Q3 2023 Arbor Realty Trust Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the third quarter 2023 Arbor Realty Trust earnings Conference call.
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I'd now like to turn the call over to your Speaker today, Paul <unk> Chief Financial Officer. Please go ahead.
Okay. Thank you, Mike and good morning, everyone and welcome to the quarterly earnings call for our Realty Trust. This morning, we'll discuss the results for the quarter ended September 32023 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 uncertainties, including information about possible or assumed future results of our business financial condition liquidity results of operations plans and objectives. These statements are based on our beliefs assumptions and expectations of our future performance.
Taking into account the information currently available to us factors that could cause actual results to differ materially from arbor's expectations. In these forward looking statements are detailed in our SEC reports listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of today <unk> 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 as you can see from this morning's press release, we had another outstanding quarter.
Business model continues to generate earnings.
Got it well in excess of our dividend.
This allowed us to maintain one of the lowest dividend payout ratios in the industry, which was 78% from third quarter.
<unk> very significantly despite.
Being in a very challenging environment over the last several quarters, we've managed to maintain our book value, while recording reserves for potential future losses.
Clearly differentiate us from every one of our peers. In fact, we are one of the only companies that space to a experienced significant book value appreciation over the last three years with roughly 40% growth from around $9 a share to nearly $13 a share.
As we discussed on our last call we feel we're right in the thick of this dislocation.
Operating our business with the expectation that the next two or three quarters will be the most challenging part of the cycle.
We have been laser focused over the last two years preparing for this environment. One of our primary focus has been and continues to be preserving and building up a strong liquidity position.
We're very pleased to report that we currently have approximately 1 billion in cash well it gives us tremendous amount of flexibility to manage through this downturn and provides us with a unique ability to take advantage of the opportunities that will exist to generate superior returns on that capital clearly given the current interest rate environment, we expect to.
Experienced additional stress you need a tremendous amount of discipline and expertise to successfully navigate this market and we're very pleased to have a tenured managed senior management team with a track record of managing through multiple cycles as well as what I consider to be the best asset basketball team in the industry.
This is an extremely challenging environment.
Very pleased with the level of success, we've had to date and managing through this downturn, which is a real testament to the quality of our franchise and the extraordinary efforts being put forth by our entire organization.
As we have said before.
We feel we are very well positioned compared to our peers, given our strong liquidity position multifamily centric portfolio, the depths and skill of our management team and the strength of our balance sheet and the versatility of our franchise.
We also believe we are uniquely positioned to step back into the lending market and gone at some very accretive opportunities to continue to grow our platform. While all of this in this space will be dealing with significant internal issues. We feel we are well positioned which is allows us to reenter the lending market at a time when there was a great opportunity to put some of our.
The high quality loans with attractive returns while the competition is less active.
In addition, we recently launched our first construction lending business, which is something we are very excited about and we believe we can generate 10% to 12% Unlevered returns on our capital and eventually leverage this business and produce mid to high teens returns.
We also believe this product is very appropriate for our platform as it offers us returns on our capital construction bridge and permanent agency lending opportunities. We are very committed to this business.
A result, we went out and hired some of the best and top people in the construction lending deal. We are extremely pleased with how quickly we're able to.
Roll out this product and get ahead of the market and the incredibly talented team to execute this strategy.
Turning now to our third quarter performance as Paul will discuss in more detail our quarterly financial results were once again remarkable we've produced distributable earnings of 55 cents per share, which is well in excess of our current dividend representing a payout ratio of around 78% the dividend policy that we have implemented without.
Board, keeping such a wide disparity between our earnings and dividend has provided us with a large cushion.
Was it very strict with very strategic knowing full well that we were entering into a market dislocation.
We certainly could've raised our dividend again this quarter based on substantial cushion and continued strong earnings the board decided to keep it flat until we believe we are not getting credit for raising it in this environment and it would be more prudent to preserve a large cushion as we head into the most challenging part of the cycle.
We're also the only company in our space that has been <unk>.
Well to consistently grow our dividend with approximately 40% growth over the last three years, all while maintaining the lowest dividend payout ratio in the industry.
Just as importantly.
I'm a tremendous stress we've managed to maintain a book value of our recorded reserves for future losses, which clearly differentiates us from our peers.
And we believe our diverse business model uniquely positions us as one of the only companies in this space with the ability to preserve our book value and can you continue to provide very stable protected dividend even in this extremely challenging environment.
And our balance sheet lending business, we remain focused on converting our multifamily bridge loans into agency product allow us to recapture a substantial amount of our invested capital and produce significant long dated income streams in the third quarter. We continue to have success in this area with another $665 million of balance sheet run.
