Q2 2023 Arbor Realty Trust Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the second quarter 2023 Arbor Realty Trust earnings Conference call.
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I would now like to turn the call over to your speaker today, Paul linear 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, we'll discuss the results for the quarter ended June 30th 2023.
With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.
Before we begin I need to inform you that statements made in this earnings call maybe deemed forward 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.
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, although 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 August President and CEO Ivan Kaufman.
Thank you Paul and thanks, everyone for joining us on today's call as you can see from this morning's press release, we had another outstanding quarter.
That's how diverse business model continues to generate earnings.
Well in excess of our dividend.
This has allowed us to once again increase our dividend to <unk> 43 cents, reflecting our 12th increase in the last 14 quarters or.
Or 43% growth over that time period, all while maintaining the lowest dividend payout ratio in the industry, which was 75% for the second quarter.
In fact, we're the only company in our space has continued to grow our dividend, while many are either cutting their dividends or electing to pay out over 100% of the earnings.
Additionally, and very significantly we're also one of the only companies in the space, who have experienced significant book value appreciation over the last three years with roughly 45% growth from approximately $9 a share to nearly $13 a share put simply we have increased both our dividend and book value by over 40.
Percent, all while maintaining the lowest dividend payout ratio in the industry.
And despite being a very challenging environment over the last several quarters, we've managed to maintain our book value, while we recorded reserves for potential future losses, which clearly differentiate this differentiates us from.
From every one of our peers.
As we've discussed many times, we've been laser focused over the last two years and preparing for what we felt would be a very challenging recessionary environment.
In fact, unlike all of US in this space, we've been conducting ourselves as we have been in a recession for over a year now and that resolved one of our primary focus has been and continues to be preserving and building up a strong liquidity position. We are very pleased to report that we currently have approximately 1 billion in cash.
Which gives us a tremendous amount of flexibility to manage through this downturn and provide us with a unique ability to take advantage of the opportunities that will exist in this environment to generate superior returns on our capital.
There continues to be a very significant a significant amount of volatility in the market and we are well aware of the challenges that lie ahead. We feel we are right in the thick of this dislocation and operating our business with the expectation that the next two to three quarters would be the most challenging part of the cycle.
As in the case with any real estate cycle, there will be issues and challenges to contend with some of which will be a high touch and require a tremendous amount of discipline and expertise.
We are extremely well positioned compared to our peers, given our multifamily centric portfolio, our asset management skills.
And 10 years senior management experience with a track record of managing through multiple cycles, and the strength of our balance sheet and versatility of our franchise.
Turning now to our second performance as Paul will discuss in more detail our quarterly financial results will once again remarkable we produced distributable earnings of 57 cents per share, which is well in excess of our current dividend representing a payout ratio of around 75%.
The dividend policy that we have implemented without board of keeping such a wide disparity between our earnings and dividend provides us with a huge cushion that was a very strategic was very strategic knowing full well that we're entering into a market dislocation.
This has enabled us to raise our dividend called book value and create reserves.
We believe we're uniquely positioned as one of the only companies in our space with a very sustainable protected dividend even in this challenging environment.
And our balance sheet lending business, we will remain very selective focusing mainly on converting our multifamily breaks laws into agency product, allowing us to recapture a substantial amount of our invested capital and produce significant long dated income streams in the second quarter. We continue to have success in this area.
With another $685 million of balance sheet run off 435 million or 64, 64%, which was recaptured into new agency loan originations as.
As a result, we were able to recoup 125 million of capital and continue to build our podcast position, which again currently sits at approximately $1 billion.
G S. He agency business, we had an exceptionally strong second quarter originating $1.4 billion of loans.
Pipeline remains elevated clearly with the continued to inverted yield curve. The agencies are effectively the only game in town, which gives us confidence in our ability to continue to produce strong origination volumes for the balance of the year.
We also have a strategic advantage and that we focus on the workforce housing part of the market out of a large multifamily balance sheet look book would that actually feeds our agency business.
And again this agency business offers a premium value as it requires limited capital and generate significant long dated predictable income streams and produces significant annual cash flow to this point, our $29 4 billion fee based servicing portfolio, which grew another two.
