Q3 2024 Arbor Realty Trust Inc Earnings Call
Please standby we're about to begin.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the third quarter 2020 for Arbor Realty Trust earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during this period you will press star one on your telephone.
Speaker Change: If you want to remove yourself from the queue simply press star two.
Speaker Change: Be advised that today's conference is being recorded if you should need operator assistance. Please press star zero.
Speaker Change: I would now like to turn the call over to your speaker today Poly Lineal Chief Financial Officer. Please go ahead.
Poly Lineal: Okay. Thank you, Jamie and good morning, everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended September 32024.
Speaker Change: 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.
Speaker Change: These statements are based on our beliefs.
Speaker Change: Assumptions and expectations of our future performance taking into account. The information currently available to us factors that could cause actual results to differ materially tomorrow versus 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.
Speaker Change: Only as of today Barbara 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 strong quarter as we continue to effectively navigate through this challenging environment.
Speaker Change: As we discussed in the past we have properly positioned the company to succeed in this market and we.
Speaker Change: Our executing our business plan very effectively and in line with our expectations. We have a diversified business model with many counter cyclical income streams are invested in the REIT asset class with the appropriate liability structures and a well capitalized which has allowed us to consistently outperform our peers in every major financial.
Speaker Change: Category for a long period of time and by a wide margin.
Speaker Change: In fact, most of our peers have cut their dividend substantially of experienced significant book value erosion and have generated a negative total shareholder return over the last five years.
Speaker Change: As we have stated many times and this can clearly see from the charts posted on our website. Our results have been nothing short of remarkable.
Speaker Change: System outperforming and leader in this space.
Speaker Change: As we discussed on our last few calls we expected the first two quarters this year to be the most challenging part of the cycle.
Speaker Change: I also thought it could leak into the third and fourth quarters as well yeah freight rates remained higher for longer.
With the recent 50 basis point rate cut by the fed and a significant drop in the 10 year to a low of around 360, we began to see a much more positive outlook as a result of cap costs become unless becoming far less expensive and borrowers being able to access five and 10 year fixed rate agency deals.
Speaker Change: And buyers moving off the sidelines and becoming extremely active in the market.
Speaker Change: However, there has been a backdrop in the 10 year again to 425, which is somewhat changed the tenor and we now believe that the recovery will be a little bit slower.
Speaker Change: And could lead to a challenging fourth quarter, which is consistent with our previous guidance.
Speaker Change: We continue to do a very effective job of working through our portfolio by getting bars to recap that deals in purchase interest rate caps in the third quarter. We modified another $1 2 billion of loans with $43 million of fresh equity committed to be injected into these deals from the sponsors. This includes quite cash to purchase new interest rate caps on.
Speaker Change: Interest in renovation reserves brain past interest to cover and pay down loan balances where appropriate.
Speaker Change: We also continue to make progress in line with our previous guidance on the approximately 1 billion of loans that were past due at June 30th by either modifying these loans foreclosing, taking them into Oreo or bringing in new sponsorship either consensually or simultaneously with the foreclosure last quarter, we discussed our plans for these loans.
Speaker Change: And we estimated at approximately 30% to 35% of the pool would be modified another 30% to 35% would pay off and the remaining 30% we'd be taken back is already all in the third quarter. We successfully modified $250 million of these loans were 23% and we expect to modify and roughly 10% in the fourth.
Speaker Change: <unk>.
We also had one delinquent loans for $8 million payoff in full in the third quarter and we expecting another 300 million plus a detailed liquidity to pay off over the next few quarters. Additionally, we took back as Oreo roughly $77 million of flows in the third quarter.
Speaker Change: <unk> to take back another $250 million plus over the next few quarters. This is strong progress in one quarter and has reduced the $1 billion in delinquencies. We had is June 30th now to just over 700 million at September 30th or a 30% decrease.
Speaker Change: But as expected we did experienced additional delinquencies during the quarter of approximately $225 million, bringing our total delinquencies at September 30th to approximately $945 million, which is down 10% from a peak in the second quarter.
Speaker Change: And while we anticipate having an additional delinquencies in this environment, we believe our resolutions will exceed new defaults, resulting in a continued decline in our total delinquencies.
Speaker Change: It is also very important to distinguish between oreos, we take back and bringing new sponsorship to operate in and assumed debt and oreos, we own and operate ourselves of the $77 million of Oreos. We took back in Q3 20 million. We successfully brought a new sponsors to operate and assume our debt at 57.
Speaker Change: We now own and operate directly.
Speaker Change: We are working exceptionally hard in resolving delinquencies in accordance with our plan, which when achieved will convert noninterest, earning assets into income producing investments that will be highly accretive to our future earnings. This is a challenging and demand at work and I am very pleased with the progress we are making in resolving delinquencies in accordance with our objectives.
Speaker Change: <unk>.
Speaker Change: We also continue to focus on maintaining adequate liquidity levels and the appropriate liability structures, which is critical to our success. In this environment. Currently we have approximately $600 million cash and liquidity, providing us with the flexibility needed to manage through the balance of this downturn and take advantage of the opportunities that exist in the small.
Speaker Change: To generate strong returns on our capital.
Speaker Change: One of these opportunities is our bridge lending platform and Ive said before.
