Arbor Realty Trust Inc Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2022 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Shelby, 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 30, 2022. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly 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 tremendous quarter as a diverse business model continues to offer many significant advantages over everyone else in our peer group. We have a premium operating platform, with multiple products that generate many diverse income streams, allowing us to consistently produce earnings that are well in excess of a dividend. This has allowed us to once again increase our dividend to $0.40 a share, representing our 10th consecutive quarterly dividend increase with 33% growth over that time period, all while maintaining the lowest payout ratio in the industry. We've also strategically built a platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to thrive in this economic downturn. We invested in the right asset class, with a lot right liability structures, highlighted by over 8 billion in non-recourse non-mark-to-market CLO debt representing nearly 70% of unsecured indebtedness with pricing that is well below the current market. We also have no significant short-term debt maturities and are well capitalized with currently around 600 million in cash and liquidity, providing us with the unique ability to remain offensive and take advantage of the many opportunities that will exist to generate superior returns with our market capital. Additionally, the dividend is well protected, with currently the lowest dividend payout ratio in the industry. And we cannot emphasize enough the depth and experience of our executive management team, including our best-in-class dedicated asset management function that allowed us to successfully operate our business through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing REIT in our space for several years now. Our view of the current environment is that we are in a recession with high inflation; I will expect the market to continue to be volatile and dislocated for the foreseeable future. With this dislocation comes great opportunity for us to gain market share in our core business platforms and generate superior risk-adjusted returns on capital. As a result, we are excited about how we strategically positioned the firm to take advantage of what we believe will be extraordinary opportunities in this downturn. Turning now to our third quarter performance as Paul will discuss in more detail, our quarterly financial results for once again are remarkable. We produced distributable earnings of $0.56 per share, which is well in excess of our current dividend representing a payout ratio of around 71%. Our financial results will continue to benefit greatly from rising interest rates, which have significantly increased our net interest income and our floating rate loan book as well as earnings on our escrow balances. And clearly, with our extremely low payout ratio and for our earnings outlook, we're uniquely positioned as one of the only companies in our space with a very sustainable protected dividend, even in a recessionary environment. As we mentioned in our last call, in this market, we have been very selective with our balance sheet lending, looking to replace our runoff with high-quality loans with superior spreads. In fact, in the third quarter, we originated 600 million in new multifamily bridge loans with an average loan-to-cost of around 72% and interest rates of 1,450 over the index, while a 600 million in runoff we experienced during the quarter had an average loan-to-cost of around 79% with average spreads around 390 over the index. As a result, we're able to widen our spreads on average by around 25 basis points while substantially increasing the loan quality with a 7% reduction in loan-to-value. Additionally, we have a significant amount of replenishable capital in our low-cost CLO structures that have resulted in a meaningful increase in the level of returns on these loans. In fact, our third quarter originations averaged over 14% levered return and the loans we financed through our CLOs came to over 18%. We've also placed a heavy focus on converting our multifamily bridges all runoff into agency loans, which is a critical part of our business strategy as our Agency business capitalizes and produces significant additional long-dated income streams. In the third quarter, we successfully refinanced around 25% of our balance sheet runoff into new agency loans that produce strong gain on sale margins and long-dated servicing income. Our strategy is to preserve and build on a strong liquidity position to allow us to remain offensive and garner premium yields on our capital. In our GSE/Agency business, we originated another 1.1 billion in loans in the third quarter. October's originations came in at 250 million. We've seen some leveling off in the pipeline given the rise in the tenure. Despite the current rate environment, we believe we can close out the fourth quarter with a similar volume as the third quarter. We have a strategic advantage in that we focus on the workforce housing part of the market and have a large multifamily balance sheet loan book that nicely feeds our Agency business. This Agency business offers us premium values as it requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flows. Our 27 billion fee-based service portfolio which is mostly prepayment protected generated approximately 115 million a year in recurring cash flow. This is in addition to the strong gain on sale margins we generate from our origination platform and a significant increase in earnings in our escrow balances that we are experiencing, as rates continue to rise which acts as a natural hedge and is unique in our business. In our single-family rental business, we are gaining significant traction with a steady increase in deal flow. In the third quarter, we funded 150 million in prior commitments and committed to another 450 million in new transactions. We have a very large pipeline of deals we are currently processing, and we love this business as it generates strong levered returns and offers us returns on our capital through construction, bridge, and permanent lending opportunities. In summary, we had another tremendous quarter and we're extremely well positioned to succeed in this environment. Our dividend is well protected with earnings that significantly exceed our dividend run rate. We invested in the right asset class and a very stable liability structure. We're well capitalized and have no significant short-term debt maturities, putting us in a unique position to take advantage of the many creative opportunities that exist in this market, giving us great confidence in our ability to continue to significantly outperform our peers. I will now turn the call over to Paul to take you through the financial results.

Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $105 million or $0.56 per share, which is up from $94 million, or $0.52 per share last quarter. The increase was largely due to substantially more net interest income on our floating rate loan book, and from higher earnings on our escrow balances due to the increase in rates, along with a few one-time losses recorded in the second quarter on some one-off loan sales. Our third quarter results translated into ROEs of approximately 18%, and once again, our quarterly distributable earnings have substantially outpaced our dividend with a dividend to earnings ratio of around 71%, allowing us to increase our dividend for the 10th consecutive quarter to an annual run rate of $1.60 per share. As Ivan mentioned earlier, we are well prepared for this downturn, and our model offers many strategic advantages, giving us great confidence in the quality and sustainability of our earnings and dividends. In our GSE/Agency business, we originated and sold 1.1 billion in GSE loans in the third quarter. We generated margins on these GSE loan sales of 1.3% in the third quarter compared to 1.59% in the second quarter, mainly due to a greater percentage of FHA loan sales in the second quarter, which have a much higher margin, as well as some overall general margin compression given the current rate environment. We also recorded 17.6 million of mortgage servicing rights income related to 1.2 billion of committed loans in the third quarter, excluding 300 million of balance sheet loan sales, representing an average MSR rate of 1.51% compared to 1.48% last quarter. Our servicing portfolio was approximately 27.1 billion at September 30th, with a weighted average servicing fee of 42.4 basis points, and has an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward at around 115 million gross annually, which is down slightly from last quarter due to increased runoff in our Fannie Mae portfolio, mostly due to extensive sale activity again this quarter. As a result of the runoff, prepayment fees related to certain loans that have prepayment protection provisions continued to be elevated, with 11 million in prepayment fees received in the third quarter, compared to 15 million in the second quarter. In our balance sheet lending operation, our $15 billion investment portfolio had an all-in yield of 7.19% at September 30th, compared to 5.82% at June 30th, mainly due to the significant increase in LIBOR and SOFR rates. The average balance in our core investments was $15 billion this quarter compared to $14.6 billion last quarter due to the full effect of our second quarter growth. The average yield in these assets rose to 6.57% from 5.26% last quarter, due to increases in SOFR and LIBOR rates. Total debt on our core assets was approximately $13.9 billion at September 30th, with all-in debt costs of approximately 5.33%, which is up from a debt cost of around 4% at June 30th, due to the increase in benchmark index rates. The average balance in our debt facilities increased to approximately $13.9 billion in the third quarter from $13.4 billion last quarter, mostly due to the full effect of our second quarter growth and from the new three-year convertible note we issued in August. The average cost of funds in our debt facilities was 4.49% for the third quarter, compared to 3.10% for the second quarter, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets decreased slightly to 2.08% this quarter compared to 2.16% last quarter, mostly due to fewer accelerations from early runoff in the third quarter, and our overall spot net interest spreads rose to 1.86% at September 30th from 1.82% at June 30th, primarily due to positive effects of rising rates on our floating rate loan book. In fact, all things remaining equal, a 1% increase in rates would produce approximately $0.10 per share in additional annual earnings. Additionally, we have 8 billion in CLO debt outstanding with average pricing of 163 over which is well below the current market, and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations. As rates are predicted to continue to rise, we will also earn significantly more income from the large amount of escrow balances we have from our agency business and balance sheet loan book. These earnings will grow substantially, as we have approximately 2 billion in escrow balances that are now earning almost 3% for around $60 million annually, effective November 1st, which is up significantly from a run rate of approximately $25 million annually at June 30th. These features are unique to our business model, giving us confidence in our ability to continue to generate high-quality, long-dated recurring earnings in the future. That completes our prepared remarks for this morning. And I'll now turn it back to the operator to take any questions you may have at this time.