Percent in the second quarter generates approximately $118 million a year and reoccurring cash flow. We also generate significant earnings on our rest gross in cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning approximately four 5% at around 2.8 billion.
Balances are roughly 125 million annually, which combined with our servicing income annuity totals over $240 million of annual gross earnings $1 20, a share.
This is in addition to the strong gain on sale margins, we generate fly originations platform and again, it's something that is completely unique to our platform, providing us a significant strategic advantage over our peers.
We continue to expand our single family rental business is that we are the only remain one of the only remaining lenders in this space, allowing us to aggressively grow this platform.
We remain committed to this business as it offers us three turns on a capital true construction bridge and permanent lending opportunities and generate strong loved who retires in the short term, while providing significant long term benefits by further diversifying our income streams and allowing a sick and then continuing to build our franchise.
In summary, we had a very strong first half of the year with exceptionally well with exceptional results that once again, clearly demonstrates our ability to generate strong earnings and dividends in all cycles.
We understand very well the challenges that lie ahead and feel we are well positioned to manage through the cycle.
Our earnings significantly exceeded our dividend run rate.
We are invested in the REIT asset class with very stable liability structures highlighted by a significant amount of nonrecourse non mark to market CLO debt with pricing that is well below the car market.
Also well capitalized with significant liquidity, which has put us in a unique position to be able to manage through this downturn and take advantage of the accretive opportunities that will exist in this environment.
And again with a best in class asset management capability and seasoned executive team we.
We're confident that we will continue to be the top performer company in our space.
I will now turn the call over to Paul to take you through the financial results.
Okay. Thank you Ivan as Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million or <unk> 57, a share. These results translated into industry high or a lease again of approximately 18% for the second quarter, allowing us to increase our dividend to an annual run rate of $1 72 a share.
Reflecting a dividend to earnings payout ratio of around 75% for the second quarter.
Our quarterly results significantly beat our internal project projections once again, largely due to substantially more gain on sale income from increased agency sold loan volumes, mainly due to stronger origination volumes in the second quarter than we anticipated. We also continue to see increased earnings on our floating rate loan book and on our cash in escrow balances in the second quarter.
From higher interest rates, and we generated approximately $6 million of income from our equity investments in the second quarter, which included $3 5 million of income from our residential banking joint venture from gains on servicing sales and a two and a half million dollars distribution from our electrified investment.
As a result of the servicing sales in our residential joint venture this quarter. Our current income tax provision was higher than usual due to book to tax differences associated with T cells.
I haven't mentioned, we do expect some challenges ahead and as a result, we recorded an additional $16 million and seasonal reserves on our balance sheet loan book during the quarter. These reserves do not affect distributable earnings as we have not experienced any realized losses on these loans to date.
Our loan book did see an increase in delinquencies in the second quarter as a result of where we are in the cycle. Again. This is to be expected and were confident in our ability to manage through this downturn as we believe we are well positioned given our multifamily focus strong liquidity position and our best in class dedicated dedicated asset management team with extensive experience in lung.
Workouts and debt restructurings.
It's very important to note that despite booking approximately $48 million in seasonal reserves across our platform over the last two quarters, we still managed to grow our book value by per share by 1% to $12 67 at.
At 632023 from $12.53 a share at 12 31 2022.
And we're one of the only companies in our space that has seen significant book value appreciation over the last three years.
And our GSE agency business, we had a very strong second quarter with $1 4 billion originations and $1 3 billion in loan sales the margins on the loan sales came in at 167% this quarter compared to $1 seven 2% last quarter. We produced very strong margins over the first six months of the year ahead of our projections mainly.
Due to an increase in our FHA loan production in the first two quarters that generate much higher margins. We also recorded $16 2 million of mortgage servicing right income related to $1 1 billion of committed loans in the second quarter, representing an average MSR rate of around 1.43% compared to 1.23% last quarter.
Our fee based servicing portfolio grew another 2% in the first quarter to approximately $29 4 billion at June 30th with a weighted average servicing fee of around 40 basis points and an estimated remaining life of eight and a half years. This portfolio will continue to generate a predictable annuity of income going forward of around 118.
Million gross annually.
In the second quarter, we also received $3 million in prepayment fees as compared to $2 million last quarter and given the current rate environment. We are estimating that prepayment fees will likely run around $2 million a quarter going forward.