Speaker Change: Some of the best times.
Speaker Change: Some of the best loans are made in the bottom of the cycle. We believe now is the appropriate time to sell ramping up our bridge lending program again and take advantage of the opportunities that exists in the market to originate high quality short term bridge loans allowed us to generate strong levered returns on our capital in the short run while continuing to build up a significant pipe.
Speaker Change: Line of future agency deals, which is critical to our strategy.
Speaker Change: We have also done an excellent job of deleveraging, our balance sheet and reducing our exposure to short term bank debt. We have approximately $2 9 billion in outstandings with a commercial banks, which is down from a peak of $4 billion and we have 65% of our secured indebtedness and non mark to market nonrecourse low CLO vehicles.
Speaker Change: Cielo is a major part of our business strategy and they provide us with a tremendous strategic advantage in times of distress and dislocation due to the nature of that non mark to market nonrecourse elements.
Speaker Change: In addition, they contribute significantly to providing a lower cost alternative to warehousing banks, which in times like this are fluctuating pricing and leverage points parameters. In fact, one of the significant drivers of our income change of our low cost CLO vehicles, as well as our fixed rate debt and equity instruments.
Speaker Change: That make up a big part of our capital structure.
Speaker Change: We were very strategic in our approach to capitalizing our business with a substantial amount of low cost long dated funding sources, which has allowed us to continue to generate outsized returns on our capital.
Speaker Change: Another major component of our unique business model has a significant agency platform, which offers a premium value as requires limited capital and generate significant long dated predictable income streams and produces considerable annual cash flow in the third quarter. We produced $1 1 billion of agency originations, which was in line.
Speaker Change: With our second quarter volumes in the third quarter. We also saw a big dip in the 10 year to a range of $3 60 to $3 80, which immediately resulted in a massive increase in our agency pipeline to approximately $1 9 billion, which is one of the highest levels we've ever seen.
Speaker Change: During that timeframe the agencies got significantly backed up by creating a delay of three to six weeks, which certainly affected the timing of our closes which was compounded by the recent backup in rates is solidly above 4% again as.
Speaker Change: As a result of these factors and given the magnitude of our pipeline. We are guiding up fourth quarter volumes to be in the range of $1 2 billion to $1 5 billion, which is very rate dependent if rates stay at these levels. We are confident that we can originate $1 2 billion in the fourth quarter, but a phrase get meaningfully below 4% again.
We can produce the top end of our range to one 5 billion.
Speaker Change: We also continued to do an effective job at converting our balance sheet loans into agency product, which has always been one of <unk> key strategies and a significant differentiator from our peers.
Speaker Change: In the third quarter, we generated $520 million of payoffs and $385 million was 74% of these loans being refinanced into fixed rate agency deals for the first nine months of this year, we recaptured over 60% or 1.1 billion of our balance sheet runoff into agency <unk>.
Speaker Change: Sure.
Speaker Change: And as I have said in the past if interest rates continue to decline we expect that this will become an even more meaningful part of our business going forward.
Speaker Change: Our fee based servicing portfolio, which grew another 2% this quarter and 10% year over year to $3 3 billion generates approximately $125 million, yeah reoccurring cash flow.
Speaker Change: We also generate significant earnings on our strong cash balances in fact, we are earning four 6% on around $2 3 billion of balances of roughly $120 million annually, which combined with our servicing income annuity totals $235 million of annual gross cash earnings or $1 15, a share. This is in the dish.
Speaker Change: Due to the strong gain on sale margins, we generate from our originations platform and.
Speaker Change: And it's extremely important to emphasize that our agency business generates over 45% of our net revenues.
Speaker Change: Vast majority of what's your cars before we even turn the lights on everyday this is completely unique to our platform.
Speaker Change: We continue to do an excellent job in growing our single family rental business, we had another strong quarter with $240 million of fundings and another $375 million of commitments signed up which now brings our nine month numbers to $1 1 billion, which is already right on top of the total will be produced for all of last year and brings our total <unk>.
Speaker Change: <unk> volume to four $6 billion from this platform. Additionally, we have a large pipeline and remain committed to doing this business that is also the three turns on our capital through construction bridge and permanent lending opportunities and generate strong levered returns in the short term, while providing significant long term.
Speaker Change: Benefits by further diversifying our income streams. We also continue to make steady progress in our newly added construction lending business. This is a business. We believe can produce a very accretive returns tied to our capital by generating 10% to 12% Unlevered returns initially and mid to high a levered returns on our capital.
When we obtain leverage.
Speaker Change: We closed our first deal in the third quarter for $47 million and we continue to see growth in our pipeline with roughly 300 million under application and $200 million in our lives and $600 million of additional deals in the current screening. We believe this product is very appropriate for our platform as it offers us three times on a capital pool construction.
Speaker Change: The bridge and permanent agency lending opportunities and again between our asset far in construction lending products, we expect to be able to continue to grow our balance sheet loan book and generate strong returns on our capital very importantly, seeding a significant amount of our future agency production in.
Speaker Change: In summary, we had another productive quarter and we are working very hard to manage through the balance of this dislocation.
