Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2023 Arbor Realty Trust Earnings Conference Call. 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 your call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, 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, 2023. 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 conditions, 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 and closed out an exceptional 2023. In fact, 2023 was one of our best years as a public company despite an extremely challenging environment. We managed to increase our dividend twice while maintaining one of the lowest payout dividend ratios in the industry and generated a total shareholder return of 28% outperforming our peers. Additionally and very significantly, we're able to maintain the book value of our recording reserves for potential future losses, which clearly differentiates us from everyone in this space. In fact, as Paul will discuss in more detail later, we generated GAAP earnings in excess of our dividend in 2023 despite recording approximately $90 million in reserves and our distributable earnings were also well in excess of our dividend, providing one of the best dividend coverage ratios in the industry. We're also very effective in refinancing loans off our balance sheet through our capital-light Agency Business. We generated $3 billion of multifamily runoff in 2023 and recaptured 56% or $1.7 billion of those loans in new agency product. Our agency platform gives us a tremendous strategic advantage, allowing us to continue to delever our balance sheet and generate significant long-dated income streams, which is a key part of our business strategy. We have been a significant player in the Agency Business for almost 20 years and now have been a top 10 Fannie Mae DUS lender for 17 years in a row, coming in at number 6 for 2023, and it's extremely important to emphasize that our Agency Business generates over 40% of our net revenues, the vast majority of which occur before we even open our doors every day. This is completely unique to our platform and is something we feel is not fully reflected in our valuation. On our last call, we gave guidance that the fourth quarter of last year and the first quarter and second quarter of this year would be the most challenging part of the cycle. We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter. As a result of this environment, we are experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second which is not a strategy that works well with us. Second, borrowers need to bring capital to the table to right-size their deals and raising capital is a lengthy process in today's climate. Therefore, you will see defaults rise initially until we are able to raise additional capital and then deals will often be recapped. We feel we have done a very good job to-date in collecting payments and have been highly effective in refinancing deals for our Agency Businesses as well as getting borrowers to recapitalize their deals and purchase interest rate caps where appropriate. In fact, we had $2.5 billion of loans with interest rate caps that were expiring over the last four months, of which $1.7 billion executed new rate caps or put cash up in lieu of caps, and we continue to work on getting new caps executed every day. We also have longstanding relationships with many quality sponsors that we've been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions. As we are constantly receiving interest in the market to purchase our assets as well, our goal is to maximize shareholder value. And very often, it's not just the value of the collateral, but the recourse provisions that we evaluate in determining how to approach each individual circumstance. The short-term nature of having a delinquent loan will not impact our decision-making process to achieve a correct economic result on a transaction. With that said, we've received a lot of public criticism in what we consider to be an extremely successful transition of assets to new ownership through the legal process or even through consensual cases. This is very difficult and complicated work. And as I said earlier, we expect to be extremely busy in the first two quarters of this year, managing through the most challenging part of this dislocation. Additionally, we continue to focus heavily on maintaining a very strong liquidity position. We currently have over $1.1 billion of cash between $1 billion in corporate cash and $600 million of cash in our CLOs that results in an additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment as it provides us the flexibility needed to manage through the rest of the downturn and take advantage of opportunities that will exist in the market to generate superior returns on our capital. We have also done an excellent job in reducing our exposure to short-term bank debt and have no significant pending maturity to deal with on any of our warehousing facilities. We are down to approximately $2.8 billion in outstandings with our commercial banks from a peak of nearly $4.2 billion, and we have over 70% of our secured indebtedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. As previously discussed, these vehicles provide a tremendous strategic advantage at times of distress and dislocation, like the environment we are in today, due to the nature of that non-mark-to-market, non-recourse elements. In addition, they contribute significantly to providing a low-cost alternative to warehouse banks which in times like this have fluctuating pricing and leverage point parameters. Turning now to the fourth quarter performance. As Paul will discuss in more detail, our quarterly financial results are once again remarkable. We produced distributable earnings of $0.54 per share, excluding a one-time realized gain on an office property that we had previously reserved for. The results were well in excess of our current dividend, representing a payout ratio of around 80%. We are very pleased with the substantial cushion we have created between our earnings and dividends, which will serve us well through the balance of this dislocation. We believe our diverse business model uniquely positions us as one of the only companies in this space with the ability to continue to provide a sustainable dividend and just as importantly, at a time of tremendous stress, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from