And our balance sheet lending operation, a $13 $5 billion investment portfolio had an all in yield.
Up nine 7% at June 30th compared to eight 3% at March 31, mainly due to increases in LIBOR and sofa rates, partially offset by an increase in nonperforming loans in the second quarter.
The average balance in our core investments was $13 6 billion this quarter as compared to $14 1 billion last quarter due to run off exceeding originations in the first and second quarters.
The average yield on these assets increased to 9.19% from 894% last quarter, mainly due to increase in sulfur in LIBOR rates, partially offset by an increase in nonperforming loans in the second quarter and from less acceleration of fees from early runoff totaled.
Total debt on our core assets was approximately $12 1 billion at June 30th when all in debt cost of approximately 7.25%, which was up from a debt cost of around $6, 97% on March 31, mainly due to increases in the benchmark index rates.
The average balance in our debt facilities was approximately $12 5 billion for the second quarter compared to 13 billion last quarter. The average cost of funds in our debt facilities was 7.11% for the second quarter compared to $6 six 9% for the first quarter again, primarily due to increases in the benchmark index rates combined with the full effect of the.
Secured notes we issued in March.
Overall net interest spreads on our core assets decreased to 2.8% this quarter compared to 2.25% last quarter and our overall spot net interest spreads of 182% at June 30, and $1 86 at March 31.
Lastly, we believe it's important to continue to emphasize some of the significant advantage of our business model, which gives us comfort in our ability to continue to generate higher high quality long dated recurring earnings.
We have several diverse and counter cyclical income streams and allow us to produce strong earnings in all cycles. The most significant of which is our agency platform, which is capital light and generates very high roe's through strong gain on sale margins long dated servicing annuity income and increased escrow balances that are significantly more income in today's higher interest.
Rate environment.
Additionally, we have multifamily centric and have a substantial amount of our non mark to market nonrecourse CLO debt outstanding with pricing that is well below the current market were also well capitalized with significant with significant liquidity and have a best in class asset management and senior management team that have tremendous experience and expertise in operating.
Multiple cycles.
We believe these features are unique to our platform, giving us confidence in the ability to continue to outperform our peers that completes.
Our prepared remarks for this morning, I'll now turn it back to the operator to take any questions. You may have at this time Todd.
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We will take our first question from Steve Delaney with JMP Securities. Please go ahead.
Hey, good morning, Ivan and Paul Congrats on another strong quarter, maybe I'll start off with something that was not the highlight of the quarter, but I think important to discuss you had the three new M. P else all multifamily I'm curious, whether those were where they three loans to three distinct borrowers and as they're common.
The common theme leading to the to the downgrades. Thank you.
Well why don't you take those.
So hey, Steve its Paul Thanks, Hey, Boston sure. Yeah. So we did have three new nonperforming loans during the quarter and our balance sheet totaling about $116 million or they were all to different borrowers are two of the properties were in the Houston, Texas area and the other was in the Atlanta, Georgia area.
You know I had gone the deals had gone 60 days delinquent this quarter, but that's the that's kind of the geographics and the borrowers were all different borrowers.
The G O D G O sounds good.
Is it a is it interest rate problem I mean these people just behind there is it cash flow.
Or just you know let me get let me give you a leasing leasing problem yeah. It would be a little bit of a view on it. Thank you Ivan.
Generally and in particular with.
Yeah. That's that's worth talking about is you often have underperforming sponsors okay. Yeah underperforming sponsors you know it catches up to them a little bit. So when you see stress in the portfolio like we're saying it's it's the fact that the sponsors are not executed in the law.
On that plan.
That's one part the <unk>.
Second part is that you know we are in the cycle of long period of time and as elevated interest rates to put stress on these assets and mature.
The rates are up.
Anywhere between.
10% to 100% so they run into payment issues and often they are late and that payment trying to raise additional capital and try and get them.
In a proper position.
But what we're seeing most of all where there's stress on some of these loans a lot of it is execution I mean, there are other factors as well.
Elevated interest rates increased insurance costs and increased taxes and increased labor costs. So it's a combination of all but generally if you have good operators.
They're able to manage effectively.
