarter sales was up substantially to 172% compared to 133% in the fourth quarter again, mainly due to a large deal that closed in December of last year with a reduced margin and from a higher percentage of FHA loan sales in the first quarter that contained much higher margins. We also recorded 18.
$5 million of mortgage servicing rights income related to $1 5 billion of committed loans in the first quarter, representing an average MSR rate of around 123% compared to 1.12% last quarter, mainly due to reduced servicing fees on the large portfolio deal we closed in December .
Our fee based servicing portfolio grew another 3% in the first quarter to approximately 29 billion at March 31, with a weighted average servicing fee of 40 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 $117 million gross annually, we do.
See substantially less accelerated run off in our agency loan book again in the first quarter due to market conditions, which has resulted in reduced prepayment fees in the first quarter, we received $2 million of prepayment fees as compared to $6 million last quarter.
And again given the current rate environment, we are estimating that prepayment fees will continue to run around 2 million a quarter going forward.
And our balance sheet lending operation, our $13 6 billion investment portfolio had an all in yield of eight 3% at March 31, compared to $8 four 2% at December 31, mainly due to increases in LIBOR and sofa rates during the first quarter.
The average balances in our core investments was $14 1 billion this quarter as compared to $14 8 billion last quarter due to run off exceeding originations in the first quarter.
The average yield on these assets increased to 894% from 7.91% last quarter, excluding $8 million in back interest collected on the repayment of a nonperforming loan in the fourth quarter, mainly due to increases so far in LIBOR rates and from more acceleration of fees in the first quarter.
Total debt on our core assets was approximately $12 6 billion at March 31, with an all in debt cost of approximately 697%, which was up from a debt cost of around six 5% on December 31, mainly due to increases in the benchmark index rates.
The average balance in our debt facilities was approximately 13 billion for the first quarter compared to $13 7 billion last quarter. The average cost of funds in our debt facilities was $6 six 9% for the first quarter compared to $5 eight 1% for the fourth quarter again, primarily due to increases in the benchmark index rates.
Our overall net interest spreads on our core assets increased to $2 two 5% this quarter compared to $2, one 1% last quarter, excluding $8 million of defaulted interest default interest we collected in the fourth quarter and our overall spot net interest spreads were 1.86% at March 31st at 192% at December 31st.
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 as Ivan mentioned earlier, we have several diverse and counter cyclical income streams that allow us to produce strong earnings in all cycles. The most significant of which is the value.
Of our agency platform, which is capital light and generate very high ROE through strong gain on sale margins long dated servicing annuity income and increased escrow balances there on significantly more income in today's higher interest rate environment.
Additionally, we are multifamily centric and have a substantial amount of non mark to market nonrecourse CLO debt outstanding that with pricing that is well below the current market were also well capitalized with significant liquidity and have a best in class management and <unk>.
Asset management, and senior management team that have tremendous experience and expertise in operating through multiple cycles and we believe these features are unique to our platform, giving us confidence in our ability to continue to outperform our peers and deliver high quality and sustainable earnings and dividends 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 Brittany.
Thank you as a reminder to ask a question. Please press the star and one on your telephone to withdraw your question Press Star two so others can hear your questions clearly we ask that you pick up your handset for the best sound quality, we will take our first question from Steve Delaney with JMP Securities. Your line is now open thanks, well good morning, and congratulations on it.
The strong quarter to start the year.
Big News I've been in the banking World of course, and I'm curious given signatures presence and in New York.
If they were a material competitor to Arbor in any way and how does the demise of that bank impact your opportunity set in New York going forward. Thank you.
Sure. That's a good question and I think what things people are not focusing on many many of these regional banks were strong competitors of ours.
And.
They they really took over a large part of the market in particular when rates rose they were well below the market and their model is an interesting model of Louis they don't necessarily have their own originations they get fed by brokers.
And they build out their build up portfolios based on being the lowest price.
And very often as we're seeing now not just the lowest price, but having assets that are really non salable.