Speaker Change: We feel we have done an excellent job working through our loan book and then getting bars to recap that deals with fresh equity as well as bringing in quality sponsors to manage underperforming assets, we're working through our nonperforming loans, we realized that although the market backdrop is improving.
Speaker Change: A lot of work to be done to manage through this environment.
Speaker Change: We believe we are well positioned to execute our business plan and continue to perform outperform our peers I will now turn the call over to Paul to take you through financial results. Okay.
Paul: Okay. Thank you Ivan we had another strong quarter, producing distributable earnings of 88 million or 43 per share, which translated into <unk> of approximately 14% for the third quarter as Ivan mentioned, we modified another 24 loans in the third quarter totaling $1 2 billion, an approximately $710 million of those loans we were.
Paul: Wired borrowers to invest additional capital to recapture deals with us providing some form of temporary rate relief through a paying accrual feature the pay rates were modified in average to approximately 6% with two 5% of the residual interest due being deferred until maturity $240 million of these loans were delinquent last quarter and now current.
Accordance with their modified terms.
Paul: Our total delinquencies are down 10% to 945 million at September 30th compared to 1.15 billion. At June 30. These delinquencies are made up of two buckets loans that are greater than 60 days past due and loans that are less than 60 days past due that we're not recording interest income on unless we believe the cash will be received.
Paul: The 60, plus day delinquent loans, our nonperforming loans were approximately $625 million this quarter compared to $676 million last quarter due to approximately $152 million of modifications $77 million of loans taken back as Oreo, which was partially offset by a $110 million of loans.
Paul: <unk> from less than 60 days delinquent to greater than 60 days past due and $68 million of additional defaulted loans during the quarter.
Paul: The second bucket consisting of loans that are less than 60 days past. Due were also came down to $319 million this quarter from $368 million last quarter due to $88 million of modifications $110 million of loans progressing to greater than 60 days past due and $8 million payoff, which was possible.
Paul: Offset by approximately $157 million of new delinquencies during the quarter.
Paul: While we're making good progress in resolving these delinquencies in accordance with the objectives that we discussed earlier at the same time, we do anticipate that there could be new delinquencies in this environment.
Paul: I haven't mentioned in accordance with our plans of resolving certain delinquencies. We have started to take back real estate in the third quarter and we expect to take back more over the next few quarters the process of taking control and working to improve these assets and create more of a current income stream takes time, which as I mentioned on our last call will likely result in a low watermark for net.
Paul: Interest income over the next couple of quarters until we have worked through this portfolio. This is what we expected and is consistent with our previous guidance that this would be the period of peak stress in the bottom of the cycle.
Paul: In line with our strategy of taking back Oreo assets, we decided to breakout our Oreo assets into a separate line item. This quarter, which was previously included in other assets on our balance sheet.
As I've discussed earlier, we took back approximately $77 million of assets in Q3 57 million of which we currently own and operate which was cat, which was accounted for as Oreo and roughly $20 million that we had brought in new sponsorship to run and assume our debt, which was accounted for as a sale and a new loan in the third quarter. The other rush.
The $78 million and Oreo on our balance sheet at 930 were deals taken back in previous years that were included in other assets in the past.
Paul: We also continue to build our seasonal reserves given the current environment recording an additional $16 million of reserves on our balance sheet loan book in the third quarter.
Paul: It's important to continue to emphasize that despite booking approximately $162 million and seasonal reserves across our platform in the last 18 months, a $132 million of which were in our balance sheet business. We were still able to maintain our book value. This performance is well above our peers the vast majority of which have experienced significant.
Paul: <unk> book value erosion in this market. Additionally, we are one of the only companies in our space that has seen significant book value appreciation over the last five years with 28% growth in that time period versus our peers, whose book values have declined on average approximately 22%.
Paul: In our agency business, we had a solid second quarter with $1 1 billion in originations and loan sales the margins on our loan sales was up to $1 six 7% for the third quarter from 154% last quarter. We also recorded $13 2 million of mortgage servicing rights income related to $1 1 billion of committed loans in there.
Paul: Third quarter, representing an average MSR rate of around one 5%.
Paul: Our fee based servicing portfolio also grew to approximately 33 3 billion at September 30, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $125 million gross annually and this income stream.
Paul: Combined with our earnings on escrow and gain on sale margins represents over 45% of our net revenues.
And our balance sheet lending operation are 11, 6 billion investment portfolio had an all in yield of 816% at September 30, compared to eight 6% at June 30, mainly due to a decrease in sulfur during the quarter.
Paul: The average balance on our core investments was 11 8 billion this quarter compared to $12 2 billion last quarter due to run off exceeding originations in the second and third quarters. The average yield on these assets increased slightly to nine 4% from 9% last quarter, mainly due to slightly more back interest collected in the third quarter.
Paul: In the second quarter from third quarter modifications, which was partially offset by some new nonaccrual loans in the third quarter.
Paul: Total debt on our core assets decreased to approximately $10 billion at September 30 from $10 3 billion at June 30th mostly due to paying down CLO debt with cash in those vehicles in the third quarter.
Paul: The all in cost of debt was down to approximately 718% and $9 30 versus 753% at 630, mostly due to a reduction in sulfur.