Poor operational catches up with them a little bit.
Okay, Great and Paul did I understand that on when you put these and it's a.
Its nonperforming did you add $5 million into your reserve for these these three lines is that correct.
That's correct, Steve we did record a specific seasonal reserve of $5 million related to one of the walls. Okay nonperforming. The other two we believe the values are fine are the borrowers are just seeing a little stress is that I haven't mentioned.
And then what we're working hard with those borrowers to to get those deals to perform but we don't see right now any need for reserves on the other two so we did take a $5 million reserve related to one of the assets.
Right I can note that as of yesterday.
Barbara made has made one of those payments so.
He is buying is making up just to make it still remains a little bit behind.
He has made progress and you know he's he's getting there it's just a very slow process.
Great well I appreciate the color on that and I'll leave it there I'm sure. The other guys have questions for you too.
Have a good weekend. Thanks, Thanks, Steve.
Thank you we'll take our next question from Stephen laws with Raymond James.
Hi, good morning.
First off congrats on another strong quarter, another dividend increase a lot of those the past couple of years, you know in a lot of positives in the quarter, but but I haven't I wanted to follow up on your comment you started with talking about the next two to three quarters being the most challenging and I think it's.
Likely due to the issues you just mentioned in your answer to Steve Delaney.
Is it interest rate caps rolling off I mean can you talk about is it behind business plans you know the good good operators bad operators you know do we think about this being really a wave of <unk>.
Stress from origination say two years ago or is it a bigger sample size given the differing maturity dates.
Let me give you a little bit about macro view and it's one that we've had for quite some time and.
One that is obviously put us in a very favorable position in terms of liquidity and strategy and personnel and.
Resources.
It's been our view that you know generally these downturns last you know.
18 to 24 months and Oh on the outside of it and if it's a downturn.
A short time, it's 15 months.
We've been at this already for at least five quarters and that's why we think that there could be another two to three quarters left.
<unk> been through multiple cycles, we feel now we were pretty much on the bottom of the cycle.
And that we're going to work our way out of it shortly but the bottom is keep most difficult period of time.
Borrowers are working really really hard to.
To manage their loans and their portfolios and this is a peak of their stress right now we feel it there.
Working hard to raise capital get their assets in a good position so.
So, we're just thinking and planning for a little bit more elevated than it's been in the last quarter and we think the next two quarters, given where we are in the cycle and what our outlook is going to be a little bit tougher.
So the bars are you know put a lot of resources and a stretched on their resources interest rates have remained elevated because of labor, even though it's coming down and put a lot of stress on people's portfolios and the other aspect, which is beginning to fade, a little bit which people don't talk about but I've talked about on our prior calls.
As the economic vacancy specifically in areas like New York, and New Jersey and other.
Oh that areas like that where the economic vacancy the ability to get rid of non paying tenants has been extremely elevated and it is going to begin to come down.
Yeah, let's start blocks, where you have physical occupancy of 97% to 98% you have economic vacancy of 10 to 12 per cent and that's been putting a lot of stress. So we think the economic vacancy.
Down.
Our outlook in terms of our interest rate is at this point a little bit more favorable than it was six months ago or nine months ago and the ability to for people now to really put their time and attention and manage their assets it become much more focused.
But we do think that the next two quarters will be the worst of the quarters.
And that's what we're saying, but economic vacancy has played a pretty significant part in terms of making having these borrowers struggle.
Thanks, Ivan and follow up Paul can you.
Given the outlook for kind of a couple of challenging quarters.
To continue through the you know what gives you confidence that the current reserves are appropriate you know how are you looking at the losses and what's the risk that those reserve levels need to increase our.
Possibly materially in the next couple of quarters.
Sure Steve. Thanks, So we do look at this.
Very detailed level a lot of the reserve building Youre seeing is from stress in the portfolio as Ivan said and what we think could happen over the next couple of quarters a lot of it is the macroeconomic view out there on commercial real estate. We obviously think we have adequate reserves today, we built 48 million of reserves across our platform.
Both on the agency and the balance sheet side, the last two quarters, but I think it's a great question and I think I don't know what others are saying out there in our space, but I do expect over the next couple of quarters to continue to see a reserve building, maybe similar to where we were this quarter and maybe a little higher maybe a little lower but that's my expectation, obviously, we will see.