So getting rid of a lot of these regional banks, who lend improperly right by being below the market with a relying on short term deposits is something that we believe is very healthy for companies like ours will maintain a huge amount of discipline and as we stated and I'll call them consistently do.
We have a very much asset and liability structure anybody could generate loans right when they don't match assets and liabilities correctly and surely they are there.
And then on the price of loans. So I think like US we have a tremendous origination set with.
A very disciplined in the way, we do our business and eliminating these lenders.
Who don't even know how to originate all they do is really take over loans from brokers at the lowest price I think will create a better landscape for us and it's going to be very clear, it's definitely in the interim that being an agency lender with the ability to underwrite sell or securitize loans into the market with Fannie Freddie and FHA.
Just an invaluable tool specifically aligned in times of illiquidity like today.
Ivan do you think that this is goes far beyond signature and Theres a broader.
Many banks I guess, playing that game are playing that card and <unk>.
Possibly the FDIC is going to come down on them from a regulatory standpoint so.
Beyond just New York.
<unk> to see this broadly across the country with respect to the banks.
Banks that do the broker fed lending model.
Yeah, I mean, it's it's it's huge I mean this is just the tip of the iceberg, but I believe the FDIC will keep these people afloat and I've always amazing on the first Republic.
When you saw that the government gave them $90 billion from their treasury to keep them alive. So you know anybody was fixed rate loans, who originated fixed rate loans you know.
In the threes.
And you know, they're sitting with fixed rate loans in the threes are paying on deposits in the fours they can't raise equity.
To sell their assets, so, it's probably a 30% haircut.
I would I would say that it's going to have to decide who stays and who doesn't stay and then there are other institutions that are much healthier because they have more floating rate loan book, so they've been able to manage that book, but they're under pressure with a losing deposits right. So they're.
They're losing deposits and yet they still have to fund up a lot to go there.
There are no.
The assets that they've put on their books and they are being grouped and little bit unfairly. So I believe to the extent like Pac West who has billions and billions and billions. That's just one of many.
A five year loans in the threes anybody can do the math of a five year loan at a three as you know when rates, a five and a half with liquid piece of collateral poorly underwritten them.
Is it worth 2030 40 cents.
That wipes out their regulatory capital and you can't raise capital when you're in that situation when you're losing deposits you have a run.
So I think the fed has done a reasonable job and you know at least providing lines I would love to see to disclose the amount of the lines that were provided to all these regionals. All these local banks that would tell you the significance of the rollout of deposits not much the fittest propping. These people up but when your asset values are so significantly less and you're really in.
Solve it you know on a mark to market basis, because she went ahead and you've originated fixed rate loans with short term liability costs.
And you have an inverted yield curve you're in tough shape. So I believe this will continue a lot we'll do with what the fed does and where rates elevated on the short term and at a cost of deposits being so high. This problem is not going away and then of course, what you'll see is for those people who are borrowing from the fed I don't know what rate, they're borrowing but you'll.
Negative earnings to some extent because your assets.
All are in less than your cost of fund them. So this is a real issue, but more importantly, it's a real long term issue. It doesn't seem fair in a sense that we just got through the great financial crisis, such a short time ago.
Actually doing the exact same thing just under a different you know.
A different mantra. So some reason the system never learns and we're back where we were in a fed didn't step in it would be worse than the great financial crisis, a total eradication of the banking system.
So I think we'll manage through this I think there'll be others, and there'll be winners and losers and mergers.
But unfortunately I think there was all will be you know the big four or five or six banks are just going to get bigger so it's going to really affect to your first question the competitive landscape and for lenders like us who.
So I think we will have more flexibility.
Because we won't be competing on fairly against government sponsored banks, who get to operate in really an inappropriate way. So we're optimistic that it'll be great for companies like ourselves.
Thank you so much for that and there it was.
A much more substantial response than than than I expected. So but thank you. Thank you I'm going to pass on my other a couple of questions. I know there are other analysts on the line, but I appreciate the conversation.
