Arbor Realty Trust Inc Q4 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 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.

Thank you, Todd, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 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 and exceptional 2022 as our diverse business model continues to offer many significant advantages over everyone else in our peer group. In fact, our 2022 results reflect one of our best years as a public company and we believe we are well-positioned for continued success. We have a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings well in excess of our dividend. This has allowed us to increase our dividends three times in 2022, an intent of our last 11 quarters, all while maintaining the lowest dividend payout ratio in the industry, which was 70% for 2022. Our performance is head and shoulders above everyone else in our peer group, almost all of which have been unable to increase their dividend at all in the last few years and some are even paying dividends of over 100% of their earnings. We have strategically built our platform to succeed in all cycles and as a result we believe we are extremely well-positioned to continue to outperform in this economic downturn. We have been very cognizant over the last 18 months, preparing for what we believe would be a very challenging recessionary environment. As a result, we have taken a patient and selective approach to new investments and have been heavily focused on preserving and building up a strong liquidity position. This has allowed us to accumulate over $800 million of cash and liquidity on hand, providing us with unique ability to remain offensive and take advantage of the many opportunities that will exist in this recession to secure premium yield on our capital. We are also invested in the right asset class that strategically positions ourselves with appropriate liability structures, highlighted by a significant amount of non-recourse, non-mark-to-market CLO debt with pricing that is well below the current market, allowing us to pursue premium yield on our assets. As we cannot emphasize enough, especially in the current environment, the importance of having a best-in-class dedicated asset management function and an experienced and tenured executive management team that has a proven track record of successfully operating 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 in a row. Turning now to our fourth quarter performance. As Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.60 per share, which is well in excess of our current dividend, representing a payout ratio of around 67%. Our financial results also have continued to benefit greatly from rising interest rates, which have significantly increased our net interest income on our floating-rate loan book, as well as earnings on our escrow balances. And clearly, with our extremely low payout ratio and multiple predictable, recurring income streams, we are uniquely positioned as one of the only companies in our space with a very sustainable, protected dividend even in a challenging environment. In our balance sheet lending business, we continue to be selective, looking to replace our runoff with higher quality loans with superior spreads. In the fourth quarter, we strategically reduced our balance sheet loan book by $600 million on approximately $500 million of new originations offset by $1.1 billion of runoff. This allowed us to recapture $150 million of our invested capital and continue to build up our cash position to take advantage of the many opportunities we believe will exist in this downturn to generate outsized returns on our capital. Our level of returns on our fourth quarter originations came in at over 16%, as we have significant amount of replenishment capital in our low-cost CLO structures that have meaningfully increased returns on capital. Additionally, we participated in our first Freddie Q Series securitization in the fourth quarter, which demonstrates our strong social commitment to providing liquidity to the preservation of the affordable multifamily housing market. This transaction also provides us with another low-cost financing option, allowing us to reduce our warehousing debt by more than $350 million of loans into a non-recourse non-mark-to-market securitization vehicle. We now have nearly $8 billion in securitized debt outstanding, representing around 70% of unsecured indebtedness at pricing that is well below the current market. We continue to place a heavy focus on converting our multifamily bridge loans into Agency loans, which is a critical part of our business strategy and our Agency business is capitalized and produces significant long-dated income streams. We had tremendous success in the fourth quarter recapturing over $500 million, around half of our balance sheet runoff into new Agency originations. A key component to our success in this area is a unique opportunity that exists in today's market given the inverted yield curve to grow on premium yields on our capital by refinancing certain of our balance sheet loans to Agency product and provide mezzanine financing. This has allowed us to convert some of our balance sheet loan book into Agency business with long-dated servicing income and repatriate a portion of our capital into mezzanine positions behind Agency loans at lower loan-to-values. In fact, in the fourth quarter, we successfully refinanced around $200 million of balance sheet runoff into new Agency loans and funded $20 million of mezzanine loans on these transactions, which are generating 13% unlevered returns on our capital. This is a strategy we believe in, and again, that’s something that is unique in our business, and we are both a top balance sheet lender and operate a very large Agency platform. In our GSE/Agency business, we had a very strong fourth quarter originating $1.5 billion of new loans. These numbers include a few large deals in December that were accelerated to close by year end, resulting in a light start to 2023 with approximately $150 million of originations in January. However, our pipeline remains strong, giving us confidence in our ability to produce similar volumes in 2023. Additionally, 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. In fact, we are one of the leading agency lenders in the achievement of affordable housing goals. As a result, we will continue to be viewed very favorably by the agencies. This Agency business offers premium value, requires limited capital, generates significant long-dated predictable income streams, and produces significant annual cash flow. To this point, our $28 billion fee-based servicing portfolio, which is mostly prepayment protected, generates approximately $115 million a year in recurring cash flow. We have also seen a significant increase in earnings on our escrow balance as rates continue to rise, which acts as a natural hedge against interest rates. In fact, we are now earning in excess of 4% on approximately $2 billion of balances or roughly $80 million annually. Combined with our servicing annuity, we are generating $195 million of annual cash earnings or approximately $1 a share before we even turn the lights on every day. This is in addition to the strong gain-on-sale margins we generate from our originations platform and again something that is completely unique in our platform, providing a significant strategic advantage over our peers. In our single-family rental business, we had an outstanding year, as we continue to grow out that platform and go on to increase market share. In the fourth quarter, we funded $160 million of prior commitments and committed another $350 million of new transactions, putting our total deal flow at $1.2 billion in 2022. We have a very large pipeline of deals we are currently processing. Again, we love this business as it generates strong leveraged returns and offers us returns on our capital through construction, bridge, and permanent financing opportunities. In reflecting on 2022, we had another exceptional year and once again clearly outperformed our peer group. We are well-positioned with earnings that significantly exceed our dividend run rate, are invested in the right asset class, and have very stable liability structures. We are also focused heavily on building up a strong liquidity position, which has put us in a unique position to take advantage of the many accretive opportunities that will exist in the 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.