our peers. In our balance sheet lending business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency product allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams. In the fourth quarter, we were able to again be highly effective with this strategy, producing another $800 million of balance sheet runoff, $465 million or 58% of which was recaptured to new agency loan originations. As a result, we recouped over $100 million of capital and continue to build up our cash position, which again currently sits at around $1.1 billion. With today's current interest rates, we will continue to chip away at converting loans to the agencies. But if the 10-year goes below 4% again, it will become more meaningful and every quarter of a point drop in rates from here will be even more impactful. As we touched upon last quarter, we also believe we are well positioned to step back into the lending market and do accretive opportunities to continue to grow our platform. We feel now is an appropriate time to originate some of the highest quality loans with attractive returns, allowing us to grow our balance sheet and build our pipeline of future agency deals. In our GSE/Agency Business, we had another great quarter and an exceptional 2023 despite elevated interest rates. We originated $1.3 billion in the fourth quarter and $4.8 billion for the full year, representing a 7% increase over our 2022 numbers. This is a tremendous accomplishment in light of the fact that the agencies were down 25% to 30% in production year-over-year. We have done an excellent job in gaining market share and converting our balance sheet loans at the agency product which has always been one of our key strategies and a significant differentiator from our peers. We also originated $300 million of five to ten-year fixed rate GSE/Agency alternative products through our private label business, bringing our total agency volume to $5.1 billion for 2023. Traditionally, January is a much slower month with the agencies, which resulted in us originating $250 million of loans. February numbers are looking much stronger. We have a large pipeline, setting us up for what we believe will be another very solid year in agency originations for 2024. And again, as Agency Business offers premium value as it requires limited capital and generates significant long-dated, predictable income stream and produces significant annual cash flow. To this point, our $31 billion fee-based servicing loan portfolio, which grew another 4% in the fourth quarter and 11% year-over-year generates approximately $121 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 5% on around $3 billion in balances, roughly $150 million annually, which combined with our servicing income annuity totals approximately $270 million of annual gross earnings or $1.30 a share. This is in addition to the strong gain on sale margins we generate from our originations platform, providing us a strategic advantage over our peers. In our single-family rental business, we had a very strong fourth quarter and a full year 2023 as we continue to dominate this space and become a lender of choice in the premium markets we traffic in. We had $200 million of fundings and another $470 million of commitments signed up in the fourth quarter and closed out 2023 with $1.2 billion of new commitments. We also have a large pipeline and remain committed to this business as it offers us 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. We're also very excited about the opportunities we think we can garner from our newly added construction lending business as we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid to high-teens returns. We continue to build up a pipeline of potential deals and now have roughly $44 million on new applications, another $400 million in NOI and a significant number of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us three turns on our capital through construction, bridge and permanent agency lending opportunities. Lastly, I would like to spend some time talking about the short reports that have been written on our company. I want our loyal investor base to understand that these reports are written in a way that is purposely designed to drive down the company's stock price to achieve the desired goal of profit from a short position. As such, the facts, assumptions, predicted future events and market conditions as well as conclusions in these reports are exaggerated, laced with incomplete and inaccurate data, and slanted only to provide a negative view on Arbor and again, purely for personal gain. And while we will not get into a back and forth on the information in these reports or have detailed discussions on any specific loans, what we will point out is that the short reports state that our CLO delinquencies were 16.5% in December and 26.6% in January, when in reality, the rate was 1.3% for December and 5.6% for this January as of today. More importantly, the 30-day delinquency numbers are 0.9% for December and 1.2% for January as of today, which are the numbers the industry focuses on. This is a perfect example of using select data as of a point in time, which does not contain the full picture or represent the industry's focus, only to inject fear into the market for personal gain. We urge our long-term shareholders to know these one-sided self-motivated reports and focus only on our results and public disclosures and the fact that we've consistently outperformed our peers. It is also very important to emphasize that a significant portion of Arbor's lending is multifamily focused, specifically in the workforce housing part of the market. As we all know, Fannie Mae and Freddie Mac have had a specific mandate to address the workforce/affordable housing needs, which is a major issue in the United States, making Arbor a great partner. This product requires a high level of management and tremendous expertise, which we have been effective at for decades. Because this product may not have the same curb appeal as other multifamily product types, we've been criticized for a core part of our business that we have been extremely effective at and we'll continue to fulfill a very important mandate for the federal agencies, as well as the social needs for society. Again, we thank you for your continued support. And now I will turn the call over to Paul to take you through our financial results.