What rates go and what happens in the market, but my expectation is that there will be some reserve building over the next two to three quarters probably consistent.
Or slightly consistent to where we were in the last couple of quarters. I mean would you agree with that and I think it's extraordinarily important to focus on the fact that as we've as we've put reserves on the books, we've maintained up both value and we haven't had a book value.
And cushion between our dividend and our earnings are so large and you know as I mentioned in my comments, that's always been very critical to us and the board to make sure that.
We have that no one will go into a recession, no they're going into a difficult environment.
It's normal to have reserves I think.
The fact that we're able to create these reserves which were against future losses.
And that.
Decrease how book value on maintaining it is remarkable and a real testament to how we've.
You know manage through this cycle.
But I do agree with Paul I do I do think that what we've seen this quarter could continue for another quarter or two and our balance sheet is well positioned to handle it.
Great. Thanks for the comments as well.
Thanks, Steve.
Thank you we'll take our next question from Crispin Love with Piper Sandler.
Thanks. Good morning. Appreciate you taking my questions I guess can you just speak to your ability to roll your repo facilities that are coming up and then.
What percent of your loans have interest rate caps right now.
Yeah, I mean, the repo facilities.
A major concern with us is very diversified and they've come down dramatically.
We've continued to renew them.
And in fact, the banks are more aggressive could want to do business with them is the outstandings keep coming down.
And as you're watching the securitization market. The securitization market is returning the CLO market is returning we're not far from you know re addressing some of that and even bringing our outstandings are back down.
I continue to meet with management and treasury with their different institutions and.
Now there are aggressive to to continue to have more outstanding. So that's the least of our issues and if we look at our outstandings on repo and our ratios are extremely healthy. So we feel really good about it we feel really good about.
Accessing the CLO market and actually creating greater efficiencies.
Today, and we're pretty efficient.
So that is how are you on that with respect to caps and everything Paul you can address that I can give you some commentary as well.
Yeah, I I think Christian just to.
To add onto islands comments on the Repos I mean, I think we've done a great job of continuing to Delever the balance sheet from natural runoff in the portfolio. Obviously, there's no balance sheet lending going on right now that makes any sense. So as loans run off were naturally delevering the balance sheet and I think we've done a great job of managing.
Managing the efficiency in our CLO vehicles to help do that I think currently today, we stand with 70% of our secured indebtedness and nonrecourse non mark to market vehicles and as you look those leverage numbers continue to come down quarter over quarter. So while we are very confident that our repo lines are healthy and will have no issue.
Rolling them as we've never had and as Ivan said the bank Sir.
Getting more aggressive.
Just prudently, where we're delevering the balance sheet and putting us in a much better spot. So I think we've we've been focusing on that for a while and knowing how you go through these cycles as far as the rate caps and a book, it's always been a big part of our strategy to have certain structural efficiencies in our loans and a good portion of our loan book.
Half rate caps I think it's somewhere in the high sixty's to low seventies, but also a good portion of our loans have interest reserves and interest serve a punishment guarantee is probably in the same range, probably about 60% and then there's a crossover to a certain loans that have rate caps and interest rate reserves I don't have that percentage handy.
But a good portion of our book has rate caps and interest reserves.
Yes.
Thanks, I appreciate that and then just during the quarter did you buy any loans added your CLO and if so are you able to size that.
I don't recall doing that during the quarter have to look we do have similar amount of credit risk assets designated in our CLO since we did last quarter $114 million.
But I haven't do you know if we purchased anything back I'm not aware if we did it was one loan but I have to look yeah, I don't recall off hand.
All right. Thanks, I appreciate you taking my questions.
Thanks Krishna.
Thank you we'll take our next question from Jay Mccanless with Wedbush.
Hey, good morning, everyone.
It looks like special mention.
Loans in the multifamily portfolio went up about 500 million from the first quarter to the second quarter.
Could you maybe talk about what drove that decision is there any type of geographic or vintage risk, we need to be mindful of with that book.
And the loans that moved to special mention.
Sure Yeah. So it's.
