Arbor Realty Trust Inc Q3 FY2023 Earnings Call

Good morning, everyone, and welcome to Arbor Realty Trust's Earnings Conference Call for the Third Quarter of 2023. I will now hand the call over to Paul Elenio, our Chief Financial Officer. Please proceed.

Okay. Thank you, Mike, 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, 2023. 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 may be deemed forward-looking statements and 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 outstanding quarter as our diverse business model continues to generate earnings that are well in excess of our dividend. This has allowed us to maintain one of the lowest dividend payout ratios in the industry, which was 78% in the third quarter. Additionally and very significantly despite being in a very challenging environment over the last several quarters, we've managed to maintain our book value while reporting reserves with potential future losses, which clearly differentiates us from every one of our peers. In fact, we are one of the only companies in our space that have experienced significant book value appreciation over the last three years with roughly 40% growth from around $9 a share to nearly $13 a share. As we discussed on our last call, we feel we are right in the thick of this dislocation. Operating our business with the expectation that the next two or three quarters will be the most challenging part of this cycle. We have been laser focused over the last two years preparing for this environment. One of our primary focuses has been and continues to be preserving and building up a strong liquidity position. We're very pleased to report that we currently have approximately $1 billion in cash, which gives us a tremendous amount of flexibility to manage through this downturn and provides us with the unique ability to take advantage of the opportunities that will exist to generate superior returns on our capital. Clearly, given the current interest rate environment, we expect to experience additional stress. We need a tremendous amount of discipline and expertise to successfully navigate this market. And we're very pleased to have a tenured senior management team with a track record of managing through multiple cycles as well as what I consider to be the best asset management team in the industry. This is an extremely challenging environment, and I'm very pleased with the level of success we've had to date in managing through this downturn, which is a real testament to the quality of our franchise and the extraordinary efforts being put forth by our entire organization. As we have said before, we feel we are very well positioned compared to our peers given our strong liquidity position, multifamily-centric portfolio, the depth and skill of our management team, and the strength of our balance sheet and the versatility of our franchise. We also believe we are uniquely positioned to step back into the lending market and done some very accretive opportunities to continue to grow our platform. While others in the space will be dealing with significant internal issues, we feel we are well positioned, which allows us to reenter the lending market at a time when there is a great opportunity to put some of the high-quality loans with attractive returns while the competition is less active. In addition, we recently launched our first construction lending business, which is something we are very excited about, and we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid- to high-teen returns. We also believe this product is very appropriate for our platform as it offers us returns on our capital through construction, bridge, and permanent agency lending opportunities. We are very committed to this business. And as a result, we went out and hired some of the best and top people in the construction lending field. We are extremely pleased with how quickly we were able to roll out this product and get ahead of the market and build an incredibly talented team to execute this strategy. Turning now to our third quarter performance. As Paul will discuss in more detail, our quarterly financial results were once again remarkable. We've produced distributable earnings of $0.55 per share, which is well in excess of our current dividend, representing a payout ratio of around 78%. The dividend policy that we have implemented with our Board of keeping such a wide disparity between our earnings and dividend has provided us with a large cushion and was very strategic knowing full well that we were entering to a market dislocation. And we certainly could have raised our dividend again this quarter based on a substantial cushion and continued to show earnings, the Board decided to keep it flat since we believe we are not getting credit for raising it in this environment and it will be more prudent to preserve a large cushion as we head into the most challenging part of the cycle. We're also the only company in this space that has been able to consistently grow our dividend with approximately 40% growth over the last three years, all while maintaining the lowest dividend payout ratio in the industry. Just as importantly, in a time of tremendous test, we've managed to maintain the book value of our according reserves for future losses, which clearly differentiates us from our peers. And we believe our diverse business model uniquely positions us as one of the only companies in the space with the ability to preserve our book value and continue to provide a very stable protected dividend even in this extremely challenging environment. In our balance sheet lending business, we remain focused on converting our multifamily bridge loans into agency product, allowing us to recapture a substantial amount of our invested capital and produce significant long-dated constraints. In the third quarter, we continued to have success in this area with another $665 million of balance sheet runoff, $350 million or 53%, which was captured into new agency loan originations. As a result, we're able to recoup approximately $100 million of capital and continue to build up our cash position, which again currently sits at around $1 billion. And again, we're excited about the opportunities we think will be available to us over the next three to six months to reenter the market, grow our balance sheet loan book, and generate very attractive returns on our capital while continuing to build up our pipeline for future Agency Business. In our GSE/Agency Business, we had another solid quarter, originating $1.1 billion of loans in the third quarter, and our pipeline remains strong. Despite the significant recent rise in the tenure, we are poised to complete the year roughly in line with our 2022 originations numbers, which is a tremendous accomplishment in light of the fact that the agencies are down 20% to 25% production year-over-year. We have done a great job in continuing to gain market share and in converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. This Agency Business offers a premium value as it requires limited capital and generates significant long-dated, predictable revenues and produces significant annual cash flow. To this point, our $30 billion fee-based servicing portfolio, which grew another 2% in the third quarter and 11% year-over-year, generates approximately $119 million a year in recurring cash flow. We also generate significant earnings on our escrow and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning almost 5% on around $1 billion of balances, roughly $140 million annually, which combined with our servicing income annuity, totaled approximately $260 million of annual gross cash earnings or $1.25 a share. This is in addition to the strong gain on sale margins we generate for our origination platform. And again, it's something that is completely unique to our platform, providing a significant strategic advantage over our peers. We remain very committed to our single-family rental business as we are one of the only remaining lenders in the space, allowing us to aggressively grow the platform. We had a strong third quarter with approximately $140 million of fundings and up $430 million of new commitments signed up, and we also have a very large pipeline. We love this business as it offers three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams and allowing us to continue to build our franchise. In summary, we had another great quarter, and we believe our unique business model clearly demonstrates our ability to generate strong earnings and dividends in all cycles. We understand very well the challenges that lie ahead, and we are very well positioned to manage through this cycle. Our earnings significantly exceed our dividend run rate. We invested in the right asset class with very stable liability structures, highlighted by a significant amount of nonrecourse non-mark-to-market CLO debt with pricing that is well below the current market. We are well capitalized with significant liquidity, which has put us in a unique position to be able to manage through the downturn and take advantage of accretive opportunities that will exist in this environment. And again, with our best-in-class asset management capabilities and seasoned executive team, we are confident that we'll continue to be one of the top-performing companies in our space. I will now turn the call over to Paul to take you through the financial results.