Paul: The average balance of our debt facilities was down to approximately $10 billion for the third quarter compared to $10 8 billion last quarter, mainly due to the unwind of CLO 15 that occurred late in the second quarter combined with Paydowns in our CLO vehicles from run off in the third quarter.
Paul: The average cost of funds in our debt facilities was up slightly to 758% for the third quarter from 754% for the second quarter.
Paul: Our overall net interest spreads on our core assets was flat for both the second and third quarter at $1 four 6% and our overall spot net interest spreads were down to <unk>, 98% at September 30 from one 7% at June 30th mostly due to less CLO debt outstanding which has a lower cost of funds from paydowns during the quarter.
Paul: We also continue to improve our financing sources, adding a new banking relationship with a $400 million warehouse facility that we closed in the third quarter and lastly, but very significantly as we continue to shrink our balance sheet loan book, we have de Levered, our business, 25% over the last 18 months to a lever.
Paul: Ratio of three to one from a peak of around 401 equally as important our leverage consist of around 65% nonrecourse non mark to market CLO debt repricing that is still well below the current market, providing strong levered returns on our capital that completes our prepared remarks for this morning, and I'll now turn it on.
Paul: Over to the operator to take any questions you may have at this time Jamie.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone to withdraw your question simply press star queue. So that others can hear your questions. Clearly we ask that you pick up your handset for Boston quality, we will pause for just a moment to assemble the queue.
Okay.
Speaker Change: We'll hear first from Steve Delaney with citizens JMP.
Steve DeLaney: Thanks, Good morning, Ivan and Paul.
Steve DeLaney: Thanks for the helpful details additional details on your Mpls and loan mods in the press release that that's very helpful.
Steve DeLaney: Wondering you've obviously built seasonal reserves I think Paul said.
Steve DeLaney: 101.
Whatever it was $180 million over the last 18 months.
Steve DeLaney: One thing that's not in your release I guess, we can find it in the reconciliation of your loss reserve could you comment.
Steve DeLaney: The actual amount of realized losses.
You've taken this year as you work through the whole process.
Steve DeLaney: Do you think about it that way.
Speaker Change: There's paper reserves, but at some point in time, there is a real loss and that's kind of what I'm getting at if you could give us some idea of what the real losses look like compared to the the loss reserves.
Speaker Change: Sure. So so Steve Thanks for the question it's Paul.
Paul: We haven't really had really any realized losses during the year I think we had maybe a one 5 million realized loss in last quarter or the first quarter I forget on a small loan.
Paul: That we took back but for the most part some of the Oreo we took back during the quarter. We had some reserves on and we took those back it at fair value. So until we dispose of those Oreo assets.
Paul: You don't have a gain or a loss. So we've not seen any real significant realized losses or any material realized losses as you know the $162 million that I guided to on the call that we booked in seasonal reserves of $132 million.
Paul: Our balance sheet is already reflected in our book value, but as you said it hasnt been realized and in Maine. We don't know if how much if any will be realized and it takes time to work through those assets and dispose of them, but at this juncture. We just haven't had any significant realized losses at this point.
Speaker Change: Got it got it that's helpful to understand thank you Paul.
Speaker Change: We noted the <unk>.
Speaker Change: In the press release, the $100 million three year notice you at 9% could you comment on the purpose and use of proceeds.
Speaker Change: On the surface it looks like expensive capital, but just curious what your thought process was with that.
Speaker Change: Well, we felt that was appropriate price capital for what it is it's three year capital we didn't want to go out for a long time.
Speaker Change: And.
Speaker Change: Sharply.
Speaker Change: It was accretive relative to where our dividend was and it was easy piece of capital to put in place.
Speaker Change: We're also seeing some pretty good opportunities in the mid teens returns. So we thought it was properly priced.
Speaker Change: Given where we were in the cycle and there was also an important to us.
Speaker Change: And not go up five or seven years to go out three years.
Speaker Change: BT short so it's just an easy piece of capital to put in place and Steve I'll just add to that I think that was our thought processes. We don't really have any pending maturities coming up on any of our unsecured debt other than a convert that's coming due at Endo 2025, which is easily replaceable, but island view is correct I mean, we as we said in our commentary.
Speaker Change: Today, we are starting to ramp back up our bridge lending opportunities we have the <unk> business that funds over time, we have our construction business, we're starting to see real real solid opportunities to market to get mid teens returns. So we looked at that is still cheaper capital than common and in our view that's accretive capital cost yes.
Speaker Change: In my prepared remarks.
Speaker Change: Our.
Speaker Change: So far in construction lending business.
Speaker Change: That's mid to high teens returns that we put in place and keep in mind.
Speaker Change: That's kind of fund up substantially next year right. It's in place longer to fund in the beginning that will ramp up and we'll get to leverage that up but having.
Speaker Change: 9% capital and that's mid teens returns and knowing it's going to be in place and not having to put too much on and do a small deal is very appropriate for us.
Speaker Change: That makes sense. Thank you both for your comments this morning.
Speaker Change: Thanks, Steve.
Speaker Change: Yes.
Speaker Change: Next we'll hear from the line of Stephen laws with Raymond James. Please go ahead.
Speaker Change: Hi, good morning.