Well, thank you and thanks for your support Steve you've been a great friend to the company Youre Welcome Steve.
We will take our next question from Stephen laws with Raymond James.
Thanks, David Hi, good morning.
Pricing on the dividend increase and you know I guess, along those lines you know I don't know how much credit you're getting for it probably very little but can you talk about how you think about allocating capital.
You know between buying more stock or something else in your in your capital stack or new investments in attractive opportunities you talked about I enjoyed the response to Steve's question a second ago. So you know maybe how you think about the trade off there with your use of cash.
Yeah.
Well so first of all we bought back $37 million out of 50. When you go into a blackout period like we are its programmatic. So we sort of set different Rangers. We don't have the ability to have discretion I would love kind of bought back more but the stock never got into the last range that we wanted in order to be.
Buy that back.
It's funny, because my only regret and they told Paul.
So quick to do that or they didn't have 100 million share buyback in the only 50. So our intentions would be probably to go back to the board an increase that level. If the market continues to improperly value us.
Then we certainly will continue to buy stock at these levels, especially when we're out of blackout period. So we have significantly more capital capital, we will increase that one's once the dust settles here I go back to the board to try and increase more it's just a tremendous way to get a return on our investment.
Men this way to increase your book value.
And we like it at these levels.
As I said, we were a little frustrated we couldn't get it all used.
But you know you have to balance things, there's so many different aspects of our business. While you know we would love to buy back and use all of our capital for that we run a business we want a franchise and the idea is to build our business in these great opportunistic time and build long term relationships and reoccurring revenue when we can get mid to high teens on a loan Paul.
And investing it and go on our clients and also produce multiple times on our capital by getting long dated servicing that's extraordinarily compelling so we balance all of different things.
In addition, as you know you really can't access capital, it's really to pulse Testament in company's test that we did a debt offering last year, even despite the negative environment.
Well one of the only firms who not only access the debt markets and sometimes the equity markets in different instruments.
But do it in a very efficient and appropriate way. So we're sitting on a great deal of cash we're seeing great opportunities as I mentioned on the call the single family business, which we've been talking about for years.
It's an amazing business and it's funny, we compete against a lot of regional banks and regional banks, where crazily priced, but we still garner a decent amount.
So now we're extraordinarily well positioned for that business, it's a great business and we are a leader in it we're using our capital extraordinarily well, we will continue to build that business.
The bridge lending business, we don't feel is a good time right now because.
We're so for us to be lending at 9% roughly.
Situation.
It doesn't make a lot of sense when people buy a five and five and a cafe assets and have cap costs. So we'll look at the yield curve will look at the opportunities. We will look at what cap rates are and we'll look to see how we can build our franchise in the long term.
But yes, we will like to go to the board an increase that buyback. We think if the market continues to be irrational and clearly as we all can see that we're.
Totally.
Improperly valued and that's okay. That's just opportunity for all of us as long as what patients were not short term you've been following US we are never short time, I'm not thinking and that's why we're so well positioned because when everybody was doing loans at the top of the market, we were pulling back and pulling back heavily.
When everybody was using short term leverage we were very heavily into our CLO is in the market.
So we think this dislocation will create extraordinary long term value. We're good stewards of management of capital and we think these are extraordinary times to build long term value.
Great I appreciate those comments.
A quick follow up if I may Paul you mentioned in your prepared remarks that gain on sale margins I think improved in the late part of the quarter can you talk about are those still looking you know having rebounded from earlier this year due to the second quarter to date.
Yeah, I think it's a great question, Steve Thanks, and yes, we did see a nice pop in our gain on sale margins. Some of that as I said in my prepared remarks had to do with we had some large portfolio deals. We did at the end of last quarter was like a one point margin. So it was dragging that margin down a little bit in the fourth quarter, and we had more FHA sales this quarter, which obviously.
It's a three four point business as you know, but we are seeing a trend of some strong margins here on our April product I think we closed $425 million of agency product in April so off to a really good second quarter start as we talked about our pipeline is building as the agencies are kind of the only game in town right now with the yield curve, where it is in the balance sheet business.