Thank you, Ivan. As Ivan mentioned, we had another very strong quarter, producing distributable earnings of $112 million or $0.55 per share. These results translated into industry-high ROEs again, of approximately 18% for the third quarter, resulting in a dividend to earnings payout ratio of around 78%. Our quarterly results were slightly higher than our internal projections largely due to increased earnings on our cash and escrow balances from higher interest rates, combined with stronger gain on sale income from slightly higher agency sold loan volumes than we anticipated. As Ivan mentioned, we do expect to continue to experience some level of stress as we manage through this very challenging environment. As a result, we recorded an additional $15 million in CECL reserves in our balance sheet loan book during the quarter. Additionally, we did see a slight net increase in delinquencies in the third quarter of approximately $28 million. We experienced $98 million of new delinquent loans and resolved a $70 million delinquent loan from last quarter through a successful restructuring. As Ivan said earlier, we are in the most challenging part of the cycle and new issues arise each day. We are very pleased with the level of success we've had to date and believe we are well positioned to manage through this downturn given our multifamily-focused, strong liquidity position and our best-in-class dedicated asset management team with extensive experience in loan workouts and debt restructurings. It's very important to reiterate that despite booking approximately $70 million in CECL reserves across our platform over the last nine months, we still grew our book value per share almost 2%, to $12.73 a share at 9/30 from $12.53 a share at 12/31/2022. And we are one of the only companies in our space that have seen significant book value appreciation over the last three years. In our GSE/Agency Business, we had a strong third quarter of $1.1 billion in originations and $1.2 billion in loan sales. The margins on these loan sales came in at 1.48% this quarter compared to 1.67% last quarter, largely due to significantly more FHA loan sales in the second quarter. We are very pleased with the margins we've been able to generate over the first nine months of the year, which are well ahead of last year's pace. We also recorded $14.1 million of mortgage servicing rights income related to $1.2 billion of committed loans in the third quarter, representing an average MSR rate of around 1.16% compared to 1.46% last quarter, mainly due to a higher percentage of Freddie Mac loan originations, combined with a greater mix of larger loans in the third quarter, both of which contain lower servicing fees. Our fee-based servicing portfolio grew another 2% in the third quarter to approximately $30 billion at September 30, with a weighted average servicing fee of 40 basis points and an estimated remaining life of 8.3 years. This portfolio will continue to generate a predictable annuity of income going forward of around $119 million gross annually. In the third quarter, we also received $1 million in prepayment fees as compared to $3 million last quarter. And given the current rate environment, we are estimating the prepayment fees will likely remain nominal at around $1 million a quarter going forward. In our balance sheet lending operation, our $13.1 billion investment portfolio had an all-in yield of 9.12% at September 30 compared to 9.07% at June 30, mainly due to increases in the benchmark interest rates, which was largely offset by an increase in nonperforming loans in the third quarter. The average balance in our core investments was $13.4 billion this quarter as compared to $13.6 billion last quarter due to runoff exceeding originations in the second and third quarter. The average yield on these assets increased slightly to 9.25% from 9.19% last quarter, mainly due to increases in the benchmark index rates, which was largely offset by an increase in nonperforming loans. The total on our core assets was approximately $11.9 billion at September 30, with an all-in debt cost of approximately 7.41%, which was up from a debt cost of around 7.25% at June 30, mainly due to the increase in the benchmark rates. The average balance on our debt facilities was approximately $12 billion for the third quarter compared to $12.5 billion last quarter. The average cost of funds in our debt facilities was 7.37% for the third quarter compared to 7.11% for the second quarter, again, primarily due to the increase in benchmark index rates. Our overall net interest spreads in our core assets decreased to 1.88% this quarter compared to 2.08 last quarter, and our overall spot net interest spreads were 1.71% at September 30 and 1.82% at June 30. Lastly, we believe it's important to continue to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated recurring earnings. We have several diverse and countercyclical income streams that allow us to produce strong earnings in all cycles. The most significant of which is our agency platform, which is capital-light and generates very high ROEs through strong gain on sale margins, long-dated servicing and annuity income, increased escrow balances that are on significantly more income in today's higher interest rate environment. Additionally, we are multifamily-centric and have a substantial amount of non-mark-to-market, nonrecourse CLO debt outstanding with pricing that is well below the current market. We are also well capitalized with significant liquidity and have a best-in-class asset management and senior management team that have tremendous experience and expertise in operating through multiple cycles. And we believe these features are unique to our platform, giving us confidence in our ability to continue to outperform our peers. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. Mike?