Stephen Laws: I wanted to follow up on Steve's question there on the capital you mentioned that the construction opportunities Ivan you mentioned in your prepared remarks, some of the best loans over the years have been done kind of at this point in the cycle as far as the bridge loans can.
Stephen Laws: Can you talk about how that pipeline builds into next year and as you need more capital.
Stephen Laws: How much more unsecured debt are you comfortable raising without equity or when you look at hitting the tapping the ATM a little bit curious to get your thoughts on how you'll raise capital to fund the growth opportunities.
Stephen Laws: Okay, I'm going to meander, a little bit because we've made a very strategic decision to put our effort into the.
Stephen Laws: And to the build to rent or <unk> business and construction business for a couple of reasons.
Stephen Laws: Number one the spreads were very outsized.
Stephen Laws: There wasn't a lot of competition as regional banks really got dried up.
Stephen Laws: And we've really become a dominant lender in that space, we were lending in the I would say $3 50 to $4 50 spread.
Stephen Laws: And.
We were able to get a lot of commitments knowing that would be something that would be funding up.
Stephen Laws: And in 2025, so it was a good way to look at our business.
Stephen Laws: We opted not to jump into and it's also very low loan to value business I think our average loan to value on that $565 or 60%.
Stephen Laws: I thought that the bridge lending on multi was a little too aggressive at that juncture and it was higher loan to value.
Stephen Laws: I wasn't as comfortable and we had the optionality of really putting our capital into that space, which we did.
Stephen Laws: We'll tell you with clarity.
Stephen Laws: Reds have tightened over the last 60 to 90 days by 75 basis points. So we have embedded value in that pipeline.
Stephen Laws: What's really happened in the marketplace.
Stephen Laws: <unk>.
Securitization market has come Roaring back.
Stephen Laws: And maybe a year ago, it really couldnt get an effective securitization done.
Stephen Laws: Our markets are.
Stephen Laws: Not as tight as they were in the heyday.
Stephen Laws: They are not that far off maybe to three eights out. So there are a lot of efficiencies that have been drawn and I think ramping up right now on the.
Stephen Laws: On the bridge lending platform, especially with cap costs coming down and securitization costs coming down.
Stephen Laws: We like that business.
Stephen Laws: About a year ago spreads were in the four to $4 50 cap costs were fortune and I didn't like to make sense in that business I stepped away from it.
Stephen Laws: And now Youre seeing spreads.
Stephen Laws: 275 between a quarter range with CLO leverage being.
Stephen Laws: Yes, coming in 75 basis points to where it was and those deals make more sense. So we'll be looking to really get more effective on that side of the business I think the securitization market will be much more efficient.
Stephen Laws: And we will be able to tap that in the first quarter, which will be very effective in the way we leverage our balance sheet now we got to manage all of this with where interest rates are because as I mentioned in my prepared remarks.
Stephen Laws: Interest rates have a lot to do with our run off.
Stephen Laws: And we'll manage our runoff in our liquidity.
Stephen Laws: On a moment to moment basis based on where rates are we could see if rates come back down to 375 basis points. We can see an accelerated runoff on our balance sheet, which generates enormous cash. So we will pay attention to all of those factors and we will tap the different avenues to increase our liquidity as needed.
Speaker Change: Where appropriate based on how all those other features toggle, yes, and Steve to add to that our whole approach on capital is and exactly what I've laid out I think we've proven over time is big insight on as we have been tremendous stewards of capital. So we're sitting on sitting on a nice amount of liquidity, we tapped a three year debt instrument, we thought was appropriate and accretive as Ivan said we.
Speaker Change: Manage based on interest rates, if we are going to see a lot of run off we're.
Speaker Change: We're going to generate capital if we see tremendous opportunities on the bridge side. The construction <unk>, we'll look to access liquidity in the ways. We always have which is the barbell approach between equity and debt and right now we're pretty lowly leveraged so we like our spot a lot depends on interest rates, but we will continue to approach the capital markets like we always have.
Speaker Change: And really focus on not being diluted yes, and just to jump back into one other item.
Speaker Change: Not only are the npls.
Speaker Change: In order for us to manage through.
Speaker Change: Interest standpoint, if you have a $1 billion of noninterest, earning assets. How you can do the math as we return that back in.
Speaker Change: At the capital, but the leverage on those assets is much lower so we'll generate a lot of cash as we resolve that as well. So we'll keep our eye on the path to resolutions.
Speaker Change: Thank you for the color on that and it really leads to my follow up question to Paul.
Speaker Change: Paul I know in your prepared remarks, you mentioned kind of a low while crossing on the earnings here.
This quarter next quarter kind of near term.
Speaker Change: Back half of next year is it fair to assume we're going to get a decent amount of earnings between the the NPL resolutions recycling capital and then resolutions.
Speaker Change: Oriental assets as well is that the right way to think about earnings kind of ramp next year.
Yeah, I think I think it's.
I think thats correct, but lets go over it in pieces I think you got to look at things a little bit longer term than one or two quarters right. That's what we talked about so we're at the bottom I had guided to a low water mark on interest income because as Ivan said in his prepared remarks, we're doing a great job of resolving our delinquencies, but we do expect new ones to pop up.
Speaker Change: Our goal is that our resolutions will exceed the new delinquencies and we will continue to.