We'll take our first question from Steve Delaney with JMP Securities.

I would congratulate you on another great quarter, but I think the fact that ABR shares are up 9% this morning says it much better than I could, but congratulations. Nice to see the response. So, obviously, a lot of talk about the CLO market that had been a very important tool in building your bridge portfolio. We know what's dislocated right now. We're starting to read just in the last four to six weeks about Freddie and their Q-Series shelf, that seems to frankly, I hadn't heard about it until the last couple of months. And you hear about K-Series, obviously, but Q, I don't know what Q is. But I think a deal got done in October. I'm just curious, if for you for Arbor in the business you do. Is that program viable as an alternative to your normal CLO shelf?

Sure. So let me respond to that, Steven, once again, thank you for your positive comments and a great relationship that we've enjoyed over the years. We're a Freddie Seller/Servicer, we've evaluated the Q-Series and it is a viable program. It is really geared towards affordability to enhance their affordability numbers. We think it's an important program because it offers the ability to access securitization through the government for those types of products. That's right now our wheelhouse. So, it's something that you shouldn't be surprised if we're a participant in that program.

Great to hear. And we're going to be talking about affordability in a couple of weeks at our conference, hopefully. But I was glad to think if anybody was going to be involved that with your relationship with Freddie that you probably would. Paul, jumping over to you. When you were talking about your CLO, I think you were talking about reinvestment of CLOs, you mentioned a figure of 18%. Is that your estimated return on capital on reinvestment with fresh coupons going in?

Yes, so it's exactly that Steve. What we're saying is because we have these low costs locked in CLOs at 163 over and we all know where spreads have gone. And all the CLOs that are left have replenishment periods. What we're doing is we have the loans running off where we're originating new loans at higher spreads and financing them through those vehicles with the replenishable capital, and while we're doing that we're getting greater than an 18% levered return on those new investments. That's exactly what's happening. It's really meaningfully moving up the levered returns on our model. And I'm sure Ivan can comment, but very unique to our situation and the way we've structured our deals and the foresight prior to the market dislocation to go out and do two securitizations this year, and really lock in those low costs.

Fantastic. And the replenishment terms on the two that you just did this year. How many months or years do you have left on those two to reinvest?

Yes, so let me give you some color. So, we have almost 10 billion of assets sitting in our CLOs with 8 billion of debt, roughly about 82% leverage. One of the vehicles comes out of the replenishment period this month. So, if we exclude that vehicle, we have, we'll call it, 7.5 billion of CLO debt and about 9.5 billion of CLO assets that are sitting in one, two, three, four, five, six, seven vehicles that still have replenishment. Of those seven vehicles, I would say about 2 billion of that debt comes out of replenishment in the middle to end of 2023. It's all staged. Another 5.5 billion of that debt doesn't come out of replenishment until the middle to late of 2024. So, we have lots of time and room on a lot of these vehicles, which is really helping our returns.

That's fantastic. Okay, thanks. And one final quick question. I'm turning to the rest of the analysts. I haven't read that you did a deal in Brooklyn on 22 Chapel Street leading a recap. Commercial Observer had a feature on it. I was curious that because that property, I think is an opportunity zone. Can you just comment on the attractiveness of that type of property for a developer and also the opportunity for the lender in terms of, I guess, in tax benefits to the developer? And how defensible when you look at that property? Is it more likely to perform better in an economic slowdown in a recession than maybe some high-end properties that may not be absorbed as quickly? I'm just curious your thoughts about that property as both an investment and as a loan? Thank you.