And we will take our first question from Steve Delaney with JMP Securities.

Congrats on another solid quarter. The number that stood out to me in the report was the $500 million in cash sitting in the CLOs. I noted that you put $240 million to work in new structured loans in the third quarter. My question is whether that $240 million was done within the CLOs or outside of them. Also, how do you plan to reduce that $500 million significantly over the next couple of quarters?

We've done a really good job in managing our cash balances in our CLOs and keeping them well. What we're seeing is a lot of payoffs coming at the end of the month. So when they come at the end of the month, it takes time to redeploy that money. It used to come more evenly over a period of time. So that's kind of what we're seeing. So there's probably a large number of payoffs. We are constantly looking at our inventory and moving stuff out of our bank lines into it and keeping that cash balance as low as possible, but it's a process, it's not always perfect.

Yes. Steve, it's Paul. Ivan is 100% correct. We did have some late runoff in the third quarter. To answer the rest of your questions of the $240 million we funded during the quarter, $140 million, as we said in our commentary, we're funding prior commitments on our SFR business. So that all gets funded through our warehouse lines. And that business has been tremendously accretive for us. We're generating almost a 17% levered return on that business for the quarter. Of the other $100 million that was funded, $92 million were bridge loans and $8 million were mezzanine and private equity behind our agency business. So the mezzanine and private equity is obviously not financed and it's a 13% yield on your money. And the other $92 million, I think $62 million of it went into one of our CLOs and the other ones on a bank line. So that's kind of the breakout of how we financed our business. But as Ivan said, we've got $6.2 billion of replenishable CLOs at 170 over. We've got a nice amount of cash in those vehicles to reinvest. And as loans run off, it's a process of moving around and being efficient. But we've got a lot of dry powder to be able to execute very well going forward.