Okay. Thank you, Ivan. As Ivan mentioned, we had another very strong quarter, producing distributable earnings of $104 million or $0.51 per share and $0.54 per share, excluding a $7 million one-time realized loss in an office property that we had previously reserved for. These results translated into industry high ROEs, again, of approximately 17% for the fourth quarter and 18% for the full year of 2023. Equally as important, we closed out 2023 with GAAP EPS of $1.75 a share which was in excess of our dividend, despite booking approximately $90 million of reserves for potential future losses. And of course, with distributable earnings of $2.25 a share that easily beat our dividend run rate, we provided a very strong dividend to earnings coverage ratio for our investors. Our fourth quarter results were positively affected by a $5 million distribution from our Lexford investment, which was recorded in income from equity affiliates. We also had higher gain on sale income as our agency volumes are typically stronger in the fourth quarter and we continue to benefit from strong earnings on our escrow and cash balances from elevated interest rates. As Ivan mentioned, we do expect to continue to experience stress as we manage through the most challenging part of the cycle. As a result, we continue to build our reserves, recording an additional $23 million in CECL reserves in our balance sheet loan book during the quarter which was slightly offset by a $3 million recovery we had from a payoff of a nonperforming loan that we had fully reserved for previously. As to be expected in this market, we also experienced a net increase in our delinquencies in the fourth quarter of approximately $115 million. And as discussed earlier, we are expecting that we will experience additional delinquencies over the next few quarters. Very important to emphasize that despite booking approximately $90 million in CECL reserves across our platform in 2023, $74 million of which was in our balance sheet business, we still grew our book value 2% to $12.80 a share from $12.50 a share last year. And we are one of the only companies in our space that has significant book value appreciation over the last 3 years with roughly 30% growth from around $10 a share to nearly $13 a share. In our Agency business, we had a very strong fourth quarter with $1.4 billion in originations and $1.3 billion in loan sales. The margin on these loan sales came in at 1.32% this quarter, compared to 1.46% last quarter, mainly due to some larger deals in the fourth quarter. We were incredibly pleased with the margins we generated in 2023 of 1.48%, which exceeded 2022 pace of 1.34% by 10%. We also recorded $21.1 million of mortgage servicing rights income related to $1.4 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.55%, compared to 1.16% last quarter, mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter, which contain higher servicing fees. Our fee-based servicing portfolio also grew another 3.5% in the fourth quarter and 11% year-over-year to approximately $31 billion at December 31 with a weighted average servicing fee of 39 basis points and an estimated remaining life of eight years. This portfolio will continue to generate a predictable annuity of income going forward of around $121 million gross annually. And this income stream, combined with our earnings on our escrows and gain on sale margins represented over 40% of our 2023 net revenues. In our balance sheet lending operation, our $12.6 billion investment portfolio had an all-in yield of 8.98% at December 31 compared to 9.12% at September 30 due to a combination of an increase in nonperforming loans, and loans that had not made their full payments as of December 31 that we did not fully accrue for. The average balance in our core investments was $13 billion this quarter compared to $13.4 billion last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield on these assets increased slightly to 9.31% from 9.28% last quarter due to a slight increase in yields, which was offset by an increase in nonperforming loans in the fourth quarter. Total debt on our core assets decreased again to approximately $11.6 billion at December 31 from $11.9 billion at September 30. The all-in cost of debt was relatively flat at 7.45% at 12/31 versus 7.41% at 9/30. The average balance on our debt facilities was approximately $11.8 billion for the fourth quarter compared to $12 billion last quarter, and the average cost of funds on our debt facilities was 7.48% for the fourth quarter compared to 7.37% for the third quarter, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets decreased to 1.83% this quarter compared to 1.91% last quarter, and our overall spot net interest spreads were down to 1.53% at December 31 from 1.71% at September 30 again, due to an increase in delinquencies and nonaccrual loans during the quarter. And as I mentioned earlier, we are expecting to experience additional delinquencies over the next few quarters, which could further reduce these margins. Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 18% in 2023 to a leverage ratio of 3.3:1 from around 4.0:1 last year. Equally as important, our leverage consists of over 70% non-recourse, non-mark-to-market CLO debt with average pricing of 170 basis points over, which is well below the current market, providing strong leverage returns on our capital. 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.