Not really attractive for everyone in a lot of players are not in the not in the market today, but we are seeing really solid margins I always guide to like a $101 35 to 100 150 ish range, but yes, and I think we'll be in that range, maybe towards the middle to the top of that range, but margins are holding strong.
Fantastic I appreciate the color. Thanks again this morning.
Yeah.
We will take our next question from Crispin Love with Piper Sandler Your line is now open.
Thanks, Good morning, Ivan and Paul My first one is on credit I'm, just curious if you'd be able to share some of the underlying credit stats for the CLO structuring mambo.
Construction loan back in the Fannie loss sharing just curious how they are faring and expectations over the near to intermediate term.
Yeah, I haven't you want me to take some of that Youre right. Yeah sure. So as you saw Kristen we were certainly more conservative this quarter with our seasonal reserves as you know those seasonal reserves don't really <unk>.
Translate always into realized losses, so we've got some specific reserves against them.
Some balance sheet assets that we've had for a while some legacy assets.
<unk> not seen a significant amount of stress a little bit of stress, we've had a little bit of a migration.
Some loans from past watch the special mentioned, but again special mentioned is not a category that means to us that we're going to have a loss so theres going to be a default imminent, it's just changes in where.
Maybe values have gone over interest rates have gone. So overall I think the balance sheet book is holding up well in this market. We do expect the market to be challenging over the next few quarters.
As Ivan said, we think the bottoms in the year, but it will take time to rebound, but it's been performing well we've put some seasonal reserves away, but we're not seeing really a lot of stress on the balance sheet side and on the CLO side as well.
On the agency side, we do have.
As you know a loss share component with Fannie Mae we saw a little bit of a tick up in delinquencies this quarter, but not significant and things move in and out all the time, we put a couple of million dollars more in specific reserves on our books this quarter related to our agency book, but for the most part things are things are pretty.
A pretty stable, we haven't seen a tremendous move negatively on the credit of either side of our portfolio. Both the balance sheet or the agency Island would you say that's accurate.
Yeah, I would say that's accurate are the one thing that we have seen which is worth noting because I think it's a transition transitory and it will work itself out we're still seeing them.
And some of the jurisdictions.
You know people, having tough time evicting tenants really really long you would think with Covid, it's all behind us it's not.
So you're seeing economic occupancy a lot lower which is putting a lot of stress on borrowers, which they don't have the income.
To support that that service and they're coming out of pocket, which they shouldn't they will and that's causing some of our 30 and 60 day delinquencies on the agency sides to pop up.
We think that you know where $50 60 per cent for little or no back end of that as a court systems are loosening up but there are some jurisdictions.
We're just not moving quickly and it's not fair to landlords.
To allow tenants to stay in that property for years and.
And not pay rent and not be able to have a victim. So that has caused a little bit of a tick up in delinquencies are borrowers are holding on their committed to their assets.
They're struggling but theyre getting there, but I think the worst is over on that I've said I think that we will turn the corner on those kinds of things, but people don't really talk about that but we see it front and center we.
We see it in certain specific geographic locations and we see it if a borrower has five or six or eight or 10 properties across this portfolio.
He's dealing with that and that'll work itself out over time, because the value is still in the real estate the operators have good real estate.
They've dipped into the pocket a good deal.
And they are looking to solve those problems is solvable overtime and were working with a lot of these bars to get through some of those issues.
Great I appreciate all the detail there and then just looking at the income statement for the quarter.
I know you've got the income from equity affiliates the elevated in the quarter at $14 million I think Paul I think you alluded to some of this in your prepared remarks, but can you just expand on that a little bit deeper and what were some of the key drivers that drove that increase in the quarter.
Sure So as crisman as I mentioned in my prepared remarks, we had two components that drove that line item to be higher than it has been in the past.
One of them was we got a distribution from our <unk> investment and that happens, we will get that sometimes quarterly sometimes biannually. It depends on the performance of that of that investment and that's our share of that and that was about just under $5 million, but the other $11 million was an equity kicker that we had on our preferred equity loan that we had built into the.