Got it. That leads into my follow-up. Ivan, in terms of the new loan demand on the structured side, are you seeing long-term Arbor borrowers, people that you have had relationships with for 10 to 20 years, stepping up and looking to take on new multifamily projects in this environment? Or is everything you're looking at really just refinancing existing projects?

We've done some purchase activity, especially on the agency side. And I think that you still don't have the price discovery in the market and the buyers and sellers meeting of the eyes to have active transactions. So I don't think it's a very active part of the market. You are seeing some refinancings in the market, and you're seeing the existing bridge loans from time to time getting refinanced, perhaps some cash or restructure deals. But we've been real cautious. We've been spending more of our time on the build-to-rent, where we feel the opportunities are a little greater. And now as I mentioned, we just launched a construction lending business, which we think is great, all the banks are kind of out of the market.

And we have our next question from Stephen Laws with Raymond James.

Congratulations on a strong quarter despite a challenging environment. Ivan, I wanted to start by discussing your comment about the next two to three quarters being the most difficult. I recall you mentioned something similar last quarter. When considering the fourth quarter of '21 origination volume, you had a significant quarter. With two-year loans reaching their original maturity dates next quarter, can you elaborate on how many of those loans have caps that might expire? Given the changing outlook since last quarter, how do you expect this to affect the stress you might experience in the coming months, considering current rates? Additionally, could you provide more details on how many of those borrowers you believe are on track with their business plans, how many may require more time, and how many face real cap rate issues due to rate movements?

Yes. Most of our loans are three-year loans with extensions, it's not two-year loans. Just a correction on that comment. It's an ongoing process. We don't wait until the expiration of a rate cap or we don't wait for loans. People have come to us, we're very proactive. I think the biggest risks other than the rate cap which is a true risk, and that's just an economic issue because, of course, the new rate cap as a stated dollar amount. For us, the real concern is performance and making sure that the assets are being managed. A lot of the bridge assets required execution to get to their business plan. There was a lot of upside in the rents and unit turns and getting them to market. And I think, if anything, is what we see in the industry is the lack of execution, which creates an economic risk for the borrowers and not getting to their numbers. So we're putting a lot of time and attention to managing these assets, staying on top of the bars, working with them to change management companies and recapitalize their deals well ahead of time. So it's an ongoing process. It's not get to the cliff and deal with it then.

I appreciate the clarification on the original maturity term. Paul, as a follow-up regarding financing, I recall you mentioned in the Q that there are discussions ongoing about extensions. Could you elaborate on those conversations? Do you expect those lines to be extended without changes to the terms? Regarding CLO buyouts, have you purchased any loans? If so, what is the typical liquidity requirement to transition a loan out of a CLO to a bank line?

Sure. We have some data for you, Steve. Thanks for the question. During the quarter, we had approximately $6.5 billion in committed warehouse lines, involving about 15 different relationships, and we extended $4 billion of that during the quarter. In our Q report, we noted that some maturities were due, and we successfully extended nearly all of them. There is one line left which we expect to finalize by the end of the month, so there are no issues there. Overall, our conversations have been quite consistent across the board, with little to no movement on the existing products being financed. We've managed to maintain our pricing steadily. The discussions have shifted more towards new products and their potential pricing. However, we've maintained strong and long-standing relationships with our banks, allowing us to roll over those lines without any significant changes to the existing terms. This support has been incredibly beneficial. The second part of your question was about... remind me again, it was...

CLO buy outs and liquidity...

Sure. As you know, from time to time when loans have issues, we do exercise our right to buy loans out of the vehicles, restructure, and we then put them back into another vehicle or put them into our warehouse lines. And that's a fluid process that happens each quarter. This quarter, I think we ended up buying $140 million of loans out of our vehicles. But one of those was a loan that I mentioned in my commentary that we restructured a $70 million defaulted loan late last quarter. That was restructured. So that was pulled out, restructured, and then financed on one of our warehouse lines. So net, we probably had about, call it, $80 million of buyouts during the quarter. And it changes every quarter. It depends on performance. Last quarter, we had $50 million. So it's just a fluid process from how loans perform and how you operate your vehicles.