350 million or 53%, which was captured into new agency loan originations.
As a result, we're able to recoup approximately $100 million of capital and continue to build up our cash position, which again currently sits at around $1 billion and again, we're excited about the opportunities. We think we would be able and available to us over the next three to six months to reenter the market raw balance sheet.
Loan book and generate very attractive returns on our capital while we continue to build up a pipeline for future agency business.
And our GSE agency business, we had another solid quarter originated $1 1 billion of flaws in the third quarter and our pipeline remains strong.
Spite the significant recent rise in the tenure, we are poised to complete the year roughly in line with our 2022 originations numbers.
Which which is a tremendous accomplishment in light of the fact that the agencies are down 20% to 25% production year over year, we've done a great job in continuing to gain market share and then converting on balance sheet loans into agency product, which has always been one of our key strategies and a significant.
Differentiator from our peers. 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 $30 billion of fee based servicing portfolio, which grew another 2% in the third quarter and 11.
A cent year over year generates across $119 million a year reoccurring cash flow. We also generate significant earnings on that restaurant in cash balances, which acts as a natural hedge against interest rates. In fact, we are now, earning almost 5% on around 2.9 billion of balances.
Roughly 140 million annually, which combined with our servicing income annuity totals approximately $260 million of annual gross cash earnings or $1.25 a share.
This is in addition to the strong gain on sale margins, we generate for our origination platform and again, it's something that is completely unique to our plan.
That form providing a significant strategic advantage over our peers.
We remain very committed to our single family rental business as we had one of the only remaining lenders in this space, allowing us to aggressively grow the platform. We had a strong third quarter with approximately 140 million of fundings in the Gulf of $430 million of new commitments signed up and we also have a very large pipeline we love.
This business has it also has a three turns on that capital through construction bridge and permanent lending opportunities and generate strong levered returns in the short term, while providing significant long term benefits by further diversifying our income streams and allowing us to Canadian adult.
Our franchise.
In summary, we had another great quarter, and we believe our unique business model clearly demonstrates our ability to generate strong earnings and dividends in all cycles.
We understand very well the challenges that lie ahead, and we are very well positioned to manage through the cycle.
Our earnings significantly exceeded our dividend run rate, we invested 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 current market.
We are well capitalized with significant liquidity, which has put us in a unique position to be able to manage through the downturn and take advantage of accretive opportunities that will exist in this environment.
And again with a best in class asset management capabilities and seasoned executive team. We are confident that we will continue to be one of the top performing companies 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 very strong quarter, producing distributable earnings of $112 million or 55 per share. These results translated into industry high borrowings again of approximately 18% for the third quarter, resulting in a dividend to earnings payout ratio of around 78%.
Quarterly results were slightly higher than our internal projections largely due to increased earnings on our cash in escrow balances from higher interest rates combined with stronger gain on sale income from slightly higher agency, so loan volumes than we anticipated.
As Ivan mentioned, we do expect to continue to experience some level of stress as we manage through this very challenging environment. As a result, we recorded an additional $15 million and seasonal reserves in our balance sheet loan book during the quarter.
Additionally, we did see a slight net increase in delinquencies in the third quarter of approximately $28 million, we experienced $98 million of new delinquent loans and resolve the $70 million delinquent loan from last quarter through a successful restructuring.
As Ivan said earlier, we are in the most challenging part of the cycle of new issues arise. Each day. We are very pleased with the level of success. We've had to date and believe we are well positioned to manage through this downturn given our multifamily focus strong liquidity position and our best in class dedicated asset management team with extensive experience in lower loan workout.
And debt restructuring.
And it's very important to reiterate that despite booking approximately $70 million and seasonal reserves across our platform over the last nine months, we still grew our book value per share almost 2% to $12 73, a share at $9 30 from $12.53 a share at 12 31 2022.
And we are one of the only companies in our space that have seen significant book value appreciation over the last three years.
And our GSE agency business, we had a strong third quarter of $1 1 billion in originations and $1 2 billion in loan sales. The margins on these loan sales came in at 1.48% this quarter compared to $1, 67% last quarter largely due to significantly more FHA loan sales in the second quarter. We are very pleased that the.
<unk>, we've been able to generate over the first nine months of the year, which are well ahead of last year's pace. We also recorded $14 1 million of mortgage servicing rights income related to $1 2 billion of committed loans in the third quarter, representing an average MSR rate of around 1.16% compared to 1.46% last quarter, mainly due.
Two a higher percentage of Freddie Mac loan originations combined with a greater mix of larger loans in the third quarter, both of which contained lower servicing fees.