Okay. Thanks, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million or $0.60 per share. We also had a record year with distributable earnings of $2.23 per share in 2022, an 11% increase over 2021 results. These results translated into industry high ROEs of approximately 18% in 2022, allowing us to increase our dividend three times to an annual run rate of $1.60 a share, reflecting a dividend to earnings ratio of around 67% for the fourth quarter and 70% for the full year 2022. Our fourth-quarter results beat our third-quarter numbers and our internal projections, largely due to substantially more net interest income on our floating-rate loan book and higher earnings on our escrow balances due to the increase in interest rates. We also experienced significantly more gain-on-sale income from stronger fourth-quarter Agency volumes and the early settlement of a few large Agency loans to help meet Agency affordable lending caps. Additionally, we benefited from no current tax provision this quarter in our taxable REIT subsidiary mainly due to year-end timing differences and adjustments that resulted in a lower 2022 full-year current tax expense that was trued up to the fourth-quarter provision. Our fourth-quarter results also contained a few large items that are worth noting. We reported a one-time expense of $7.4 million related to the settlement of a litigation we had outstanding for several years. This was the only material litigation we were involved in and we are pleased to have resolved this item as we were spending several hundred thousand dollars a month in legal fees on this case, which will now reduce our operating expense run rate by $2.5 million to $3.5 million a year going forward or $0.01 a share. We were also very pleased to have resolved our only significant non-performing loan in the fourth quarter with a full payoff of a $20 million loan on a student housing asset. As part of the payoff, we received $8 million in back interest and fees that we did not have accrued, resulting in a substantial increase to our net interest income for the quarter. In our GSE/Agency business, we had a very strong fourth quarter with $1.5 billion in originations and $1.7 billion in loan sales. The loan sales numbers were significantly above our third-quarter sales of $1 billion mainly due to a large portfolio deal that closed in December but settled in the same month to help the agencies meet their affordable lending caps. The margin on our fourth-quarter sales was up to 1.33% compared to 1.30% in the third quarter. We also recorded $17 million of mortgage servicing rights income related to $1.5 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.12% compared to 1.51% last quarter, mainly due to reduced servicing fee and a large portfolio deal we closed in December. Our fee-based servicing portfolio grew 4% in 2022 to approximately $28 billion, with a weighted average servicing fee of 41.1 basis points and an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $115 million gross annually, which is relatively unchanged from last quarter, despite very strong volumes and less early runoff in the fourth quarter. This again was due to the closing of a large portfolio deal in the fourth quarter with a 12 basis points servicing fee. We did see substantially less accelerated runoff in our Agency loan book in the fourth quarter due to market conditions, which has resulted in prepayment fees leveling off as well. In the fourth quarter, we received $5.6 million in prepayment fees compared to $11.2 million in the third quarter. In January, prepayment fees were around $1 million. Given the current rate environment, we're estimating the prepayment fees will run between $2 million and $4 million a quarter going forward. In our balance sheet lending operation, our $14.5 billion investment portfolio had an all-in yield of 8.42% at December 31st compared to 7.15% at September 30th, mainly due to the significant increase in LIBOR and SOFR rates and from higher yields on new originations as compared to runoffs during the fourth quarter. The average balance in our core investments was $14.8 billion this quarter compared to $15 billion last quarter due to runoff exceeding originations in the fourth quarter. The average yield on these assets increased to 8.12% from 6.57% last quarter, mostly due to the $8 million in back interest reflected on the repayment of a non-performing loan and increases in the SOFR and LIBOR rates, partially offset by less acceleration of fees in the fourth quarter. Total debt on our core assets was approximately $13.3 billion at December 31st, with all-in debt costs of approximately 6.5%, which was up from a debt cost of around 5.33% on September 30th due to the increases in the benchmark index rates. The average balance in our debt facilities was approximately $13.7 billion for the fourth quarter, compared to $13.9 billion last quarter. The average cost of funds in our debt facilities was 5.80% for the fourth quarter compared to 4.49% for the third quarter, primarily due to increases in the benchmark index rates and from the convertible and unsecured debt issuances we made in the third and fourth quarters. Our overall net interest spreads on our core assets, excluding the $8 million of default interest we collected in the fourth quarter, increased to 2.11% this quarter compared to 2.08% last quarter, and overall spot net interest spreads were up to 1.92% at December 31st from 1.82% at September 30th. This was mostly due to the positive effect of rising rates on our floating-rate loan book and the highest spreads on our new originations. Lastly, we believe it's important to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high-quality long-dated recurring earnings in the future. One of these features is the continued growth we'll see in our net interest income spreads as rates rise on our free-floating rate loan book. In fact, all things remaining equal, a 50 basis point increase in rates, 20 basis points of which has already occurred since year-end, will produce approximately $0.05 a share annually in additional earnings. Additionally, we have approximately $7.6 billion of CLO debt outstanding with average pricing of 1.67%, which is well below the current market, and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations. Very significantly, our substantial escrow balances will continue to produce tremendous earnings, as rates are predicted to continue to rise. These earnings have grown substantially as we have approximately $2 billion of balances that are now earning around 4% or $80 million annually effective February 1st, which is up significantly from a run rate of approximately $7 million annually at this same time last year. As Ivan mentioned earlier, these features are unique to our business model, giving us confidence in the quality and sustainability of our earnings and dividends. 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.