Document many many years ago.
I don't know that we have any of those left but that's a legacy type structure. We had when we were doing preferred equity years ago, and we had an equity kicker in there that if certain things happen what transpired and there was a certain amount of proceeds from a sale.
We would get a piece of that and to our surprise.
The borrower did a great job of selling as asset for a significant dollar amount significantly more than maybe we had expected and that equity kicker became viable and so we ended up with 22% of the excess proceeds from the sale after a certain waterfalls happen in certain debt repayments and we got paid back our preferred equity.
Our interest and we ended up with an $11 million equity kicker I can't tell you that we have any many or any of those left their leftover from the days when they were enhancing your yield on a on a potentially enhancing your IRR on our preferred equity instrument, but that's that's just an.
An example of the things we've done over the years and the value we create and that's something that.
Came in real positive in the first quarter.
They won't put Paul what's worth noting on that.
It is really a form of interest because when we do a P. E alone, we take less and less of a coupon or kind of a return and a trade off for a little bit of a higher return down the road. So what you're seeing with some of these equity Kickers, it's really just a.
Accumulation of interests that we for going up front, which we really believe that would be better down the road.
So while it may be a little bulky. It really is representation of a level of interest that we foregone for that number of years and we do that from time to time, where we believe.
That the opportunities will be greater on a return basis to take a kicker than current interest and it's also a more conservative.
Almost like a pay and accrue, but you know, sometimes we just say listen.
We're just happy with taken an equity check it down the road.
And diversifying our income streams, which is the benefit that we did here and it does happen from time to time with the firm and we've always had a history of doing these things.
Thanks, Simon and Paul I appreciate you taking my questions.
We will take our next question from Rick Shane with J P. Morgan.
Thanks, guys for taking my questions first of all a topic, we've been raising throughout earnings season is related to repurchases and so I want to acknowledge the commitment to buying back shares in the context of what's going on in the market.
That said I.
We've had a number of questions and I think it's a very fair.
Point related to interest rate caps and.
Extensions on loans, if you guys could just walk through a little bit given the impact of higher rates on borrowers.
The magnitude or the coverage your borrowers have in terms of interest rate caps and if you could provide some information in terms of the tenor of those caps versus the tenor of the fully extended.
The structured portfolio.
Sure first of all everything is on a case by case basis, and what's unique about all of our relative to other lenders, which we competed but consistently as we have a lot of structure on our loans and it's just not making a real estate loan with with no with with no responsibility to the borrower.
So in many cases.
Now, there's an obligation by the bar to buy interest rate caps to refund the interest and do things of that nature.
It's been actually a great opportunity for us because you know six months ago nine months ago with the inverted yield curve the cost of caps and a negative carry.
Had a lot of people say, okay. It doesn't really pay to pay 9% or 8% to buy a cap and that's a negative carry and they've elected to actually pay down their loans and convert themselves into agency loans, which you know in todays market you can borrow between four and three quarters and five 5% and that's been very very.
Very effective for us.
We do monitor very closely any caps that are expiring and we work with the borrowers to either put new caps on where to figure out alternatives in order to make sure that they were in a good position.
So there's no one specific answer to that because it's case by case management works at a very intensively and that I I actually am very involved in that as well. So we deal with that many of our borrowers have multiple loans with us and it's it's carefully crafted feature each situation. So far we are.
Been extraordinarily effective month by month quarter by quarter and managing.
All of these upcoming issues and getting them reposition appropriately.
So that's the general answer it's hard to get specific in our book and we don't disclose all the specifics, but so far we've done.
Outstanding job, we're batting a thousand percent even in the most difficult market but.
But I think my outlook as we're talking about a little bit because so far we've been spot on in terms of where the market is we believe we're already halfway through this debacle. We believe it's been already at least nine months to 11 months of real difficult times rising short term interest rates extraordinarily high borrowing costs, which is.