And our next question comes from Jay McCanless with Wedbush.

The first question I had, if rates stay at these levels or even higher into '24 and '25, could you talk about what you think could potentially happen with the loan book?

Yes. I mean rates are clearly at a very elevated level, and it's put a lot of stress on people being able to exit into the fixed rate market when rates were in the 3s. It was already stressful for borrowers, and we were encouraging borrowers to convert. The short-term rates have gone up a little bit, but they're maintaining it at these levels. Clearly, it's an elevated stress level. We're thinking we're going to stay at these levels for the next three quarters and are planning accordingly. But make no mistake about it. That's distress in the system. People, when they have their business plan, they exit to a fixed rate, and it was anticipated in their minds that the tenure would be around 3. Now it's getting close to 5, so the opportunity to exit is much more difficult. So they've got to bring more capital to the table to be able to carry their assets. That's as simple as it is, and that's just stressing the system.

Are rate caps even available in this market? And if so, what type of cost are people having to incur to extend or create a new rate cap?

Rate caps are always available, at least they have been, they continue to be and costs vary. I think people have to bring roughly three points to the table to buy a rate cap in order to bring net debt service down to a level that would make it a breakeven. So they have to make capital calls to figure out ways to bring that capital to the table. So that's the cost to balance their loans. It's roughly three points.

Okay. If I could ask one more question, regarding the new construction lending opportunity you're mentioning, will these loans be connected to actual new construction? Or are you considering some transitional assets where banks are withdrawing from deals? I’m curious about the type of product you envision for this new construction lending initiative.

It's pure ground-up multifamily, primary markets, primary sponsors, where we have the opportunity of construction lending trying to build bridge loan and get the end loan. That's what it is, the banks are out of that market. There are some local and regional banks. The advance rates, which used to be in the 75% to 80% range are in the 50% to 65% range, and the guarantees on the deals are very good. So we think it's a great opportunity, a great market, a great way to play our capital and where the short-term rates are our unlevered returns are very, very good, and our levered returns are outstanding.

We have our next question from Jade Rahmani with KBW.

I was definitely impressed by the very moderate increase in, I would say, the category of substandard and doubtful accounts, a very slight uptick. But overall, I wanted to ask, do you have a sense for what percentage of the balance sheet loans have been modified in recent quarters, problems dealt with? And what percentage in your view is remaining to go through some kind of modification?

I don't have those numbers. I don't have those numbers ahead of me, but I will tell you this has been a process that began two years ago. We got out ahead of it. We started managing loans that we thought would require adjustments and changes. It's an ongoing process. We resolved a few. We modified a few. We got a few new ones to come in. I see this trend continuing over the next three to four quarters in this elevated interest rate environment. So whether it ticks up a little bit, it should tick up a little bit, but it's been pretty consistent.

Yes, Jade, it's Paul. I mean, it's been fairly nominal. We've been pleasantly surprised the last few quarters, as Ivan said, we're expecting continued stress. And we think over the next two quarters, we'll continue to have those conversations with borrowers, but during the quarter, we only had one material modification, which we disclosed, which was that $70 million loan I mentioned in my commentary. That was a defaulted loan last quarter that we were able to restructure and get to a performing loan. That was the only material modification we had in the quarter. So as a percentage, that's a pretty low percentage. And we've been fairly fortunate that those numbers have been quite low over the last few quarters. Nothing comes to mind that with a significant modification other than that item over the last few quarters, but that obviously could change in the next few quarters.

And cumulatively reviewing CLO surveillance performance, it does seem that the percentage would be in the 15% to 20% range over not just the last two quarters, but maybe, say, 18 months. Does that number strike you as too high or reasonable?

I think that number is high. I have to look back. I mean, we did, as I said...

I think what you're referring to is loans that may be more credit risk under the terms of the business of it not loans that are being modified two different categories in two different times.

Yes, there's a difference.

Okay. Turning to cash flow performance. I understand that when we look at the cash flow statement, there's timing of loan originations for Fannie and Freddie and then the loan sales, which take place 30 to 60 days after that. So adjusting for that, were there any items that drove negative working capital? There is a category called other assets and liabilities, that working capital account. I think in the quarter it was negative $200 million, which doesn't usually occur. I wanted to see if you could provide any color on that.