Speaker Change: Continue to have our total delinquencies come down hopefully in a similar fashion as it did in this quarter, obviously sulfur where sulfur those obviously affects the model as well as you know, but I think over a longer period of time a longer outlook, that's correct that as rates move in favor.
Speaker Change: And we were able to resolve our npls and our agency business originations go up all those things move in our favor right. There's some things that move against you short term when rates come down.
Speaker Change: And there's things that move with you as the as the cycle progresses. So I think I look at it and I haven't looked at it as a more long term view and in a more long term view, we think over the next 10 to 12 months, we start to really see a lift from from those nonperforming loans getting resolved as long as we don't have.
Speaker Change: Significant additional delinquencies, we see a lift from rates being more cooperative and launching our origination business, our <unk> business, our bridge business, but it's over over a longer period of time Steve.
Steve DeLaney: Great well I appreciate the comments this morning, and you guys have done a great job kind of managing through a difficult environment to last year and.
Speaker Change: Vertical will show.
Speaker Change: The successes <unk> had managing through that so I appreciate the comments in here.
Speaker Change: Thanks, Steve appreciate it.
Speaker Change: Next we'll hear from the line of Rick Shane with Jpmorgan. Please go ahead.
Rick Shane: Thanks, everybody for taking my question good morning.
Rick Shane: A couple of things.
Rick Shane: I think you talked a little bit about the backlog associated with the agency business.
Rick Shane: And given the run rate through July, which I think last quarter. You guys had said was about $360 million.
Speaker Change: We were surprised not to see an acceleration there.
Speaker Change: Curious.
Speaker Change: How this actually works from a pipeline perspective do your borrowers lock rates.
Just a deferral or if they didn't hit that window, where rates were below 4% for two months, which you've sort of signal is the big number.
Speaker Change: Is that.
Speaker Change: Basically lost opportunity until the next time, we see rates tick lower.
Speaker Change: Okay, I think it's a great question and I'm intimately involved in it because.
Speaker Change: It's a little bit of a new park at the <unk>.
Speaker Change: <unk> would be sold backlog and normally things would move much quicker when agencies total turnaround your loans you can't rate locked them right.
Speaker Change: So there was a period of time, where you were eager to rate lock these loans they work well, but you couldn't get in position.
Speaker Change: That cost us roughly.
Speaker Change: In my estimation.
Speaker Change: $2 million to $300 million worth of loans that if rate lock. They would've closed now unfortunately rates moved against us so loans that would have worked it 4% or three <unk>.
Speaker Change: 75 don't work today. Okay. So the question is are they lost or are they not lost we have 1 billion eight pipeline roughly.
Speaker Change: And you have normal fallout, we gave a range based on where interest rates are and where they could be.
Speaker Change: And our range is $1 billion in a quarter 2 billion and a half so that number of $2 50 to 300, what I mentioned earlier, which is interest rate sensitive is the toggle feature of loans that are in the pipeline that if rates come down will close so we think if rates stay for.
Speaker Change: 25% for 'twenty.
Speaker Change: We will hit $1 billion two for the quarter.
Speaker Change: 250, if rates migrate down to 4090 380.
Speaker Change: That $300 million, which was previously on the drawing board, but those rates, which don't make sense because borrowers have to put cash back in.
Those will only happen if rates come down so that's how we look at it.
Speaker Change: Great. Its very helpful context, I appreciate that.
Speaker Change: Just pivoting quickly to distributable income Paul when we look at that number.
Speaker Change: And think about the mods and the loans that are picking up.
Speaker Change: I am assuming with the way you report numbers that Pik income is included in distributable.
Speaker Change: And I apologize I'm bouncing around a lot. This morning. If you mentioned this how much Pik income was there that was reported that is non cash in the third quarter.
Speaker Change: Sure.
Speaker Change: Good question Rick.
Speaker Change: You're right, we are including the Pik interest on the mods in distributable earnings because I think there is a high probability of collecting it and its timing.
Speaker Change: To answer your question for the third quarter, there was $15 million of pick interest in our numbers, but I want to break that number out for you to give you a little context, so of the $15 million that was pick interest for the quarter.
Speaker Change: 3 million was related to a group of assets, we modified in a prior year that we have substantial guarantees.
Speaker Change: From the equity behind that we feel very very strong we're going to collect another on top of that another couple of million dollars of that was mezz and PE, which part of our Mezz and PE product whenever we're doing mezz and PE and we're doing it behind agency that always has a pick feature to it. That's just normal course, he ever pay and you'll have a call the rest of it.
Is about $10 million was related to mods that happened in the first and second and third quarter of this year with 4 million coming from our third quarter mods and $2 million coming from our second quarter mods and $4 million coming from our first quarter months. That's the breakout of the numbers for the third quarter. If that's helpful to you.
Speaker Change: <unk>.
Speaker Change: It's very helpful and.
Speaker Change: Scanning the second quarter transcript as you were speaking.
Speaker Change: $15 million I can't find the number in the transcript at the moment is that comparable to I think you said 9 million last quarter.