Fueled by an inverted yield curve.
So if it goes up from 25 basis points to 5.25% that's extraordinary right. We believe that the real the real work here was getting for the next nine months, we've gotten through the first nine months extraordinarily successfully you have nine more months to go and it's our thought process that after that period.
Time, you know short.
Short term rates will come down, but with this inverted yield curve every time, we see a drop in the tenure, we see a tremendous number of our borrowers say, okay. Let's lock in you know every time the 10 year hit Street, 33, 10, and 325 and it drops a little bit people are just saying, okay, let's convert.
From a variable variable rate loan with negative carry.
Let's put a little bit more equity into a capital call recap the transaction and converted to a fixed rate. So this yield curve has been really beneficial for us even though it put a lot of stress on our asset management group, but all in all it's worked in our favor.
That raises a really interesting point, which is that when I compare your results for the quarter versus our expectations. One of the things that stands out is that the repayments on the structured portfolio remain substantially higher than we would've anticipated I think our expectation is that bar.
Our hours would have delayed the financing into the fixed rate market because of the long term and lockouts on those loans.
Is there a way that you are able to is this a purely borrower driven activity, where theyre looking at saying Hey, let's just get this locked in it might not be great economically we're going to lock in long term financing costs, but let's move on.
Or are there incentives that you were able to structure the deals in order to basically move from making hole dew moving them on off the balance sheet.
That's a good question and.
The reason, we're able to do it is with extraordinarily proactive we look ahead a year.
We look at all loans that have.
[laughter] expiring rate caps have negative carry that are under stress.
Our originators are working without portfolio refinanced group and re underwriting all the loans getting them positioned get them in front of the agencies and when the market drops are these people who are ready to go I. Just wanted to let you know the agencies are very backed up there the only game in town and.
They're going to be very busy the key is to look at your portfolio look down the road and see at what levels. They can be in a good position and get ready to lock them if.
If you react.
Today to say you want to take advantage of something but your loans are not in a position of your borrowers in that position you can't execute.
So this is all about execution. This is all about the skill set to know how to help the bar put themselves into it into a better position. There's also a tremendous mentality right now with our borrowers, which we're working with them as they don't have any problems problems you can't participate in todays market remember if you default on a loan.
You you can't borrow from Fannie Mae Freddie Mac, so easily anymore. Once your default on a loan and you cant borrow from Fannie and Freddie you might as well get out of the industry.
So what we're doing is saying listen you know you may need to put another five or 10 per cent until alone you know to go fixed rate.
Let's get in that position live to fight another day stabilize your assets and this way you can go out in the market and take advantage of good opportunities you'll still get a good return convince your investors to or yourself to put a little bit more in and we do have some tools that other people's don't we're willing to put some pressure some mezz with the right returns.
We're one of the only approved agency lenders that are allowed to put mezzanine over our own book and we've been doing that from time to time to help our borrowers get to where they need to go. So we have a lot of tools, but it's really the management and looking forward and reposition these bars remember when things happen like this your borrowers or like a deer in headlights, they don't even know.
What's going on and they don't believe it they don't believe in it changes.
We do we've been through the cycles, we understand the market.
And we understand different levels of execution. So we really work to get ahead of the curve.
Everybody in a position so if one crazy day, the banks are failing and the 10 year drops from $3 60 to $3 20, and $3 20 of works, we can lock in a lot of borrowers and we really help them reposition their portfolio into a bedroom into a better circumstance.
Got it look I agree with you it's hard to look at a building and look at the land see the lights on and see the people going in and out and view it as changing in value based on numbers on a spreadsheet.
Okay.
Okay.
We are in an adjustment period that slow at all.
Cap rates have gone up considerably too.
High threes low fours.
And the four and three quarter to five and a half range and that's been a significant movement and.
On interest rates will dictate whether it is movement, but obviously even at these levels as you've been reading you know, they're very few sales right now it's still hard to buy a five cap asset.
When you got to put up five 5% financing right, that's still negative leverage and you cant borrow short term.