It's a natural progression as loans get closer to maturity and move on to Javier ratings move all around I will I will preface. This that we originate loans that are special mentioned special mentioned, it's not a category that gives us a concern that there's a pending.
Loss or delinquency or or nonperformance coming it's just one of the tools, we use as a management tool.
Two to focus more on alone if we think certain things are changing or certain things in the market are changing I have the numbers going up from 32% last quarter to 37% this quarter and special mentioned, but there's nothing specific I can say related to a group of loans or geographic location. Its just a natural progression.
Oh long, we did have as you saw a little bit of a move but not much in the substandard and doubtful, which is related to the nonperforming loans, we put on the books this quarter and a little more stress, but the special mentioned doesn't give us a level of concern that theres going to be a loss or a default. It's just things we look at it.
We look at the loans two to highlight more of a focus on the wall.
Yeah.
Okay sounds great. Thank you.
The second question could you. Please repeat the comments you made about moving bridge loans into agency volume I guess, how much of that are you doing and what type of mezzanine financing as well the arbor be putting in to make those deals happen.
Sure. So we had a fairly effective.
The reduction in our balance sheet and our conversion.
Into fixed rate loans with the agencies a lot of that is and lungs.
Yes, the condition. They go that are appraised they get stabilized.
With the 10 year being so volatile are the lower the lower the tenure the greater the opportunity there is and what an inverted yield curve, it's a natural shift from floating rate loans into fixed rate loans and.
That's something we've been doing consistently.
From time to time and I don't have the numbers Paul May habit, we will be put it we do put some mezzanine.
Lending on on some of those loans not that much.
Okay.
It does.
But a lot of those loans are now 65% loan to value and have a certain coverage and sometimes when the borrowers paying down those long as put in more equity.
We'll also put some mezzanine lending into that to facilitate those transactions, we like that kind of lending. We think the returns are extraordinarily healthy and it's a big part of our business, but it's not a very big part of our business and Paul maybe you can comment on how much money, we put out in the quarter for that kind of business. Yeah. I think it's I think it is.
Xactly, what I haven't said, it's not a big part of our business, but as some of our business and it was pretty pretty benign. This quarter, we had $685 million of balance sheet runoff, we recaptured $435 million of that into the agencies, which was 64% recapture rate very high and we only gave a million and a half of mezz behind one.
Those agency loans in the first quarter, we had like a 1 billion to have run off we were captured just under 50% of that and we put $5 million mezz behind the agency. So it's not been a very big part of our business it's helpful. But.
But we've seen a really really nice recapture rate almost about 50% for the first two quarters here and runoff that we brought over to our agency book, which is which is the way we model our business.
We happen to like that mezzanine lending, we know the collateral we know the cash flow the yields generally run.
No, 13% and it's long dated so it's a good part of our book.
But at the end of the day, even though it's something that our borrowers look into sometimes they just change their mind and say, it's better to raise the equity and pay down the loan themselves. So we're not putting out as much as we thought we would.
Okay that sounds great. Thanks, Thanks for taking my questions.
Okay.
Thank you we'll take our next question from Jade Rahmani with K B W.
Thank you very much a follow up to the last question for Jay.
What you said the better for the borrowers to raise equity, but I assume that means they're raising preferred equity because in a refi the GSE or another lender, but consider the preferred equity as equity.
As ive ever providing any preferred equity and is that an attractive opportunity you. All have had these loans on your balance sheet. So we'd know the credit pretty well yeah. So when we thought when when he mentioned mez I I also looked at it the same as preferred for us its structural we always like a mezz better it has.
Better remedies.
But I think it's one and the same for us whether we talk about preferred or Mezz. So we're open to doing both depending on whether its fannie or Freddie or what the structural enhancements are.
And we think since we know the assets we know the borrowers it's often very good opportunities and what we're uniquely positioned for.
This is often small pieces they can run anywhere from five to 500000 to 5 million and for them to bring an outside provider.
The cost of inefficiencies are really really really high so with us having full knowledge of the bar on our collateral and being able to let those are in a very cost effective way it puts us in a strategic position to be the provider.
Thank you very much are you surprised that.
There hasn't been more more of that or.
Or is it that the borrowers are raising private equity from someone else. We thought we thought there'd be more.