Yes. I have to look at what items you're talking about, a lot of things get netted into the cash flow. I'll take a look at the details, Jade, and I can call you after because there's a lot of things netted in there. But the cash flows were, I think, pretty stable compared to last quarter, but I'll get back to you on that item.

Okay. But just overall, your feeling about cash flow performance is that it remains strong and steady. Is that how you would characterize it?

Yes. That's how we look at it. I mean distributable earnings were $0.55. I mean that's the best representation of cash flow, right? It's the item, the metric we use to cover our dividend, right? So we look at it with a tremendous coverage ratio of 55% versus 43%, but we've not seen a significant decline in cash flow. Obviously, we have a few more nonperforming loans. So that puts your cash flow a little bit. But again, we're ramping up our SFR business, we're putting out some mezzanine and private equity. We've not seen a significant decline in that cash flow number yet.

And we have our next question from Rick Shane with JPMorgan.

First, can we talk a little bit about the $70 million restructuring? What is the advance rate that you received on the facilities that you pledged it to? And was any of the mezz that was funded during the quarter associated with that restructuring?

Paul, before you answer that question, I want to give a little perspective on that Paul, because it kind of touches upon some of the questions that were asked, and I think it's a good case study. That was a very, very good asset and a very good market that required a certain execution of business plan. The borrower 100% failed on his execution. 100%. Couldn't execute. Whether it was distracted by other issues, we have no idea. We were able to bring in another operator and within this short period of time, he's already transitioned this asset because he knows the market, knows the asset quality, and has done a remarkable job. So that's kind of the overview of that transaction. Great asset, great opportunity, bad management, bad execution, replaced with a good operator and a recapitalization. Paul, you can go now and give the specifics.

Yes, sure. So exactly what Ivan said, right? Great asset, just the sponsor was not getting this asset to plan like we thought he would, was behind on his payment last quarter had gone delinquent two months, and then we have the three months this quarter, which is five months. We restructured the deal and that we were able to get a payment of three months in back interest, so we did get recovery this quarter in interest. We structured a deal in which the property was sold to a third-party borrower, a third party, a new borrower assumed our debt, and as part of the assumption of our debt, we modified our loan to a three-year loan. The first 18 months, the interest rate is 6% fixed, and then after that 18 months, it reverts back to its original plus 340. And as Ivan mentioned, a quality sponsor that has committed $10.5 million to the project, $2.5 million was funded day one as an interest reserve. And the other $8 million is capital improvements that are going to be made into the asset over the next 15 months. And if those are not made or if they've come up short, the borrower needs to post a rental reserve of the lesser $2.5 million and the difference between the $8 million in capital improvements and what he spent. And it's also important to note that he's guaranteed those $8 million of capital improvement. So that's a perfect example of what we're capable of. We took a borrower who wasn't executing as planned. We brought in a new borrower who is committed significant capital to the asset. It's going to improve the asset, get it to stabilize value quicker. Took a slight reduction in interest rates for 18 months, but then it goes back to its original rate, and that's kind of the whole structure.

Got it. And that is Paul now carried apart, did you provide any mezz associated with that?

We did not provide mezzanine financing on that loan, and we did not have a reserve for it because we have a strong belief in the asset. We ended up restructuring the loan by putting it into one of our facilities and securing a standard advance rate. However, we did not provide mezzanine financing against that loan.

That's helpful. For my second question, there were $347 million in extensions during the quarter. I'm curious if you could provide some perspective on what these extensions look like. Specifically, what are you seeing in terms of pay downs, what rate caps are you requiring, and what are you doing with the coupons on those?

Sure. So I can give a little color. Ivan will probably be able to give the rest in the market, but most of all those extensions were as of right extensions, which is what borrowers have if they're making their payments and they're doing the things they should be doing. They have an as of right extension. So there's not really much we do differently with they are entitled to that extension. I think there was one loan in which the extension was granted and as a concession to grant that extension, we ended up having a pay down of the loan of $2 million and increasing the actual interest rate for like a three- or six-month extension. But almost all of the extensions we did during the quarter were as of right extensions. Ivan, I don't know if you want to give a little color on that?