So the cap rates are going to continue to move our interest rates are going to change, but you know clearly there's a little bit of a lock on sales right now and of course, you have the backdrop as we all know the banks have a lot of assets, which you have to actually have to spit out and how that's going to affect.
You know what is going to be done with the invested capital in the market.
Got it thank you very much.
Thanks, Rick.
Well take our next question from Jason <unk> with a K B W. Your line is open.
Taking my question I'm on for Jade.
Given all the.
The recent distressed banks have come out.
Got about repo and do.
Do you expect margin calls.
Sometimes it is.
Listen there's always there's always an issue and concern of margin calls we manage that.
Very good we have great counterparty for the big history.
With them.
And knock on wood, so far we've been in.
In really good shape.
We have a lot of I said since yellows, we constantly have.
Capability in those yellows are which are non mark to market.
So we have a smaller fraction of our book and those lines, we have diversified lines with good partners.
I forgot how many lines, we have we probably have 10 different lives sometimes in different institutions.
So it's something we always plan for something we always keep our level of capital available for.
But knock on wood, it's been a fairly good and nothing material work communication consistently.
So we don't see any major major concerns.
There's always something that is part of our liquidity and capital plan to cut to the tank to.
To handle those.
Those perspective margin calls.
Okay.
So for that vintage of multifamily originations.
<unk> 2021.
Okay.
This decision was made throughout the loads are you guys thinking about.
<unk> <unk> from that.
Vintage.
Yeah, I think he got cut off get Paul could you hear the comment yes, I Couldnt, Jason your phone is cutting in and out can you try to ask the question again.
I was just saying you know for that late 'twenty or 'twenty, one early 'twenty two.
Only one competition was high and the rates were a lot lower are you guys thinking about any.
More than that vintage.
I I look I think that it's it's low in specific cases specific and sponsors specific there are many situations, where you know on the flip side people bought assets and they did and execute their plan and they didn't get the increase in the rents that they wanted to.
On the other side there are many sponsors who execute their plans very well it did an extraordinary job. So we look at the entire portfolio very very carefully and then you know then you have a lot of people who bought long dated caps with low rates and you know can hang in there a lot more.
So each one is a case by case, we have a good sized portfolio, we manage it very carefully and you know we are front and center.
Go quarter to quarter, when you have an outlook for everything in the next 12 months and we're managing extraordinarily well.
Certainly.
The lowest cap rates or where we're in that vintage we did back off the market probably six months earlier than everybody else as we felt the market was getting irrational and where the market was really getting irrational, which is where we don't really deviate.
On structure on your loans people lending without structure. So if you're just looking at the real estate, where a lot of these institutions have problems if the real estate has gone down.
Borrowers have no level of requests for responsibility those are your greatest risks and that's not something that we really changed our standards on we're known for having proper structure.
Known for having loans that if the real estate itself has some issues that we're not just dependent on the real estate. So it puts us in a different set of circumstances in most of our peers.
Okay.
Jay.
We will take our next question from Lee Cooperman with Omega family Office. Your line is now open.
Firstly I'd like to just congratulate you.
<unk> the company for many many years.
You have a well deserved shout out how you position the company.
And through this whole period, and I know that a year ago, you were very cautious.
How do you tie, but youre right I congratulate you.
I also want to add.
Been doing this for about 60 years.
I've never seen a situation where a short report came out.
Couldn't find a phone number of the firm no Internet address at no name of the firm. So this guy is an idiot, yes, you see should be looking into them.
To him or her but it's it's totally bogus I think they talked about a large mobile home portfolio.
Loans that to bother them and if I'm correct, you don't have a dollar alone to mobile homes. So.
This is a bogus shouldn't crap like this should not allowed to be to take place.
I'm glad to see you're repurchasing stock given your track record you're smarter than me I'm just curious.
What do you think were worth I look at our payout ratio.
Our return on equity.