I must say, I'm not familiar with the details of that transaction, which is unusual, it must have been done in the normal course of business. So in general, anything that's affordable, there's just a huge demand for that product, anything in the New York area that's affordable. We don't project any real rent increases with this regulated environment. But yes, very low occupancy changes is more likely utility, but I am not familiar with that particular one.

We'll take our next question from Stephen Laws with Raymond James.

I want to quickly touch base. Paul, maybe a quick number, but repayment incomes and you talked about what you're seeing in repayment? So, you guys, everyone has been expecting to slow, but they've remained stubbornly high, which we'll talk about early repayment income contributions for the quarter?

Yes. So in my prepared remarks, I had mentioned that we did see a fair amount of runoff in our Fannie Mae book this quarter, again that we've seen, as you know, Steve, over the last several quarters, that runoff was about a $1 billion of transactions. We earned about $11 million in prepayment penalties. I think on the last quarter, I guided you that this should come down significantly. It was a little surprising to me that we had that much in repayment penalties, and I've done some work on it. It really has to do with the fact that the market is lagging, right? There's a little bit of a lag on one rates and two on sales volume, and we did see a little bit more sales live in the second quarter than maybe we expected the market has changed since then. So, we are expecting that to start to really slow down given where rates are. And maybe more importantly, it's very binary. Our Fannie Mae book has probably an average interest rate or coupon rate of about 4%. That doesn't mean we don't have 5% and 6% mortgages we do, and we have 3.5% mortgages that weigh to about 4%. With rates today, the 5, 7 and 10 years are above that, and even though there's a lag if loans were to repay today, and I guess, my mind loan repayments will flow naturally given the environment. There really isn't much yield maintenance, if any, because it just goes away, right because the rates exceed the coupon rate. So, it's a binary process. It hasn't happened yet, because things are on a lag. But we do expect at the start. Having said that, we did have 200 million, 200 million plus runoff in our book in October and we got about 3 million in prepayment fees already in October. I'm modeling maybe another million for November and December, so maybe we'll get to 4 million or 5 million. But I do think that after that, it gets to a very small number, maybe it's a million a month, maybe it's half a million a month, I don't know, but it's not 11 million. But on the flip side of that, what's happening when runoff slows and rates rise, our servicing portfolio is staying intact. And of course, we love that because those servicing fees are long-dated and it's an annuity. So, we'd rather have the servicing. The other side, as we mentioned in our prepared remarks is our escrow balances will stay elevated, and where rates are going, our escrow earnings are substantial. I mean, look at the numbers. So that's a great hedge against rising rates. And I think that's how this plays out over the next few quarters.

That's helpful. Thanks very much for that, Paul. Ivan, investors continue to do a lot of work on loans and portfolios, and frankly, looking into sponsor quality. Can you talk about the typical sponsors of your bridge loans? How large they are? How well collateralized? Do you have any concentration amongst sponsor exposure with multiple loans with the same people, maybe some metrics or general commentary around your typical borrower?