Thank you sir. Our first question is from Steve Delaney with JMP Securities.

Thanks. Good morning, Ivan and Paul. Congratulations on achieving impressive results in a much more challenging environment last year. Looking ahead, despite the Fed raising interest rates by 400 basis points, you managed to grow the Structured portfolio by 19% with $6 billion in originations. As you mentioned, Ivan, the world has undoubtedly changed, and you are being more selective. How should we interpret the outlook for the Structured business in 2023? Is there potential for further growth, or should we expect it to remain flat? Thank you.

So we have a variety of different business lines we are focusing on. And I would say that, as mentioned in my comments, we are really in love with single-family build-to-rent business. We are expecting to really dominate that business. Many of our competitors have fallen away. Because of the nature of having 3 turns on our capital and the growth in that space, we are putting a lot of our effort into growing that part of our business and being very successful at it. With respect to bridge loans and Structured loans, with an inverted yield curve, it's very difficult to bridge loans when you are borrowing at 9% and buying assets at 5.5 caps. So we don't see that as a growing area. However, with that said, the inverted yield curve gives us a lot of different opportunities if people want to borrow on a five or 10 year basis, lower-leveraged deals and reduce some of our balance sheet providing mezzanine/preferred financing, which we have been actively doing. So expect our mezzanine/preferred to be more active, expect the Agency book to be used more effectively on those types of transactions and also expect us to be working on other solutions to provide for transitional loans, five-year product with a good use of mezzanine/preferred. I think that's a sweet spot right now, but we are not overly concerned. One of the comments, in Paul's commentary is, for us, we have these low liability costs. So it has to really be effective in putting our capital out into opportunities. This will leverage returns on our capital given our existing liability costs to be very, very favorable. So accumulating cash and being for lack of better opportunities is something that we're uniquely positioned to having $8 billion of below-market liability structures in place.