Speaker Change: I think it was about $10 million last quarter, that's right. So so let's just talk a little bit because it's up a little bit because the first quarter mods I'm sorry, the second quarter mods are fully in the third quarter now because some of the more moderate mid quarter and then you've got your third quarter Mas and then those third quarter mods will have a bigger impact in the fourth quarter. If they were modified late in the third.
So you are correct. It was about $10 million that was 15, and then we'll see where it goes going forward.
Speaker Change: Great. Thank you guys for questions.
In addition to that though I just want to point out Rick that there are there are certain amount of loans that we have monitored with a pay an accrual that we've chosen not to book the accrual and not tracked vehicle and Thats a couple of million dollars thats owed to us that's not in these numbers as kind of an offset as we get it.
Speaker Change: Okay, great and actually Paul Paul Youre going to regret keeping talking because I will ask one last question that.
Speaker Change: It occurred to me.
Speaker Change: Yes.
Speaker Change: Please remind me your policy on Oreo do you when you.
Rick Shane: We noticed this diverse company to company do you realize any loss when you take property Oreo.
Speaker Change: So it depends on what the value is so the way <unk> works in the accounting World is you take back an asset the time you take back the asset you have to do an appraisal and you have to allocate the value between land and building and if you're carrying the loan at X and the appraisal comes in it why then you either have a gain or a loss.
Speaker Change: Loss for accounting on your Oreo, but for us that gain or loss is is is not a realized loss until you dispose of the REO asset.
Speaker Change: For a core gain okay.
Got it thank you.
Youre welcome.
Speaker Change: Yeah.
Speaker Change: I will turn now to the line of Jade Rahmani with <unk>. Please go ahead.
Thank you very much.
Speaker Change: Really great to get all those answers to pik.
Speaker Change: Very helpful.
Speaker Change: Our investors have a lot of questions about that.
Speaker Change: I wanted to ask on cash flow performance the depth in the third quarter.
Speaker Change: <unk> timing of agency originations and loan sales operating cash flow was $68 million.
Speaker Change: Down from $94 million last quarter, I know theres. Some seasonality again this excludes timing related to the agency business, but it is below the dividend typically you do have a pickup in the fourth quarter. So can you just talk to the cash flow operations.
Speaker Change: Outlook and if the dividend you expect to be sustained.
Sure.
Speaker Change: Let's talk about the cash flow I don't have the numbers you have in front of you Jade I think youre doing it on a quarterly basis.
Speaker Change: Q, which was filed this morning has a nine month cash flow of $415 million cash from operations. If you adjust for the timing of the held for sale loans and adjusts for the timing of the changes in other assets and other liabilities, it's a $328 million the dividend for the nine months would have been $2 65. So we cover there are dips.
Speaker Change: And there are increases obviously it depends on cash collection, there are certain loans that.
Speaker Change: Pay historically late and you get those cash in the <unk>.
Speaker Change: Subsequent quarter, but we do feel like we have adequate cash flow for many many sources to cover the dividend.
Speaker Change: Great to hear regarding liquidity, how much liquidity do you expect to use of the 600 million to take back the.
Speaker Change: <unk> hundred 50.
Speaker Change: REO that you mentioned do you expect it and also I assume there'll be further modifications.
Speaker Change: Yes, I think that we're in to think of it now and.
Speaker Change: As I've mentioned that a lot of these npls are very lowly levered relative to the rest of the business was done which has impacted our cash but it is going to be a training event.
Speaker Change: There are many loans that we have Oreo, we have slated borrowers for and what Jeff is slated bar you can re lever those loans up there are a lot of loans, we're seeing dispositions on that's pure cash.
Speaker Change: So at the moment I think that it'll be somewhat consistent with what we've done.
Speaker Change: And I think where we are.
Speaker Change: <unk>.
Speaker Change: As a pretty good outlook based on being in the bottom of the cycle.
Speaker Change: Thank you very much I also wanted to ask about loan put backs from the GSE I think one of your competitors.
Speaker Change: Has had put backs and another made some disclosure.
Speaker Change: But I don't believe theres been any disclosure.
Speaker Change: Have you experienced any of that.
Speaker Change: No no we have not.
Speaker Change: Yeah.
Speaker Change: Thank you very much and lastly, just because investors ask about it is there any comment or update you can provide regarding the Doj inquiry that was reported.
Speaker Change: No we've covered everything in our prepared remarks before is as Rick said, we don't comment on that.
Speaker Change: Okay.
Speaker Change: Thank you.
Jay: Thanks Jay.
Jay: Okay.
Speaker Change: Next we will go to Crispin Love with Piper Sandler. Please go ahead.
Crispin Love: Thank you good morning, everyone. I will you mentioned in the prepared remarks that now could be the time to start.
Crispin Love: Ramping up the Briggs alignment program. So just looking at this quarter, our originations are down to around $15 million or so.
Crispin Love: Which have come down in this environment.
Speaker Change: Completely makes sense, but that they were $100 million in early 2023 and significantly higher than that previously so curious on what youre seeing right now how that demand is from from borrowers right now just how some of those conversations are going and how you might expect originations to trend down the right side. Thank you.
Speaker Change: So I think what we're looking at to some degree is a lot of the loans with construction loans, which you get into <unk> and lease up we kind of like that business.
Speaker Change: And Thats, where were putting a lot of our attention.