We tend to have borrowers who do a significant number of transactions with us. And we generally traffic in the $25 million to say $150 million loan range, and it's not unusual to have a number of transactions with a specific sponsor, and there's a lot of tenure with us. We're not the lender who typically would do a one-off loan to garner a piece of business. We generally like to do loans with somebody who we think we're going to have a long-term relationship. So that speaks to the kind of operator we have. We went through a period of time, and you could see it in the market where a lot of sponsors, especially the big ones, were very syndicated a wave, a mixture of all types of borrowers, but typically, where the borrowers who have a lot of family and friends money, they do have some institutional money, but it varies in revealing our portfolio. In fact, I met with one of our top sponsors where we have close to a billion in bridge loans with that sponsor this week, and I will tell you that they're well capitalized. They've got access to capital, and they're on top of the details of their specific loans, and have a good grasp on them. They, I believe, at least people we have are generally really good operators who can execute very well, execution is really critical. More significantly, we have a good enough relationship with them, if they run into an issue, we'd like to be able to sit down with them and figure out how to manage that issue with them. And so far to date, looking at our portfolio, we're always ahead of schedule in terms of evaluating our assets and our sponsors, the portfolio knock on wood is in great shape, it doesn't mean that we're immune to the complexities that exist in a rising interest rate environment and decreasing real estate values. But it's how you manage the sponsors and how you have relationships are, more importantly, the kind of structures you have in your loans. I've spoken about it repeatedly over the last number of years, that we have a lot of structure in our loans. It's not just the real estate. It's the provisions to keep our loans in order in terms of interest rate, replenishments, rebalance requirements and things of that nature. So, we don't just look at a real estate; we look at a sponsor, we looked at a financial capability to sponsor and the commitment of a sponsor. And we put that all together in one potion, and that's how, with great asset management, we're able to keep our book in very good shape.

I appreciate the comment, Ivan and Paul. You guys have a great day.

We'll take our next question from Rick Shane with JP Morgan.

Thanks, guys, for taking my question this morning. And I apologize this is going to cover more balance around a little bit of the call this morning. One of the things that we're starting to realize as we move through earnings season is that sponsor behavior is increasingly influenced by exact what I would describe as exogenous factors. How they're financed on the debt side, time and maturities, type of financing? Within your portfolio, are you seeing that and how do you manage that risk so that you don't sort of get defaults or credit issues related to structure versus the underlying fundamentals of the properties?

Let's first start by recognizing that we're multifamily oriented well over 90% of our assets, maybe higher on the multifamily side. It's also realized that we're senior lenders primarily, and we're not doing preferred equity or mezzanine and things of that nature. So, those are big qualifiers. The second is, as I've mentioned earlier, many lenders in this environment were very lax on their documentation and very lax on their requirements in terms of sponsor recourse and responsibilities. We have been in this business longer than anybody at this point; we've been through multiple cycles, and documentation related to our loans, and the liability of the sponsors is very straightforward, unlike other lenders. We also have default rates in our loans typically at 24%, where other people have very mild default rates. So I would say it's our experience in terms of how we document our loans and how we ask them to manage our loans that puts us in a primary position. We also have the experience and the capability to take back and manage any asset. And we're not afraid to do that. We also have a deep pocket of sponsors who love to take on opportunities if there's a transition from an asset. So, we have the depth, we have the distribution, we have the experience, and we have the capital to manage these particular circumstances and the right asset class. That doesn't mean we won't have our issues with our sponsors. And we always do. It's just a matter of how you're able to manage them. Where you have the leverage and typically, when sponsors have no recourse and no liability, then they have the leverage. But when we structure our loans, we typically have the leverage. More significantly, we're not looking to take their assets from them. If they run into an issue, remember, they have other assets, we're looking to work out a solution that's in the long-term. Our view and our history is in multifamily; every high is followed by another high. If you look at the charge, if you look at multifamily, if you look at rents, we're in a downturn with rising interest rates. We want to help our borrowers position themselves to succeed in the long run. There's one further factor which is very important to note. If you're a multifamily borrower, if you default, then you close down your borrowing abilities with the agencies. If you can borrow for Fannie, Freddie, then you're basically out of business. So if the borrower wants to step out of the industry by defaulting, that's a very tough choice. So they have to make decisions if they're going to have difficulty either bring more capital, or come to us for different capital solutions. That's it in a holistic sense. And that's how we manage our book. We're not at the bottom yet, we're getting there; we think first quarter, second quarter, we've already dealt with a lot of borrowers, understanding where they may run into issues, and we're ahead of the game; we're not playing catch-up; we're on top of our assets; we're managing through solutions, and we're being proactive, and that's the way we manage our business.