Our fee based servicing portfolio grew another 2% in the third quarter to approximately 30 billion at September 30th with a weighted average servicing fee of 40 basis points and an estimated remaining life of eight three years. This portfolio will continue to generate a predictable annuity of income going forward of around 119 million gross annually.
In the third quarter, we also received $1 million in prepayment fees as compared to $3 million last quarter and given the current rate environment. We are estimating that prepayment fees will likely remain nominal at around $1 million a quarter going forward.
And our balance sheet lending operation are $13 1 billion investment portfolio had an all in yield of $9. One 2% at September 30, compared to nine 7% at June 30, mainly due to increases in the benchmark interest rates, which was largely offset by an increase in nonperforming loans in the third quarter.
The average balance in our core investments was $13 4 billion this quarter as compared to $13 6 billion last quarter due to run off exceeding originations in the second and third quarter. The average yield on these assets increased slightly to $9 two 5% from $9, one 9% last quarter, mainly due to increases in the benchmark index rates, which.
Was largely offset by an increase in nonperforming loans.
The total on our core assets was approximately.
$11 9 billion at September 30th.
With an all in debt cost of approximately 741%, which was up from a debt cost of around seven 5% at June 30th mainly due to the increase in the benchmark rates.
The average balance in our debt facilities was approximately 12 billion for the third quarter compared to $12 5 billion last quarter. The average cost of funds in our debt facilities was 737% for the third quarter compared to 7.11% for the second quarter again, primarily due to the increase in benchmark index rates.
Overall net interest spreads on our core assets decreased to 188% this quarter compared to 2.08 last quarter and our overall spot net interest spreads were 171% at September 30, and $1, 82% at June 30th.
Lastly, we believe it's important to continue 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 we have several diverse and counter cyclical income streams to 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 through strong gain on sale margins long dated servicing annuity income increased escrow balances that are on significantly more income in today's higher interest rate environment.
Additionally, we have multiple multifamily centric and have a substantial amount of non mark to market nonrecourse CLO debt outstanding with pricing that is well below the current market. We are also well capitalized with significant liquidity and have a best in class 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.
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 Mike.
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And we will take our first question from Steve Delaney with JMP Securities.
Taking the question.
Gratz on another solid solid quarter guys.
The the number that jumped out.
The report to me was the 500 million of cash sitting in the C. L O's.
Thought theories and you did put $240 million to work in new structured loans I've noted in the third quarter. So I guess the question is first did the 240 million, where they've done within the clo's or outside of the Clo's and what are your thoughts about.
How can you reduce or do you plan to reduce that 500 million meaningfully over the next couple of quarters. Thank you.
We've done a really good job.
In managing our cash balances.
C L isn't keeping keeping a blow.
What we're what we're what we're what we're seeing is a lot of payoffs coming at the end of the month.
So when they come at the end of the month. It takes time to redeploy that money that money used to come more evenly over a period of time.
So that's kind of kind of what we're seeing so there's probably a large number of pay offs. We are constantly looking at our inventory and moving stuff out about bank lines into it and people that cash balance as low as possible, but it's a process, it's not always perfect.
Yes, Steve its Paul Island, 100% correct, we did have some lately runoff in the third quarter.
To answer the rest of your questions of the $2 40, we funded during the quarter of 140, as we said in our commentary with fundings of prior commitments on our <unk> business. So that is correct yes.
That all gets funded through our warehouse lines and that business has been tremendously accretive for us we're generating almost a 17% levered return on that business for the quarter.
The other 100 million that was funded $92 million were bridge loans and $8 million were mezz and PE behind our agency business. So the Mezz and PE is obviously not financed in its third sure thing yield on your money and the other 92 I think 62 of it went into one of our CLO as any other ones on our bank line. So that's kind of a breakout.
And how we financed our business, but as I've said, we've got $6 2 billion. Our Replenishable CLO is at 170 over we've got a nice amount of cash in those vehicles to reinvest and add loans run off.
It's a process of moving it around and being efficient, but we've got a lot of dry powder to be able to execute very well going forward.
Got it that leads into my follow up I haven't.
Which in terms of the new loan demand on the structured side are you seeing long term Arbor borrowers people do you guys have had relationships for 10 20 years.
Stepping up and looking to take on new projects, new multifamily projects in this environment or is it everything youre looking at really just refi existing existing projects. Thank you.
We've done some purchase activity, especially on the agency side.
And I think that you still don't have the price discovery in the market and the.
Buyers and sellers meeting of the eyes to have active transactions. So I don't think it's a very active part of the market you are seeing some refis in the market.
And you're seeing existing bridge laws from time to time get refi, perhaps some cash a restructured deals but.