But there isn't I think we had forecast I think in our numbers that we would probably put out between pressing matters about 10 million a month, that's what was in our cash projections and.
We're not hitting those numbers by any means so we're well behind what our own views were <unk>.
How they are getting the capital where they get into capital I don't get that involved and I'm just happy with the conversion.
From you know the.
The balance sheet into it all and agency law and that provides US you know a long dated income streams.
Fits our business model, so I am not always familiar with how how they achieve their golf.
Yeah.
Thanks, very much on modification is it reasonable to assume that you're doing about 15 that you that you will be modifying about 15% of the portfolio.
I think it's very fluid. So there are it's just consistently different and I can't I don't have a particular number.
Hum.
It was just a point in time, so I don't have a stat on that.
Thanks, and just last question would be when you think the right time would be to ramp up originations considering the strong liquidity are you hoarding liquidity just to get through these next two to three quarters and much you think that strategy will play out and originate afterwards, because clearly you know post that.
Yields will probably be lower than where they are today.
So that's a great question and in my comments, we talk about our single family business in.
In terms of the build to rent business and that business. We are extremely aggressively have ramped that up and we want to continue to grow that.
And we we like that business and we are ramped up and we want to dominate that business will be one of the bigger lenders.
On the multifamily side I do believe I do believe that business will return we've talked about it we've put together programs.
And I I do believe the second half of 2024.
It will be.
Very very good year.
For the.
The multifamily bridge loan business and we.
We will get aggressive and we'll start to get aggressive at the end of the fourth quarter, maybe first quarter, we have liquidity for it and we also have the outlook that itself will come down.
And then multifamily transactions will start to occur and people will want to borrow floating rate business and there will be a great opportunity and we want to be a leader on that side too early right now.
I think you were a quarter early.
For that business I think fourth quarter, it will start to pick up and definitely in the first quarter, we aimed to be extraordinarily aggressive in that business.
Thanks for taking the questions.
Thank you we'll take our next question from Rick Shane with J P. Morgan.
Hi, Thanks for taking my questions. This morning, guys most have been asked and answered but.
Did want to ask the restricted cash on the balance sheet came down sharply.
What drives that just so we understand it.
Sure Hey, Rick it's Paul So a couple of things one we had one vehicle we would de levering and as you may have seen we.
We are called one of the vehicles during the quarter and took out one of our CLO, but as run off is occurring in certain vehicles that are may be past their replenishment period, you can that restricted cash goes down to pay debt that happened during the quarter in the vehicle that we retired in one of the vehicles with Delevering and then just.
Really when Theres loan run off if you can put loans in from your from your balance sheet book that are on your repo lines into the CLO, then you're chewing up restricted cash so we've seen a little bit of a more efficiency this quarter and moving loans off our balance sheet, delevering and putting them into vehicles and then you've got the natural wind down.
I have a couple of vehicles that that starts to reduce restricted cash that restricted cash ends up coming into corporate cash, but that's the natural progression of why that number has changed this quarter.
Got it okay. That's very helpful. Thank you and then I'd love to circle back on Jades question about G mods and extensions.
And he said at a 15% number and Ivan.
Understandably you kind of said that number moves ramp can we just get some context of sort of during the second quarter.
The value that the notional value of loans that were marred modified and extended both on the balance sheet in within the CLO.
Yeah, I don't have that off hand and.
It is a fluid process between extensions modifications and that's something that we could take a look at the data. It's just something that's constantly changing.
Yeah, I don't have it in front of me Rick but my my recollection is it wasn't very significant at all this quarter, but you know that could change it all depends on the cycle and where we are but we haven't seen a significant modifications that I'm aware of in either of those vehicles to date.
Yeah.
Got it and then last question for me I mean, you've talked about the next two to three quarters being the most challenging you've also spoken of sort of the fluidity of what's going on I'm, just curious what you're seeing in terms of loan performance in July .
I think you know when we're talking about it.
We're not even talking about children were talking about where we are today I don't.
Don't really reflect on that as as is as of June conversation I reflect on it is just timing as of the moment.
What we're in the middle of so it's pretty much along my comments and our outlook is that we should have somewhat of as Paul mentioned a continuation.
Terms of you know reserves and outlook for the third.
For the third and fourth quarter similar to what we had in the second quarter.