Look, it's a very helpful response. I appreciate the context. I think one of the things that we're starting to think about and hear more about is both the recalibration of cap rates, coincident with some deflation in terms of, or more pressure in terms of rents, and sponsors starting to run into issues where their pro forma rent increases are less likely to come through. So that's the other thing we're just trying to understand as we go through all this, and it sounds like you're approaching it exactly the same way.

Yes, I think what's important to note on that, which is very relative. We've definitely had cap rates increase from, let's say, four to five as a general number. But during that period of time, going back 15 months ago and 18 months ago, you've also had rents increase by 15% to 18%. So, to a large extent, you've had the rent increases kind of catch up a little bit and offset the change in cap rates. But you're right; we do not expect, under any circumstances, to see that kind of rent growth going forward at all. We've been our outlook for about 9 to 12 months now, was exactly that as rates went up, we started to look at exit cap rates and began to really assess if we are going into a recession, that we're not going to see that kind of rent growth. So we're not expecting rent growth; if you're flat to up a little bit, that's fine. We are expecting in a recession different than everybody else, we're going to expect some economic vacancy because people can't pay their bills and pay them on time. You also have a record number of units being delivered on the multifamily side. So, you're going to see some concessions on the new products coming on board. So all those are the headwinds that we're facing; you can't ignore them, and you got to manage to them. So we're prepared for that. And that's our outlook.

We will now take our next question from Jade Rahmani with KBW.

Just wanted to confirm, are you expecting a flattish trend in transaction volumes for Arbor, both on the GSE side and the bridge lending side?

I think on the GSE side, all has to do with two factors: the way the tenure is and where cap rates go to. If cap rates adjust appropriately and people can buy opportunities, and the tenure is at a reasonable level of the yield curve, I think you'll see some decent purchase activity, we'll see that. I would say going forward next year, I think we'll be in the range of what we did this year and maybe a little down. In terms of bridge activity, I think that's going to be dictated by where we see the bottom, when we want to get aggressive. I think that it may be the first quarter and maybe the second quarter. But when we are close to the bottom, we will get extremely aggressive at that point in time. It is either going to be in the first quarter or the second quarter; we're not sure when, and then we'll resume a fairly active level. It also depends on where SOFR is because depending on where SOFR is and where people have to borrow will dictate where the bridge is. We do think there is going to be an extraordinary amount of opportunity to provide recapitalization capital for very attractive returns and we're working on that very effectively. We think we can recap borrowers and get adjusted returns of between 15% to 20%, which would be a good use of our capital, and composition of people back into the agency business as that works well. So, I think a little patience right now. We've been really patient for the last six months; we'll continue to be patient with the first quarter and wait to where we feel the market has really adjusted. We think the market will overcorrect. A lot of the data that we're seeing is lagging and there will be a point in time where we can get real aggressive; it's not right now.

Jade, it's Paul to tie these comments, which are on the longer term side, which is great. Just to help you with your model a little bit as we had mentioned in our prepared remarks, we did 250 million in October and in the agency business, we did 1 billion in the third quarter. We still think we can come in similarly, maybe it's 950, maybe it's a billion; I don't know where it comes in. But we're not thinking it's going to be materially different, just in the short-term. In the balance sheet business, I think we did. October was a little bit later; I think we did 50 million in bridge and we did another 50 million of 60 million in fundings on our SOFR business. We had about a one at runoff in October, which we recaptured into agency 50% of that runoff, which was great. That's our model. But I think we're projecting and we talked about in our commentary that we're looking right now at least in the short-term to match our runoff with new originations. We are expecting that to be flat in the portfolio for the fourth quarter whether that's 400 million, 500 million, or 600 million in new volume. We're not sure yet, but we think the runoff is going to be equal to the originations at least in the short-term.

I was wondering also, if you're seeing any opportunities in M&A in the commercial mortgage REIT space? Thanks.