What where we we've been real cautious we've been spending more of my time on the built to rent what we feel the opportunities are a little greater and now as I mentioned, we just launched a.
Construction lending business.
Which we think is great all the banks kind of out of the market. While there's concern about new deliveries. We think our timing is outstanding because the lending we're gonna be doing now.
Or is it going to be in about 36 to 48 months from now where we think the absorption here.
Lack of opportunities will create a good opportunity in our yields be outsized and that's kind of where we're putting their use of our castle.
Thank you both for the comments.
Thanks, Steve.
And we have our next question from Stephen laws with Raymond James.
Hi, good morning.
And congrats on a solid quarter on a very difficult environment.
No I haven't I wanted to start.
We talk about you mentioned in the next two to three quarters being most challenging and he said something similar last quarter.
Look at the fourth quarter 'twenty, one origination volume, you're a pretty big quarter.
Two year loans would be hitting original maturity dates next quarter. So can you talk about how many of those have caps that might expire.
The outlook the increase since the last quarter.
Is that impact.
Expected stress you you think you might see in the next couple of months given where rates are.
And maybe if the.
A more detailed level.
How many of those borrowers do you think are on track with their business plan you know how many you need more time versus how many have a real cap rate issue around the rate move.
Yes most.
Most of our loans are three year loans with extensions not two year loans.
Of a correction on that comment.
Brian It's an it's an ongoing process, we don't wait till the exploration of a rate cap or we don't wait for loans people that come to us.
What we're very proactive.
I think the biggest risks other than the rate cap, which is a true risk and that's just an economic issue because the cost of a new rate cap is a state of the dollar amount.
For us the real concern is performance and making sure that the assets are being managed a lottery.
Josh that's required execution to get to their business plan. There is a lot of upside in the rents.
And unit turns and getting them to market.
And I think if anything is what we see in the industry.
Is the lack of execution, which creates.
<unk>, which creates an economic risk for the borrowers and not getting to that numbers. So we're putting a lot of time and attention to really managing these assets staying on top of the borrowers.
Working with them to change management companies and recapitalize their deals well ahead of time. So it's an ongoing process, it's not forget to the cliff and deal with it then.
Makes sense I appreciate the correction on the original maturity term.
Paul.
Follow up on the financing side, a couple of lines I think in the Q mentioned that they're currently being <unk>.
Discuss for FERC.
For extensions.
Talk about how those conversations for all Counterparties you can expect those lines to be extended with no change of terms.
And as you think about CLO buyouts did you buy any loans out and if so kind of what is the typical liquidity need to move out of a loan out of a CLO onto our bank clients.
Sure. So we have some some data for you Steve. Thanks for the question during the quarter, we have about $6 5 billion.
Of committed warehouse lines about 15 different relationships and $4 billion of that was extended during the quarter. If you go look at our Q, we had some maturities coming due we were very successful in extending pretty much all of them I think there's one line left that we expect to have done by the end of the month, so no issues there, but the conversations.
I've been pretty similar across the board, we have not seen much of a move if any on existing product thats being financed in the vehicles. So we've been able to hold the line and keep that pricing pretty consistent what were seeing is more of a conversation about new product and what the pricing would look like on new product, but for the most part we've done a great job.
Having very deep relationships with our banks very longstanding relationships and getting those lines to roll with no significant material changes to the terms that we have outstanding. So that's been really really helpful. The second part of your question was around remind me again it was yes.
Low buyouts and liquidity.
Sure. So as you know from time to time when loans have issues we view.
Do exercise our right to buy loans out of the vehicles restructure I mean to put them back into another vehicle or put them into our warehouse lines and thats a fluid process that happens each quarter. This quarter I think we ended up buying <unk>.
And $40 million of loans out of our vehicles, but one of those was.
It was a loan that I mentioned in my commentary that we restructured a $70 million defaulted long may it last quarter that was restructured so that was pulled out restructured and then financed on one of our warehouse line. So net we probably had about call it $80 million of buyouts during the quarter and it changes every quarter. It depends on performance last quarter, we had fifth.
<unk>.
So it's just a it's just a fluid process from how loans perform in and how you operate your vehicles.
Fantastic. Thanks for the comments this morning.
Yeah.
And our next question comes from Jay Mccanless with Wedbush.
Hey, good morning, Thanks for taking our questions.
The first question I had if rates.
Stay at these levels or even higher into 'twenty four 'twenty five.
Could you talk about what you think could potentially happen with the loan book.
Yeah.
Yes, I mean rates rates are clearly at a very elevated level and it's put a lot of stress.
People being able to exit into the fixed rate market.
When rates were in the threes was already stressful.