It seemed to me that if I stuck yoga data at 9% it would not be unreasonable that would put it at 20, so of buying back stock at these prices seems very reasonable very intelligent you have a view of value. That's motivating your decision to buy back stock.
Yeah, well listen as I mentioned earlier, we would buy back a lot more but we have the rational capital and use it strategically.
So we bought back as I said, we'll probably go back to the board an increase that buyback and if the market becomes dislocated.
As it currently is we'll use part of our capital to do that as well as continue to build our franchise.
And Lee I just wanted to say we go back 30 years, you were an investor and one of my original public companies and 1992.
And you've been.
Strong not the easiest shareholder because you're always vocal a good friend of the company and you know it has given US a lot of good perspectives, especially on the buyback side of the coin.
So in terms of valuation listen we've grown our book we continue to grow our book, it's an amazing to see how book grow 45% for years, we've increased that dividend now 11 times right. It's really 12, we missed last quarter, but I was very conservative. So this was a little bit of a catch up.
Payout ratio is like 70, 70% extraordinary low so theres room, there if we want.
I look at things in the long run for me.
I see I'm the largest shareholder in the company and these moves don't even phase me, they're just great opportunities to create value.
You take out dividend rate and you take what we typically trade in terms of a dividend a price and you apply a conservative number like and as you know we've traded between seven and eight.
Take eight right as a dividend yield that the market usually pays for and a stable market take a dividend you guys can do the math I mean, Paul what's the math on that 'twenty to 'twenty, one, it's a $21 price that math and I think ive in what I would add to that is there.
The other piece of this is.
We have a very large capital light agency business and lots of companies that are not in our space that have those types of businesses trade on a p/e don't trade on a price to book or a dividend yield we understand we're in the mortgage REIT space and you've got some level you have to trade with.
But clearly we think that the value of that platform is much much than excess of just trading on a price to book, but even if you just did a price to book at a seven at an 8% dividend yield throughout 'twenty, one box, we probably traded between seven and eight like you said island, so clearly just to price us the way others.
Priced in the space, which we think is unfair it's a $21 price.
Yeah and.
You know, what's what's incredible to me and the way people and Miss evaluated all the companies.
And I say, either either a value unless you know improperly valuing the other companies and properly. These companies are posting huge seesaw reserves and huge actual losses right. So it's very easy to make interest spread on risky assets and book on earnings.
When you went when the bottom line is that the assets you're in.
Losing money then you shouldn't really reevaluate, maybe theyre priced and probably maybe were priced okay for now for this dislocation, but the losses at taking on their office sector.
And all the other sectors there in that massive and you know if they wanted to just say, okay. It's too bad where you know its a sign of the market. It's just it's that.
We should be rewarded for extraordinary disciplined in sticking to the multifamily industry and not getting out of our expertise and our experience and having an asset class that even if it does suffer the losses are not huge they imaginable.
And I think that either the companies in our space and our peer group.
They should be valued lower or we should be valued higher but not the same it makes no sense to me whatsoever, and we also have a diversified operating platform before we even open the door between off servicing in Asheville balances.
We have tremendous income streams of income stream is one income stream. It's based on the loans they put on their books, how they borrow and how those loans perform it's a mono line business, which in these kind of times with those kind of assets.
Very very scary and I think the whole industry is loop by that fear.
So either we outperform them or for their they really hit a level, that's really reflective of their asset quality.
Anyway, I gave you a well deserved shout out and I'm comfortable being in your hands.
Stack looks very undervalued to me, but thank you very much I appreciate your response and your performance actually.
We have reached our allotted time for questions I will now turn the program back over to Ivan for any additional or closing remarks.
Okay, well. Thank you everybody for your time, and we're very pleased and patient to wait for this call to really address some of the negative sentiment that existed in the market and the dislocation.
We hope by the information that was delivered by the call. Most importantly outperformance. It got so shareholders are in a comfortable position that yes. We are sound. We are fundamental we have great management and a great track record.
And I look forward to your continued participation and trust in the company and management. So everybody have a great day have a great weekend and thank you once again.
Okay.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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