I think there will be; I think there's going to be a liquidity squeeze. I think people got really aggressive on the originations even late in the cycle. When we were backing off nine months ago, people were thinking that was an opportunity to gain market share. I think that was a real mistake. Many people have never managed CLOs before, don't have asset management skills. There could be some real opportunities. We're in a period now of capitulation, on cap rate changes in values and rent growth. It's interesting that we spoke about it on this call. We've been speaking about it for nine months. Everybody's been looking at us like we're nuts. I definitely think we've had a different view than everybody else. There's a bit of a catch-up. I think that will occur. There’s going to be plenty of trouble for the people who have been extraordinarily aggressive the last nine months.

We'll take our next question from Crispin Love with Piper Sandler.

I think telegraph last quarter, you pulled back meaningfully on bridge multifamily originations this quarter. Was that primarily just your conscious decision there? Or was there a drop-off in demand as well from borrowers just given for cap rates and debt costs currently for borrowers?

It was a conscious decision for a multitude of reasons. Number one, we had a significant pipeline earlier in the year that we actually didn't close because we required an adjustment to valuations based on the change in marketplace. So, that was an unusual thing that occurred. We garnered a significant pipeline, and the change in interest rates did not reflect the change in values. So that was immediate. That was a conscious underwriting decision. The borrowers didn't like it, but numbers don't lie; facts are facts. We had a lot of fallout that now exists in the pipeline. We were very aggressive in changing our underwriting grids and our pricing to reflect the market. So, we stepped out of the market based on where we saw the market and where our competitors saw the market; those were two factors. The third was an eye towards liquidity. We were very conscious of maintaining our liquidity and managing our liquidity and not putting out more money not knowing where the market was going. That really led our direction. In addition, you have to look at the way our company is structured. At this point in time, with these low liability structures that are in place, when we have runoff and we can replace it with existing inventory it's better leverage on capital. So we don't have the necessity to go out right now, especially when the cost of capital is higher. So if you take all those factors, it was a strategic direction of the Company to be exactly where we are today.

And then just one on credit quality, credit quality, it looks to be really stable in the quarter, technically no change in non-performing loans or the alliance. But can you speak a little bit to the credit outlook from your point of view? And if you're starting to see any issues, whether it be in the bridge multifamily space, or elsewhere away from your portfolio, just especially considering your comments earlier items, that you're that you believe that we're just we're in the middle of a recession right now?

Yes, I think there's going to be stress in the system. And I think people are going to have access to capital to pay for higher debt costs and potentially put new caps in place when the old caps expire. I think there's a lot of benefit right now for existing caps in place. I had mentioned I met with a borrower who we have close to a billion dollars in loans; he has strike prices on his caps between 50 and 150 basis points. So he's well protected, right? A lot of that protection is out there. When that protection wears off, either people are going to have to put lower caps in place, attract capital to buy lower caps or somehow convert it to fixed rates which are lower carrying costs and bring more equity to the table. That's going to be the point in time when borrowers have to reposition access to other equity. The equity checks could be between 5% to 20% of the capital structure and be put in a priority position; that's going to be the point in time. And it could happen a year from now; it all depends on where the yield curve is at that point in time of where we are in the cycle. But there's a little time for that; it will leak in gradually. I think that's where the stress will be. We put a very aggressive campaign in place when the treasury started going over to convert a lot of our floating-rate book into some agency loans and fixed-rate business. We were fairly effective with that, and the borrowers are very thankful for that. So, I think we will look at where treasuries go, if there's a dip in treasuries, how to convert some of our portfolio and manage it day by day based on where the yield curve comes and the access to liquidity that our borrowers have.

It appears that we have no further questions at this time. I will now turn the program back over to Ivan Kaufman for any additional or closing remarks.

Well, let me conclude by thanking everybody for their participation. Once again, it was a remarkable quarter. We do expect stress in the system, but the Company has multiple different revenue streams that act differently in different environments. We are very pleased to have delivered the kind of results we have. So, everybody, have a great weekend and have a great day. Take care.

Take care, everyone.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.