And borrowers and we won't cartoon borrowers to convert.
The short term rates have gone up a little bit, but theyre maintaining at these levels clearly, it's an elevated stress level, we're thinking they're going to stay at these levels for the next three quarters and are planning accordingly.
Make no mistake about it that's distress in the system.
And all people.
When they have their business plan, they exit to a fixed rate and it was anticipated in their mind, yet the 10 year would be around $3 50, now it's close to five set or opportunity that exit is much more difficult. So they've got to bring more capital to the table or bring more cap table to carry their assets.
That's as simple as it is and that's distress in the system.
Our rate caps, even available in this market and if so what type of cost or people having to incur to.
Extend or create a new rate cap.
Ooh recaps or always available at least they have been they continue to be.
And of course vary.
I think people have to bring you know.
Roughly three points to the table to buy rate cap.
And all in order to bring that debt service down to a level.
Make it a breakeven so they have to make capital calls to figure out ways to bring that capital to the table. So that's the costa balance loans.
It's roughly three points.
Okay.
And then if I may one more.
With the new construction lending opportunity you were you were discussing or are these loans going to be on actual new construction or is this are you going to be looking at maybe some transitional assets to bring on where banks are walking away from deals. Some maybe just kind of what type of product are you envisioning for this new construction lending vehicle.
<unk>.
It's pure ground up.
Multifamily primary markets primary sponsors.
We have the opportunity to construction lending turn it into a bridge loan and get the envelope.
That's what it is the banks are out of that market. There are some local and regional banks, the advance rates, which used to be in the 75% 80% range during the 50% to 65% range.
And the guarantees on the deals are very good. So we think it's a great opportunity a great market great wedge play out capital outweigh the short term rates are are unlevered returns.
Very good and I love It returns were outstanding.
Okay.
Since around what type of a nominal rate for some of these projects right now.
I mean, our borrowing rates will be between.
I would say average between $4 50 and 600 over.
That's kind of where all of a sofa.
Your Unlevered returns are.
11.
My estimation of 11 months, 12.5% unlevered without fees and without.
The benefit of having multiple products too.
Okay.
Okay, great. Thank you for all the color appreciate it.
And just a reminder, if he would like to ask a question that is star one on your telephone keypad and our next question comes from Jade Rahmani with Jade Rahmani with K B W.
Okay.
Thank you very much.
It was definitely impressed by the very moderate increase and I would say the category.
Substandard and doubtful accounts.
It's a very slight uptick.
But overall I wanted to ask do you have a sense for what percentage of the balance sheet loans have been modified in recent quarters problems dealt with.
And what percentage in your view is remaining to go through some kind of modification.
I don't have those numbers I don't have those numbers ahead of me, but I will tell you. This has been a process that began.
Two years ago, we got out ahead of it we started managing <unk>.
Loans that we thought would be.
Requiring adjustments and changes.
It's an ongoing process, we resolve a few we modify a few we got a few new ones to come in.
I see this trend continuing.
Over the next three to four quarters.
And this elevated interest rate environment.
So you know whether it ticks up a little bit.
It should tick up a little bit, but it's been pretty consistent.
Yeah, Hey, Jade its Paul I mean, it's been fairly nominal we've been we've been pleasantly surprised over the last few quarters as Ivan said, where we're expecting continued stress and we think over the next few quarters. We will continue to have those conversations with borrowers.
But during the quarter, we only had one material modification, which we disclose which is that $70 million loan I mentioned in my commentary that was a defaulted loan last quarter that we were able to restructure and get to a performing loan that was the only material modification we had in the quarter.
So as a percentage that's a pretty low percentage in.
We've been we've been fairly fortunate that those numbers have been quite low over the last few quarters.
Nothing comes to mind that was a significant market modification other than that item over the last few quarters, but that's obviously could change in the next few quarters.
Yes.
And cumulatively reviewing CLO surveillance performance. It does seem that the percentage would be in the 15% to 20% range over not just the last two quarters, but maybe say 18 months does that number of strike you as too high or reasonable.
Okay.
Yeah, I think that number is high I have to look back I mean, we did as I said.
I think what you're referring to as long as that may be more credit risk under it.
Some of it not loans that are being modified to different categories in two different times.
Yeah, there's a difference.
Okay.
Turning to cash flow performance.
I understand that when we look at the cash flow statement, there's timing.
Loan originations for Fannie and Freddie and then the loan sales will take place now 30 to 60 days after that so adjusting for that but are there any.
Items that drove our negative working capital that is the category called.
Other other assets and liabilities that working capital account and I think in the quarter was negative 200 million, which doesn't usually occur wanted to see if you could provide any color on that.