Our first question will come from Steve Delaney with Citizens JNP. Please go ahead.

Good morning, Ivan. Thank you. Good morning, Ivan and Paul. To start, if I may, a quick question for Paul. Thanks for the details on the NPLs increasing to 16 assets from 12 foreclosures; that is certainly part of your toolkit, but not something we've seen a lot. Should we expect over the next several quarters, as you attempt to maximize your outcome, that we will see more instances where you actually take over properties? And are you confident you have the internal ability to operate those projects and resolve them without the current borrower? Thanks, Paul.

So let me take that first, Steve. We have options to either go through the legal process of foreclosure or do them consensually. It's always better to do things consensually if you can, but sometimes the legal process is an alternative and certainly, in certain jurisdictions, it's easier to do so. With respect to us taking over the management of the assets, we do have the capability, but that's not what's taking place. In fact, the demand from potential buyers to step into some of these assets is so strong that we've had to set up an internal process to limit the number of actual borrowers that we have because we're getting inundated requests. So we've set up an internal process that when we do have a stressed asset or a stressed borrower that we don't think is going to be able to bring the asset to the finish line, we'll bring in a new borrower whether it be through a consensual process or through the legal process, and we have somebody lined up willing to step in and that's how we've done it. Maybe six or nine months ago when there was a lot of fear in the market about where our value was going to go and the lack of liquidity, it was much harder to get somebody to the table. Now it's much easier. People are raising distressed funds and there's plenty of capital and liquidity to step in. So we have that capability, and we've set up the process.

Excellent. Paul, anything you want to add there?

No. I think I definitely took you through everything that we worked through internally.

So yes, it just sounds like the opportunistic private capital and your relationships in the industry that you're going to have opportunities to resolve either working with the existing borrower or bringing in a new player that we probably won't see a lot of dead foreclosed REO properties on your balance sheet where trying to figure out a plan. It sounds like you've got the plans in place very accurately?

Yes, generally not. By the time we foreclose, the situation has already been largely determined, and you tend to see assets that haven't had the right management. That's why, when an asset isn't performing, it's so important not to just kick the can down the road, because the asset will deteriorate; instead, we accelerate either a change in management or a change in ownership.

Steve, yes, as Ivan said, we don't have a lot of REO in our book, as you know. We did this quarter and we didn't put it in our commentary, we did have an office asset that we had written loan. We took back that asset this quarter. It is an REO, and we brought in a very sophisticated partner who has a lot of experience in converting that building to condo. And so we're working through that process over the next couple of years. So that's an exception where we will take an asset back in REO. It's just not a big part of our business, as Ivan said, but you will see that in our filings.