This is Paul. As Ivan mentioned, he covered the market data, and I want to share some numbers. We are being very selective regarding our balance sheet due to the inverted yield curve. In January, we provided $175 million in funding. We also experienced $480 million in runoff, which is something we appreciate. So, the book decreased slightly in the first quarter. We are genuinely interested and excited about the SFR business, and we plan to continue growing it, although this process takes time before it impacts our balance sheet since it remains unfunded for a while. Currently, we have about $1 billion on our balance sheet. While we observed a slight decline in our loan book in January, we are projecting it to remain relatively flat because we believe mezzanine opportunities will be more prominent, and the SFR business will keep expanding.

And Ivan on the mezzanine/pref, I mean do you actually see opportunities to take equity interest in some of these financings and sort of be more of a merchant banker than just a banker, just a lender?

I think it's a combination of everything, depending on the leverage. At a low leverage basis, it’s more of a coupon. At the higher leverage you go, then you start to get a higher yield, which is a combination of pay and participation.

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

Congratulations on a very solid quarter, pretty strong numbers across the board looking versus my estimates. Wanted to follow-up on the mezzanine. How big of an opportunity is that? I think you may have mentioned in the prepared remarks some $20 million of investments, some $200 million of Agency volume? Can you talk about how big of an opportunity that is? Or how large will we see that get on your balance sheet over the coming couple of years?

I believe it varies. Right now, I think we did about $20 million in the fourth quarter, particularly in December.

We did. We did $20 million of mez, Ivan, behind Agency product that we brought over from our balance sheet.

Yes. And we're looking at depending on how much we want to juice it up between $15 million and $14 million a month, that would be the level. And then it really depends on the market, the yield curve where the purchases start to pick up. So those are the factors. But I would forecast conservatively $20 million per month.

Paul as you think about margins, I know the mix impacted the MSR margin a little bit in Q4. But when you think about those margins looking out this year, is there a range you see those playing out between over the next few quarters?

Yes, I think that's a good question, Steve. Certainly the larger transactions, as I mentioned in my commentary that we did the portfolio deals really weighed down the MSR because you're getting a lower servicing fee, but a bigger transaction done. I would say, we've been running anywhere from 1.30% to 1.35% on the gain on sale margin. I still think that holds. I think we've done a nice job there, even given where interest rates have gone. I would say on the MSR side, it was set certainly lower this quarter than it normally would be without big portfolio deals like that. I'd say, we are running probably anywhere from 1.25% to 1.45% is what I think I'm estimating going forward, depending on deal size and on the tiers of credit. We have seen a little bit of a backing off on the servicing fee in Fannie Mae, a little bit lower than where it's been, but it's still really strong. We're still seeing servicing fees on new Fannie loans anywhere from a low of mid-30s to a high of mid-40s. So I still think we will get some nice servicing strips and put on some and nice MSRs, but I think 1.25% to 1.45% is probably an appropriate range, absent any large deals.

Appreciate the color on that Paul. Thanks very much for your time this morning.

Thank you. We'll take our next question from Rick Shane with JPMorgan.

Thank you for taking my question. I apologize if this feels redundant, given that my colleagues and I have been discussing these topics in various calls this morning. I want to ask about the transition between the Structured business and the Agency business, particularly regarding how historically you placed loans on the balance sheet, collaborated with borrowers to finalize projects, and then either securitized these loans or sold them to agencies. I’m interested in how you see this approach comparing to other commercial mortgage REIT models where the eventual exit strategy involves private term markets rather than government term markets.

So as you know, our business model on every transaction we do is for an Agency takeout. That's how we are built, that's how we are structured, that's how the economics of the firm really flows and that's the value of our franchise. So each and every loan that's in our portfolio was underwritten accordingly. So in this kind of yield environment, when you have an inverted yield curve, many of the borrowers have the decision to make. Did they pay higher interest costs when their caps burn off? Can they cash in their caps and use that as equity and recapitalize some of their assets? Go with a fixed rate? If you're a floating-rate individual, you are paying anywhere between a low of 8% and a high of 9.5% and you factor in the capital costs, or cap costs, you may have a great opportunity to go into a 10-year fixed rate. We were putting people onto 10-year fixed rates in the low-5s on an adjustable basis and the savings are so considerable. The stability is so significant that people are willing to come out of pocket with cash, lower their principal balance, and go into Agency debt. In accordance with those circumstances, we have layered on some preferred debts, which has been very accretive for us as well. So that's our business model. It works very, very well. Some borrowers like to ride it out. I think borrowers are more conservative. So it's a whole mixture. But unlike our competitors, our model is built in that manner; it's multifamily debt, it's Agency eligible. And that's one of the primary exits every time we do a loan.