I'll have to look at what item, you're talking about a lot of things get netted into the cash flow.
I'll take a look at the detailed Jade I can call you out there.
Because there's a lot of things netted in there, but the cash flows were I think pretty pretty stable compared to last quarter, but I'll get back to you on that.
Okay, but.
But just overall your feeling about cash flow performance is that it remains.
Strong and steady is that how you would characterize it.
Yes, that's how we look at it I mean distributable earnings were 55.
The best representation of of cash flow right.
If the item the metric we used to.
Two.
Cover our dividend right. So we look at it with a tremendous coverage ratio 55 versus <unk> 43, but we've not seen.
<unk> decline in cash flow, obviously have a few more nonperforming loans, so that hurt your cash flow a little bit, but again, we're ramping up our <unk> business, we are putting out some mezz and PE.
<unk> not seen a significant decline in that cash flow number yet.
Thank you very much.
And we have our next question from Rick Shane with J P. Morgan.
Hi, Thanks, guys for taking my questions. This morning.
First can we talk a little bit about the $70 million a restructuring.
What is the advance rate that you received on the facilities that you pledged at two and was any of the Mezz debt was funded during the quarter associated with that restructuring.
Paul before you answer that question I want to give you a little perspective on that long because it kind of touches upon some of the questions that were.
We're asked and I think it's a good case study.
That was a very very good asset and a very good market that required.
The borrower a 100% failed on those execution 100 per cent.
Couldn't execute well it was distracted by the.
Other issues, we have no idea.
We were able to bring in another operator and within this short period of time.
He has already transitioned this asset because he knows the market knows the asset quality and has done a remarkable job.
So that's kind of the overview that transaction.
Great asset great opportunity bed management.
Execution replace with a good operator.
And our recapitalization and Paul you can go and I'll give the specifics yes sure. So.
So exactly what I haven't said right great asset just sponsor was not getting this asset to plan like we thought it would.
Was behind on his payment last quarter had gone delinquent too.
Two months and then you have the three months this quarter, which is five months, we restructured the deal and that we were able to get a payment of three months and back interest. So we did get $1 million for recovery this quarter in interest.
Restructure the deal and of which the property was sold to a third party borrower a third party Navarro, a assumed our debt and as part of an assumption of our debt we modified our loan to a three year long.
The first 18 months.
The interest rate is 6% fixed and then after that 18 months it reverts back to its original sofa plus $3 40.
And as Ivan mentioned, our quality sponsor that is committed $10 $5 million to the project two and a half was funded day. One is an interest reserve and the other $8 million is is a.
Capital improvements that are going to be made into the asset over the next 15 months and if there was or not made or if they have come up short the borrowing needs to post a rental reserve of the lesser of $2 5 million in the difference between the $8 million capital improvements and what he spent and it's also important to note that.
He's he's guaranteed those $8 million of capital improvement. So that's a perfect example of what we're capable of we took a borrower who wasn't executing as planned we brought in a new borrower who has committed significant capital to the asset it's going to improve the asset get it to stabilized value quicker took a slight reduction in interest rate for <unk>.
Months, but then it goes back to its original rate and Thats kind of the whole the whole structure.
Got it and that is all now carried a part did you provide any mezz associated with that.
It did not.
Provide mez on that loan and we did not have a reserve on that long because the loan and we like the asset a lot and we think we're money. Good we did end up restructuring that loan putting it into one of our facilities and getting a pretty standard advance rate, but we did not provide mets against that one.
Yeah.
Thank you that's helpful.
Second question, there were $347 million of extensions in the quarter.
I'm curious if you can just sort of give us and I realize it's going to be idiosyncratic over a wide array of loans, but if you can give us some perspective on what extensions looked like what you are able to get in terms of pay downs and.
What you are requiring in terms of rate caps and finally, what youre dealing with coupons on those.
Sure. So I can give a little color Ivan will probably be able to give the rest of the market, but most of all of those extensions where as of right extensions, which is what borrowers have if theyre, making their payments and they're doing the things they shouldnt be doing they havent as a REIT extension, so theres not really much we do differently, they're entitled to that extension they've executed there.
And that extension is part of their terms.
There was one loan in which the extension was granted.
Concessions have granted extension, we ended up having a pay down on the loan of $2 million in increasing the actual interest rate for like a three to six months extension, but almost all of the extensions we did during the quarter, where as of right extensions Ivan I don't know if you want to give a little color on that.
Yes, listen if it does have right theres not much to talk about but if if it's not as of right. We usually seek a level of consideration to walk that extension.
Put the asset.
On a better position so each one is.