Yes. Listen, if it does it right, there's not much to talk about. But if it's not as of right, we usually seek a level of consideration to warrant that extension to put the asset and our loan in a better position. So each one is individually analyzed to see how we can improve our position on a particular asset.

Does as of right require getting a rate cap extension as well?

It depends. If that is part of it, then it was correct, but if it's not, then it wasn't.

Got it. Okay. And then not to answer Jade's question, but I think it ties into something that we didn't fully understand in terms of the cash flows. There was commentary in the 10-Q related to a $211 million related party transaction on servicing. Is that...

Yes, I just looked it up and was going to respond to Jade. This is about timing, and we discussed this earlier when Steve Delaney asked the question. We had a very late runoff in the quarter, which sometimes happens but not always. When that runoff occurs, it happens in our servicing shop, which is off-balance sheet. We have to create a receivable from a related party because that money is moved a day later. If loans pay off at the end of the month on September 30, the money sits in our off-balance sheet servicer. It’s removed from our portfolio, and then it becomes a receivable that comes in the next day. So that cash flow change of $200 million is entirely due to the change in the receivable from the related party, which is purely timing, and all that money came in on October 1.

Got it. Okay. And then last question. Stock is now trading pretty much at book value. You guys have issued $185 million this year, repurchased 35 million. What are the parameters as we think about this, what is the premium you should be trading at book to approach the ATM? And what is the discount where you would consider repurchasing? And I'm assuming that at really close to par, you're doing neither.

We can't provide an answer without considering various factors. It ultimately hinges on our liquidity position. We must fund the opportunities available to us, particularly in areas where the market is unsettled. Each situation offers a unique opportunity. Certainly, repurchasing our stock at an attractive value would be a significant opportunity for us. If we have sufficient liquidity, it would be highly appealing. We always believe our best investment lies within our own operations. However, we also aim to expand our franchise and business. If there are excellent lending opportunities through our franchise, we will remain focused on that as well. Thus, it requires balancing multiple factors.

Got it. Now the balance sheet has continued to shrink this year. I think assets are down about 6%. You've issued equity into that. If the balance sheet continues to run off, would you continue to issue equity? Or is this something that will sort of stall until you have objectives of growing the balance sheet again?

Well, let's keep in mind that we booked a lot of SFR business and that SFR business funds over time. So when we're booking business, we have a capital obligation and we try and match our capital obligations and keep our cash very, very constant in this kind of environment. So we're really sensitized to the opportunities on capital needs and keeping our cash balances at a very heightened level during this economic cycle. So that's one of the things we pay a lot of attention to. Clearly, when our book was high, and we're able to raise capital and then increase the amount of lending we did on the SFR side, we thought that was a really good match to generate 16% and 18% returns. And we'll manage that and monitor that accordingly.

Got it. Okay. That's very helpful. For my last question, there is a $56.9 million mezzanine commitment, and I am curious about the CECL reserve levels for unfunded commitments on mezzanine.

Yes. It's a model that we run. I don't have that at my fingertips, Rick. I mean the models are run, obviously, subordinated paper gets a higher CECL reserve than obviously, first lien senior bridge stuff. We do have roughly right now, we're sitting with about $73 million in general CECL on our balance sheet. I don't have it in front of me. It may actually be disclosed. I'm not sure, but we can get you that on how much is related to mezz and what's related to unfunded commitments. It just factors into the model. It certainly factors in at a higher loss level because of the subordinate position to it.

And we have our next question from Crispin Love with Piper Sandler.

Just looking at the nonperformers in the quarter, you added five loans there, but only $16 million. Just curious a little bit more detail there. Are those smaller loans? Or was that to resolve in that delinquency you mentioned? And just any additional info in detail on the new nonperformers and credit generally would be helpful.

Sure. So we added actually six new nonperforming loans during the quarter for a total of about $98 million in total UPB. So they range anywhere from $10 million to $30 million of the assets, and then we resolved the $70 million asset that I took Rick through on the change in the terms. So the net change was $28 million during the quarter. The assets are not particularly different than the type of assets we've done. They're all multifamily, all bridge, they're throughout the country and the LTVs on these assets range anywhere from high 60s to 90s and then one we have 100 because we took a reserve against it of $1.5 million. But really nothing different than the type of assets we've had in the past.