Our next question comes from Jade Rahmani with KBW.

Hi, this is actually Jason Sabshon on for Jade. So question, we're starting to see a few cases of what looks like strategic defaults from borrowers in order to extract concessions from lenders since they know that lenders don't want a foreclosure on their hands. For example, Blackstone, this large multifamily deal in New York just said special servicing. And we know that Arbor’s borrower relationships are unique, and to be repeat borrowers, but can you comment on whether you're seeing this trend at all?

It's definitely a trend in the market. In a competitive lending environment, many lenders strip away certain structures on their loan. Without those structured loans, if the asset value is close to the debt and the lenders don't want to take back those assets, it gives a lot of strategic advantage to the borrowers, if they don't care about their profile. For us, we have a long history of originating loans and we have tremendous structure on our loans within the industry. We're treated a lot differently than other people because we're very prudent when we made these loans. Our borrowers need to come work with us for a variety of reasons. One of them is a structure on loans. The second is the number of loans we do at particular borrowers. So it is in the asset class itself. It is very common in today's environment, that if the borrowers don't want to support the loans, they are going to hand back the keys because they have no economic incentive. And if you're a Blackstone, it doesn't affect your reputation. In our case, it's just very, very different. We're involved every day with our borrowers. They come to the table because they have to come to the table. If they're willing to be reasonable, we've been able to work out good solutions. Keep in mind that we have a deep and seasoned asset management group. We are well positioned. If we have to, we will take back an asset; we haven't had to do it, but we always have that skill set and capability. We haven't been in that position, and so far we've done extraordinarily well in working with our borrower base.

For my second question on the single-family rental side, are you guys at all concerned about the recent uptick in build-to-rent supply?

We've always been concerned in that market, because there's a very, very big difference in core locations versus remote locations. A lot of the supply will come in areas that don't want the investment. So we're selective with the projects that we're doing. If you're in the right core area, and the right school districts and the right traffic patterns, you are good. But a lot of people are just buying land, building them, and having the attitude of build them and they will come. We have tremendous discrimination in terms of who we are doing business with.

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

Good morning, everyone. First on securitization markets. How do you see securitization markets to be functioning right now? You've been very active there in your history. But, could we see some signs of stress in securitization markets continue in recent weeks to start 2023? Or are you seeing any improvements?

They're improving significantly. The CLO market is improving. There is no product. The fear and dislocation, which occurred immediately, is beginning to subside. The markets have improved a lot over the last three months, and we think it will continue to improve a little bit. The investors need product. There is no new product. So it's a demand and supply imbalance. The existing structures have proven, from a credit perspective, to work well for investors. We believe the CLO market is not far from executing. It's close. The issue with the CLO market in doing execution is creating new product. It would be good for existing inventory to create some economies in how we finance our existing product, however, creating a new vehicle for new product is a little bit difficult. We would look at using the securitization market to improve our current funding, which is an upside for us. It has improved and looks like it is going to continue to tighten up a bit.

Thanks, Ivan. That's all helpful color there. Then just one last question for me. On maintaining the dividend in the quarter, can you speak to the key reasons why the Board chose to do that after I believe 10 consecutive increases? Just on the surface looking at your results, which are really strong with GAAP and core earnings, panel covering the dividend, it would seem like a dividend increase would make sense, but I'm just curious how the Board thinks about that and does that say anything about the cautious outlook?

We consistently have in-depth discussions about maintaining and increasing our dividend. Our performance has been excellent, creating a significant cushion. While the Board has talked about this, it's evident that we aren't receiving the recognition we deserve in the market at this time, especially since there's little opportunity for raising the dividend while others are cutting theirs. The Board believes that there is no real advantage to increasing it now given that many companies are reducing their dividends or drawing from capital to pay them out. Paul, could you provide some additional insights?

Yes, I believe that's correct, Crispin. As you know, we have ample cushion and could have easily opted to raise it again. We consider the timing of entering these markets. Over the past 18 months, as Ivan mentioned in his remarks, we have been strategically assessing what we foresee to be a challenging recession. Our portfolio assets are in excellent condition, positioned within the right asset class, and we have substantial structure in place. We often engage in deals with repeat borrowers. However, in difficult environments, cash and liquidity are essential. We have successfully built up a significant reserve of cash. Currently, we do not see much value in raising the dividend today, although this may change in the future. We will monitor our earnings and continue to review this matter with the Board quarterly. It's worth noting that we've raised the dividend three times this year and in 10 of the last 11 quarters, while among our peers, only one has increased their dividend nominally over the past three years. Thus, we feel the credit is not favorable at this time, but we will keep assessing it.