Thank you guys very much I appreciate it thanks.
Thanks, Rick.
Thank you we'll take our next question from Lee Cooperman with Omega family Office.
Let me just first say I congratulate you on your performance I've been an investor that company for about a decade.
In the last couple of years.
I know you've spoken to me very conservatively assessing the outlook.
I think the company's performance is not an accident. It's a result of your positioning them and I congratulate you.
And you're correct reading of the environment. Thank you Elena.
Now, let me if I can get onto some other questions.
Distributable earnings of 57 cents do you think there's a lot of push and pulls do you think that's close to recurring earnings or do you think you over earned in this quarter.
Yeah, I think we we don't give our financial outlook, Lee, but I would say that.
We're expecting that those numbers will be you know not that strong in the third and fourth quarter, but I don't know how much different we've had a couple of things during the quarter I'll give you. An example, we had $1 3 billion of loan sales in our GSE agency business.
We are excessively high second quarter volume given that rates rose to about 4% for a short period of time they have come back down we see a little backlog in that business, we expect that business to be strong for the balance of the year, but I'm projecting a billion billion one versus 1 billion for the agency.
In the third quarter, and probably something stronger than that in the fourth quarter. So I expect our agency business to come in for the year higher than we did last year, but I do expect a dip down in the third quarter and then a big rise in the fourth quarter. So that gain on sale associated with those sales will change and likely end up with.
The reduction in gain on sale and a slightly less distributable earnings also we are we are expecting the portfolio to continue to run down as there is no balance sheet lending and run off has been naturally brought onto our agency business. So I don't know if it's easy for us to say that that's a recurring number I can't tell you what the number is going to be but those are a couple of item.
That I think could make it slightly less going forward, having said that we still think the number is substantially higher going forward than where our dividend is today right either interestingly get too I think that the 57 is probably higher now than it would be in another couple of quarters, but I suspect at the earnings will be above the dividend.
We feel very confident about that Lee.
Okay, you don't like to comment on the distributable learnings because if we did we get wrong every time, we've exceeded everybody's expectations, including three loans that were highlighted as being issues. What is the loan to value ratio on average for those three loans.
I don't have them off hand, but one we took a reserve against and we didn't expect payment, but we got payment we gotta Joan payment.
The other one is a great asset just poorly managed so we'd have to take a look at what the stabilized value of that asset is and you have to also keep in mind a lot of these loans, we have a lot of recourse on as long as the substantial sponsors. So we look at a combination of not just the asset.
But the sponsor on a recourse liability that we have so.
So it's a combination of all of them multiple factors on each of these different assets.
Last question is it just an observation what do you think the shorts are thinking about.
Fully diluted share counts are at an 87 million shares if I take what you learn with the employees home with Black rock.
Owns in the Blackstone owns and I own it.
These guys are a short of a meaningful percentage of the float.
And.
What do you think they're thinking I think that's all I can say is they didn't properly understand the company when they shorted the stock the information as we've talked about on the calls before.
As was inaccurate and on the face of it is all of the analysts and everybody at all it made no sense.
So I think whatever they did they they've they've made a tremendous error in their analysis.
I mean, our performance has certainly been contrary to all their comments and more significantly.
You know they just didn't understand the fundamentals of our company relative to our peers or Paul do you have any comment on that.
I think that said I mean, I don't I don't know, who shorting the stock Lee I I'm not involved in and who shorting it but you know.
I don't know what their thinking is but a lot of times. These are just a financial our place and.
But they don't but we just continue to do what we do continue.
Continue to perform really well and the results of outperformance will be what they are for those people.
Well congratulations on your performance I'm pleased shareholder.
Thank you very much and good luck actually.
Thank you at this time I would like to turn the call back to Ivan Kaufman for any closing remarks.
Sure well, thank you everybody for participating on our call and.
Shareholders of the company, we once again had an extraordinary quarter raising our dividend having great distributor great earnings.
And a very prepared to manage through.
The rest of the year and everybody have a great weekend take care.
Thanks, everyone.
Yeah.
Thank you. This does conclude the second quarter 'twenty twenty-three Arbor Realty Trust earnings Conference call.
You may disconnect at this time and have a wonderful day.
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