Individually analyzed to see how we can improve our position on that particular asset.
Because as a bright require getting a rate cap extension as well.
It depends if it is.
That's part of it than it does right. It's just my opinion.
And it's not.
Got it okay.
And then not to answer Jades question, but I think it ties into something that we didn't fully understand in terms of the cash flows.
There was commentary in the 10.
10-Q related to a $211 million $211 7 million related party transaction.
Servicing is that yes.
I just looked it up and I was going to respond to Jade. So this is timing and this is what we talked about early in the in the commentary Steven Steve Delaney asked the question. We had very very late in run off in the quarter, which sometimes happens doesn't always happen with that run off occur as it runs off in our servicing shop, which is off balance sheet and so we have to.
Create due from related party because that money has moved a day later so if loans are paying off at the end of the month on 930. The money is sitting in our off balance sheet servicer, but but it's it's removed out of our portfolio and it's a receivable that comes in the next day, so that cash flow change that.
You see a 200 million is all to do with the change in the related party line due from related party line, which is totally timing and all that money came in on October 1st.
Got it Okay, and then last question.
Stock is now trading pretty much at book value you guys have issued $185 million this year repurchased 35 million.
What are the parameters as we think about this what is the premium you should be trading at book to approach the ATM and what is the discount where you would consider repurchasing and I'm, assuming that it really close to par youre doing either.
We can't answer that in a vacuum.
Many factors.
It all depends on our liquidity position.
The obligations, we have to fund the opportunities that we have in front of us.
We're the market dislocation is.
So each circumstance presents a different opportunity certainly buying back our stock at the right value.
He is a great opportunity for us if we have liquidity.
It's something that would be extraordinarily attractive.
We always feel our best investment is whether that alone sphere.
On the other on one hand on the other hand.
Always want to grow our franchise and grow our business.
Really great lending opportunities to grow our franchise, we keep we keep our eye on that as well. So it's a balancing act based on a variety of factors.
Got it now the balance sheet has continued to shrink this year I think assets are down about 6%.
You've.
Issued equity into that.
If the balance sheet continues to run off would you continue to issue equity or is this something that will sort of stall until you have objectives of growing the balance sheet again.
Let's keep in mind that we booked a lot of that so far business and that is so far business funds over time.
So we're booking.
<unk> business, we have a capital obligation and we try and match our capital obligations and keep our cash very very constant in this kind of environment.
So we're really sensitized to the opportunities on our capital needs and keep our cash balance is at a very heightened level. During this economic cycles. So that's one of the things we pay a lot of attention to.
Clearly when our book was high and we're able to you know.
<unk> raised capital and then increase the amount of lending we did on the asset side.
Thought that was a really good match to generate.
16, and 18% returns.
We'll manage that and monitor that accordingly.
Got it Okay. That's very helpful and last question I promise.
There is.
It ties into what you just said there was a $56 $9 million mezz commitment.
Im curious what the seasonal reserve levels are for unfunded commitments on Mezz.
Yeah.
It's a model that we run I don't have that at my fingertips.
Rick I mean, the models are run obviously subordinated paper.
It's a higher seasonal reserve then obviously first lien senior bridge stuff, we do have roughly right now we're sitting with about $73 million in general see so on our balance sheet.
I don't have it in front of me it may actually be disclosed I'm not sure, but we can get you that or how much is related to mezz and whats related to unfunded commitments. It's just it factors into the model certainly factors in at a higher loss level because of the subordinate position et cetera.
Terrific Hey, guys. Thank you for taking all my questions.
Youre welcome.
And we have our next question from Crispin Love with Piper Sandler.
Thanks, Good morning, everyone and appreciate you taking my questions just looking at the non performers in the quarter you added five loans, there, but only $16 million.
Just curious a little bit more detail there are those smaller loans or was that in Q2 of resolving that delinquency you mentioned and just any additional info in detail on the new non performers and credit generally would be helpful. Thanks.
Sure. So we added actually.
Six new nonperforming loans during the quarter for a total of about $98 million in total <unk>. So.
They range anywhere from $10 million to $30 million.
All the assets and then we resolve the 70 million dollar asset that I took Rick through on the on the change in the terms. So the net change was $28 million during the quarter.
Assets are not particularly different than the type of assets. We've done they're all multifamily all bridge there throughout the country and the.
The ltvs on these assets range anywhere from.
Hi, <unk> <unk> to <unk>.
<unk> 90, and then the one we have 100, because we took a reserve against that of a million or half, but really nothing different than the type of assets. We have had in the past.
Okay, Great. That's helpful. And then just if we're in a higher for longer scenario, which you alluded to I think I think you said that you expect rates to be somewhat stable over three quarters.