Speaker Change: I mean, the math didn't work for me before when spreads were.
400 over 450, and sulfur was a five and a quarter.
Speaker Change: And people had to buy caps.
Speaker Change: Their costs were enormous spreads. So we just took a bunch of loans of 275 over.
Speaker Change: And social was lower and cap costs were substantially lower so I think we closed.
Speaker Change: $80 million and we have another couple of hundred in the pipeline. So I would I would.
Speaker Change: Say that again.
I would like to see about $3 million to $400 million.
Speaker Change: <unk> closed on the bridge lending side between now and year end, and then ramp up that pipeline.
Speaker Change: We're also going to continue to do that.
Speaker Change: The build to rent in the construction lending. So you have to look at it in its totality.
Speaker Change: In addition, we are putting a lot of money out on the prep in Mezz and Thats been a 14%.
And thats been a very attractive business. So we have a lot of flexibility in terms of.
Speaker Change: Where do we want to put our capital, but with the securitization market returning.
Speaker Change: And with rates on the short end.
Speaker Change: Going down.
We think that will be more violence.
Alright. Thanks.
Speaker Change: To make sure I got that did you say that you would expect $300 million to $400 million of Bridger originations between now and year end.
About $300 million, yes, we're expecting we did it we did $84 million in October is as I've referenced and then we had $240 million of fundings in the third quarter from our <unk> business, which as we had in our prepared remarks, our commit committed volumes very very hot so we got $1 billion outstanding on our balance sheet in that business and that continues to fund.
Speaker Change: So we do expect that to ramp up and plus we did 84 million already and hopefully we will do a couple of hundred million more by the end of the year, that's kind of the way we're looking at it in the different product lines on top of that as Ivan said, we were active in the.
Speaker Change: The construction lending side, we did our first deal of $47 million. This quarter again that funds over time, so it'll take time to fund, but we could have a few more committed volumes close by the end of the year on that I think it will be impacted if youll see.
Short term rates come down 50 basis points, I think that business will see a lot of growth in the first quarter could be very substantial move in the right direction.
Speaker Change: Okay, great. Thank you.
Speaker Change: We should all that color and then just one last question from me just curious on your on your confidence in the current dividend level, you've been covering it with EES softened a little bit it seems like there could be some near term pressure there, but kind of more continental as you look out 10 to 12 months and so I'm just curious on how you and the board are feeling about the Permian for a refund given that.
Speaker Change: And the environment right now thank you.
Speaker Change: So.
Speaker Change: We have a pretty diversified business and a very resilient business.
Speaker Change: There are a lot of things that go up and down in that business.
Speaker Change: Clearly.
Speaker Change: If rates come down a little bit on the 10 year side.
Speaker Change: Youll see a dramatic growth in the agency business, which produced a substantial amount of revenue.
Speaker Change: The other side, we will see a little bit of declined on our escrow balances.
Speaker Change: So they kind of offset each other if rates do come down I think youll see the npls resolutions.
Speaker Change: Really.
Speaker Change: Really decline and that will be a great contributed to the way our future income comes.
So those are the kind of factors.
Speaker Change: We will look at very strong. So there is some be some offsets some benefits and some negatives.
Speaker Change: So I think we're in a pretty good position based on where rates are today, but if rates continue to decline I think you can see.
Speaker Change: A little bit more optimism on those numbers, even though there'll be a decline on interest, earning asset growth and I'll also keep in mind. The securitization market has come roaring back and there'll be a lot of efficiencies on our borrowing costs.
Speaker Change: If we decide to issue.
Speaker Change: In the beginning of next year I mean, we're paying on our warehousing lines prop.
Speaker Change: Probably 250 over to $2 75 over.
Speaker Change: The securitization market you can see 50% to 75 basis points of improvement on our borrowing costs and better leverage so.
Speaker Change: Those are the kinds of things that we're evaluating and looking at and Christmas fall Ivan laid out all of the macro different scenarios of what goes up and what goes down and you and I've talked about this in the past timing is never perfect right. Some things may go down earlier than the stuff goes up but the way we look at it the way the company and the board looks at the dividend as you look at it.
Speaker Change: More of a long term you don't look at one or two quarters at the bottom of the cycle. So we're confident we have things that will offset.
It could be over a period of time, but.
But we're real confident where we are today that over a longer period of time that's sustainable.
Speaker Change: Great. Thank you I appreciate you taking my questions.
Speaker Change: And ladies and gentlemen that will conclude today's question and answer session I would like to turn the floor back over to Ivan Kaufman for any additional or closing comments.
Ivan Kaufman: Okay I just wanted to thank everybody for their participation.
Speaker Change: It's definitely been.
Speaker Change: Very challenging time for.
Speaker Change: For us.
Speaker Change: People in the industry I think we've outperformed our peers.
Speaker Change: Really appreciate it.
Speaker Change: And your commitment to the company. Thank you everybody.
Speaker Change: Once again, ladies and gentlemen that will conclude today's call. Thank you for your participation. You may disconnect at this time and have a wonderful rest of your day.
Okay.
[music].
Speaker Change: No.
Speaker Change: Uh-huh.
Uh huh.
Speaker Change: Okay.
Okay.
Speaker Change: Right.
Speaker Change: Okay.