Okay. Great. That's helpful. And then just if we're in a higher for longer scenario, which you alluded to, I think Ivan, you said that at rates to be somewhat stable over three quarters. How would you expect that to impact the structured loan book in originations? I think as expected, bridge continues to soften a bit, but you have been seeing some nice solid activity in SFR. So curious on your thoughts on forward originations in this rate backdrop in both of those areas.

If rates decrease, our Agency Business is set to grow significantly because a large portion of our balance sheet is well-suited for conversion to long-term fixed rates. This will present opportunities for the growth of the Agency Business. Regarding the floating rate business, during times of price capitulation, there is a demand for assets that require improvement or are of a short-term nature. We anticipate that business will increase. Therefore, a drop in rates will present substantial opportunities, though we don't expect that to happen until potentially the third or fourth quarter.

Okay. Following up on that and looking at the Agency Business, the 10-year rate is currently about 480. What are your thoughts on what it would take to see a meaningful increase in agency originations when considering the 10-year rate?

It will pick up at each level, 450, you'll see an increase in a quarter, you'll see a bigger increase or you're seeing an increase subcord or explode. So as the tenor drops, the agency business will ratchet it up and the deeper it goes, the more exponential it will be.

And we now have our next question from Stephen Laws with Raymond James.

I just wanted to ask a quick follow-up. We touched a lot on Arbor specific stuff. But can you maybe give us your views more macro on the fundamental side of multifamily kind of around new supply in the near term, maybe a lack of supply in the medium term, slowing rent growth for near term related to that? And then on the expense side, anything around property taxes or insurance-related costs given the type of multifamily assets you guys play in and the regions you're in?

Listen, I think new construction, the absorption is slower. We all see that. Rent growth has slowed, expenses are a little higher than everybody thought. In your primary markets, you're looking at a flat rent growth to expense. So that's the way we've looked at it for quite some time now. But the markets with new deliveries, Class A, the absorption of concessions are higher than expected. And it's going to take a little bit to absorb. Given the housing market where it is, people aren't really buying houses. So I think that the demand for rentals continues to be fairly strong.

And we have our next question from Jade Rahmani with KBW.

The stock had been up in response to the results, but is now down 2%. Just a big picture question. What do you think is most misunderstood by the market as it relates to whether it be the book value or the credit risk or the earnings outlook?

We can't comment on that specifically. What we can say is that the entire sector is currently down. However, we have outperformed the sector in terms of our company's performance. There's a difficult mentality that concerns many in the industry. The sector is facing challenges, but we will continue to focus on our performance to outperform our competitors. It requires patience, and it's tough for me to address the investment mentality. We will keep managing our company for consistent performance, even though sometimes we face various challenges in the market.

And on the NPL side, maybe this gets to the point. It's $138 million per day, 1% of loans. What do you think the peak number of that will be?

It's not something we forecast. I will talk to Paul to see if he has any comment on that.

I don't. I mean, as we've said in our commentary, Jade, is new issues arise every day. We knock them down and when we get new ones. I can't tell you where that number goes. I think we've done a great job of managing it to date and putting our efforts where it needs to be, but I don't have a crystal ball and what happens to the market and where that number goes, but first two quarters have been okay.

And on the cash flow number, the cash flow performance number, you talked in response to Rick's question about the other liabilities and the due from related party line item. So that line resolved October 1, average cash flow was very strong in the fourth. Is that how we look at that?

Yes, that's right. It's just timing. We had a bunch of loans pay off late by the end of the month, 9/30, 9/29. Those loans, the cash is not remitted to us until October 1. It takes a day or two to get it out of our service shop once they process it. So yes, so that's why that number is down so much in the cash flow. But again, it's timing. That was it was late.

That implies about $140 million of cash from operations in the quarter. The dividend costs are around $95 million, including the preferred. Therefore, cash flow continues to exceed the dividend.

That's correct.

And we have reached out allocated time for our Q&A session today. I will now turn the call back over to Ivan Kaufman for any closing remarks.

Yes, we're done with our questions. Well, we certainly appreciate everyone's support. We think our results have been outstanding and above our peers, and we continue to grind forward, and we continue to have confidence in our ability to manage through the downturn. Hope everybody has a great weekend.

Thank you. This does conclude today's teleconference. Thank you for your participation. You may now disconnect.