Okay. So Ivan, on your point, this is kind of strategic, and I am speaking directly to some of the short reports I think early on, maybe there was a Houston asset, someone used the term slumlord to describe your portfolio, your three bites out of the apple strategy that you've used forever. Do you have any concern that the overall quality of your loans or borrowers, and I don't mean a large percentage, but do you think you have some assets, loans in your portfolio that are not of sufficient quality to be refinanced into permanent financing with Freddie Mac and Fannie Mae? That's it for me. Thanks.

Well, clearly, our agenda is when we do a bridge loan it's for the sole purpose of creating an agency loan. You have to have a quality sponsor and you have to have a quality asset. So our idea, of course, is that every sponsor that we take on is going to perform correctly, not all sponsors do that and sometimes they'll be a sponsor who couldn't hit his business plan or who had problems and they don't qualify, that's just the way it goes. Nobody is perfect. We're not perfect. With respect to the assets, if you're improving an asset, you have to approve that asset and you have to get it up to industry standards and the agency standards. If it doesn't, it won't meet that agency eligibility. So if we have a $16 billion portfolio, not all $16 billion is going to make that mark. I think 75% to 80% of them get to an agency status and convert, and that's pretty good. In other cases, when they don't do that, the assets will be sold or put into new ownership who will get that asset up to spec, so that's kind of the way we look at the world. It's not a perfect situation where every asset that we take in ends up meeting our execution.

But you have other options to resolve it? It sounds like product...

We have other options and bringing in new ownership very often they can get the assets up to speed and get them repaired and get them fixed and we've had many assets where one form of ownership couldn't get there, you bring another form of ownership. It gets there very, very quickly. In fact, one of the assets that we transitioned in Atlanta for new ownership, I think within nine months the asset was almost ready to go agency, whereas under the prior ownership we had no chance. It only took nine months to turn the asset around.

Thank you both for your comments this morning.

Our next question will come from Jay McCanless with Wedbush. Please go ahead.

Hi. Good morning. Thank you for taking my questions. Provisioning was a little less than what we were expecting this quarter. But it sounds like things may get a little rockier heading into the beginning of '24. Just could you maybe talk a little bit more about why some borrowers feel it's better to default than negotiate first? That seems to be a little backwards given the environment that we're in right now?

I can speak from experience, I'm pretty involved in the asset management side with the asset management group. I think some borrowers believe that if you default, the lenders will be more ready to work with you, they think lenders don't want the defaults on their books. That may work with other lenders. It doesn't work with us. We're not afraid of defaults and they don't intimidate us. And they may intimidate other lenders. Number two, for whatever reason some borrowers initially don't think that the recourse provisions on their loan are applicable. And when they get notification of what they're triggering, they really wake up very, very quickly. I believe other lenders in prior years didn't have structural enhancements like we do. We have always had structural enhancements on our loans, which include, in many cases, interest reserve replenishment, recourse obligations on rebalance and caps and very significantly majority of a default interest rate on loans of 24%. So I think it puts us in a different light. If a borrower has a problem, we advise them, let us know what your issue is. We're happy to figure out how to try and come up with a solution in a proper way. And that's always the best approach, and then we'll give you time to figure out how to recap and work with you. But we did definitely see a spike of a mentality of default. When that happens, we let them know of all their obligations and we're able to change that mentality quickly.

Great. Thank you, Ivan. The other question that I had, when we look at multifamily rents, especially in Texas and Florida, we've started to see some of the cities are holding up, but some of the cities are starting to see year-over-year rent declines. I guess, could you maybe talk about what type of geographic risk we should be monitoring right now and how you're feeling about that part of the country in terms of potential delinquencies and workouts you're going to have to address there?