Do you expect that to impact the structured loan book in originations I think as expected bridge continues to soften a bit but you have been seeing some nice solid activity in <unk>. So curious on your thoughts on forward originations in this great great backdrop in both of those areas.
The sniff rates drop.
Our agency business will explode, there's a lot of our balance sheet is really well positioned.
To be you know too.
To be transferred into fixed long term fixed rate.
So that's where the opportunities will come and the growth of the.
Of the agency business with respect to the floating rate business. When there's price capitulation, you know people want to buy assets that need improvement or short term in nature, you'll see that business pick up so a drop in rates will create great opportunities.
No we don't expect that to happen until perhaps the third quarter or maybe even the fourth.
Okay, and then I guess just.
Following up on that and looking at the agency that has a 10 year right now is about $4 80.
In order for you to kind.
We see a meaningful pickup in agency originations do you think how do you think about that when youre looking at.
It will pick up at each level 450, you'll see an increase four in a quarter, you'll see a bigger increase four youll see an increase sub four to explode. So.
As the 10 year drops the agency business will ratchet up.
And the depot it goes the more exponential.
Sounds good I appreciate all the color that's it for me thanks.
Yeah.
And we now have our next question from Stephen laws with Raymond James.
Hi, I just wanted to ask a quick follow up you know we've touched a lot on arbor specific stuff, but can you maybe give us your views more macro.
On the fundamental side of multifamily kind of around new supply in the near term, maybe a lack of supply in the medium term.
Slowing rent growth near term related to that and then on the expense side anything around.
Property taxes or insurance related costs, given the type of multifamily assets you guys play out in the regions around thank you.
Yes, and I think new construction the absorptions slower we all see that rent growth has slowed expenses are a little higher than everybody thought in your primary markets Youre looking at.
Flat.
You're flat rent growth to expense. So that's the way we've looked at it for quite some time now.
But the markets with new deliveries class a.
The absorption of the concessions are.
Higher than expected.
And it's going to take a little bit to absorb given the housing market, where it is people are really buying houses so.
Think that the demand for rentals continue to be fairly strong.
Yeah.
Great. Thanks.
And we have our next question from Jade Rahmani with K B W.
Thank you very much.
The stock had been up in response to the results, but is now down 2% just a big picture question, but what do you think is most misunderstood.
By the market as it relates to.
Whether it be the book value or the credit risk or the earnings outlook.
But we can't speak to that all we can speak is that the whole sector is down.
We've outperformed the sector in terms of the company's performance.
And you know I haven't so.
So hard mentality. This large concern in this sector and that sector is down.
Uh huh.
We're just going to continue to perform to our thing outperform our peers.
And I think its patients.
It's hard it's hard for me to speak to the Investor mentality, We just run a company.
Consistent performance.
And sometimes you get grouped in and.
And since there's times you just there was just headwinds.
In the market.
And on the NPL side, maybe this gets to the point, it's a $138 million day, 1% of loans. What do you think the peak number of that will be.
Yeah.
It's not something we forecast or will talk to Paul do you have any comment on that.
I don't I mean, as we've said in our commentary.
Jay is new issues arise every day, we knock them down and when we get new ones.
Can't tell you where that number goes I think we've done a great job of managing it to date.
Putting our efforts where it needs to be but.
We don't have a crystal ball on what happens to the market and where that number goes but.
First two quarters have been okay.
And on the cash flow number the castle performance number talk in response to Rick's question about the other liabilities and the due from related party line item so that line in <unk>.
So for one.
That would suggest that.
It was very strong in the quarter.
That's how we look at that yes, that's right. It's just timing we had a bunch of loans pay off late but at the end of the month $939 29, and those loans. The cash is not related to us until October 1st It takes a day or two to get it out of our serving shop once they process. It. So yes. So thats why that number is down so much in the cash flow, but again.
It's timing.
That'll just opex.
And that in fact, it was libra.
That would imply about $140 million of cash from operations in the quarter.
And the dividend costs your $90 million.
Sorry about $95 million, including the preferred so cash flow is continuing to be in excess of the dividend.
That's correct.
Alright, Thanks, a lot.
And we have reached our allotted time for our Q&A session. Today I will now turn the call back over to Ivan Kaufman for any closing remarks.
This is Jim.
Questions.
Yes, we're done with our questions.
Yes.
Well, we certainly appreciate everyone's support we think our results have been.
Outstanding and above our peers and we continue to grind forward them to continue to have confidence in our ability to manage through the downturn.
He has a great weekend.
Thank you. This does conclude today's teleconference. Thank you for your participation you may now disconnect.
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