We are trading at a similar dividend to some others in our peer group, and they haven't raised their dividend, and their payout ratio is close to 100%. The Board just said, well, what's the benefit of increasing the dividend? Let's see how that goes. We are such an outperformer in paying out 67% or 70%, increasing a dividend. What is the market even going to care? That was kind of a consensus.

We'll take our next question from Lee Cooperman with Omega Family Office.

Thank you. I have three questions. Before I ask my questions, I just want to give you guys a well-deserved shout-out. I've been an investor, I think from the day of the IPO. I think for well over 10 years, you guys have done a sensational job in managing the affairs of the company. And I want to thank you for that. My three questions are: number one, as you said in your press release, we have a best-in-class return equity of 18%. In your view is that sustainable at the current time, and where do you think that we're over earning? Number two, I need a little bit of an education. There are certain tax laws that require you to pay out a percentage of your taxable income as a REIT. Based upon your budget this year, do you think you'll be flush to pay an additional dividend before the end of the year or not? And third, I think the answer is self-evident; we don't have any need for any additional equity here because you have plenty of equity on the balance sheet.

So that’s three questions.

Yes, let's address these in order. First, regarding the tax code, as a REIT, you are required to distribute 90% of your taxable income. If you don’t distribute 100%, you incur corporate tax on the difference, creating a loss. Our advantage is that we operate with a REIT over a TRS, meaning we have a taxable REIT subsidiary that pays taxes on the Agency business. This allows us to retain capital without needing to distribute it. To your question about special dividends, the answer is no; we will keep assessing our taxable income in relation to our TRS moving forward, which will influence future dividends. Currently, we can retain capital and comply with the requirements. As for your third question on capital, we have effectively managed our capital by recognizing the importance of being well-capitalized, especially in challenging environments. We've been successful in accessing capital and are among the few in our industry with varied capital access due to our reputation, brand, and performance. Many investors consider us best-in-class, which has been beneficial. We have ample cash and are in a strong liquidity position, and we will continue to evaluate our capital needs going forward. For now, we are satisfied with where we are, right, Ivan?

We do. We will evaluate our runoff first originations because runoff exceeding our originations creates a lot of capital for us. Given the benefit of our low liability structures, it puts us in a position to continue to have outstanding earnings. If we leverage our existing liability structures with assets, we have a real cushion and a real benefit. There are a lot of firms in the industry that lock up their liabilities, which we think is not the right way to run a business and we don't do that. We get the benefit of having higher earnings on those assets, especially in replenishable vehicles. We got to wait and see how each month goes and where the yield curve is and where the opportunities are. But we are sitting in a pretty good position, Lee.

To your first question, Lee, about return on equity, certainly our return on equity has been unprecedented, as you said. A lot of that has to do with the run-up in interest rates and earning more on our capital. I think everybody in the space is seeing that. We are seeing a significant increase in the escrow earnings because of where rates have gone. Obviously, our Agency business is capital light; therefore, the ROE on the Agency business is much higher than on the balance sheet business. To answer your question on whether we think that's sustainable, that will depend on a lot of factors. It will depend on the mix between the balance sheet business and the Agency business. If we can keep close pace with where the Agency business was last year, I think that will be a meaningful contributor, but it will also depend on where rates go. If rates start to come down at some point down the road— and I don't think that's going to happen in 2024, as others may have a different view— if rates start to come down, then you start to get a lower return on your cash and your escrow balance and your floating-rate loan book. But for 2023, I see that as a relatively attainable goal or close. After that, we will just have to see where the market goes.

Thank you. Again, congratulations and a very well-deserved shout-out. You guys have done a fabulous job.

Thank you very much for your support, Lee.

Thank you. At this time, we have no further questions in queue. I'll turn it back to Ivan Kaufman for any additional or closing remarks.

Well, thank you everybody for your support in 2022. It is clearly the best year that the firm has had in what is a very challenging environment. Our management team has done a great job. Our Board is supportive and thanks to all our investors for their contribution and support to our franchise. Everybody have a great day and a great weekend. Take care.

This concludes today's call. Thank you for your participation. You may disconnect at any time.