I think we're through the worst of it, and I think in my prior calls, I talked a little bit about the economic vacancy that exists specifically in certain areas. I think there's a large economic vacancy, which has been created from COVID backlog and the cost mentality with some renters — they can be in an apartment, not pay rent and not get affected. I also think that there was a period of time from COVID that people got rent subsidies and those rent subsidies accelerated a lot of the delinquencies. The courts are starting to be a little easier to work with and tenants are being evicted at a much more rapid pace. I think you'll see the economic vacancy start to diminish without a doubt. I do want to differentiate between the product type that we have, which is a lot of workforce housing, which I think is a huge shortage, versus the Class A market, which I think is suffering from different headwinds. If you look at deliveries in 2023 and expected deliveries in 2024, you'll see continued headwinds for Class A. For workforce housing, there is a shortage. When the court systems become more efficient, the economic numbers will look a little better. I also think there's another shadow issue — there are many people who have been living in hotels and temporary housing; these people need permanent housing. Once they begin to get their work permits and start to work, we think that will have a positive impact on vacancy factors in workforce housing.

That's great. Thank you, Ivan. Appreciate it.

Our next question will come from Jade Rahmani with KBW. Please go ahead.

Thank you very much. The delinquency statistics you gave are much lower than the info available from the CLOs. And I wanted to ask what the main discrepancy is there that you see. Just so we're clear, the numbers you gave, are those the 30-day plus delinquency rates? Is that what you want us to focus on? If you could just clarify that?

Sure, Jade. So yes, the delinquency numbers that are reported with the CLOs, as we said in our commentary, were 16.5% in total delinquencies for December and 26.6% in total delinquencies for January. Those total numbers are down to 1.3% for December and 5.6% for January as of today because we've resolved a lot of those loans. However, those are total delinquency numbers. The industry normally looks at anything 30-plus days and more importantly, 60-plus days. So what we're telling you is the total delinquencies reported on those days are down significantly from when those numbers were reported. Even more importantly, the 30-plus day delinquent numbers were 6.3% in December. Of that 16.5% total delinquencies, 6.3% was 30 days plus, and that number is down to 0.9% today. So that's what we're telling you. And 60-day delinquencies are down to 0.8%. On January, same type of thesis: the 26.6% in total delinquencies is down to 5.6% today as people have made their payments. The 30-plus day delinquencies on that day were 9.1% and that's down to 1.2% today. And the 60-day delinquencies are 0.8%. So the way the industry looks — CMBS and other industries — they look at 30-plus and 60-plus, and those numbers are significantly lower than the total delinquencies in the reports.

And what was the 60 day as of 12/31?

As of 12/31, the 60-day delinquent number was 0.8% and it's still at 0.8% because those are some of our nonperforming loans.

And the 30-day is now 1.2%, down from 9.1%?

The 30-plus day number for January is 1.2%, down from 9.1%.

So in terms of moving it down by that — I mean, this looks dramatic that there was that level of delinquency. First of all, that level of delinquency is surprising to me. Understanding that some borrowers may just pay late, because different loans pay in the 15th versus at the end of the month. But that's a high delinquency rate, but it's down sharply. What is the main means of getting it down sharply?

Ivan, do you want to talk to that?

On a lot of loans, there's no grace period. People pay late, they collect rents late — it's not a number that we give a lot of credibility to. What we give credibility to is 30-plus days. Borrowers are struggling in more difficult times and if there's a shortfall between the rents that come in and where the capital is, they've got to raise capital. But keep in mind, there's really no grace period on these loans so payments made late show up as delinquencies at a certain point in time. We focus on the 30-plus days. It's definitely more challenging times, but our focus is on those 30-plus days and we work hard to make sure that borrowers get within that period or we work through solutions.

The other thing I'll point out, Jade, just quickly, it's a little more granular. We're one of the only lenders left in the space that have replenishment vehicles with cash in those vehicles. We have $600 million of cash ready to be deployed in those vehicles. The way these numbers are calculated for those reports is based on the delinquencies over your total investable assets. But we can make the argument that that $600 million of cash is a performing asset and will be invested into a qualified performing asset. If you increase the denominator by using the cash as well, the numbers drop by about 1.5 points. I'm just telling you that there are ways these things are reported and ways we look at it. But more importantly, the 30-plus delinquencies are where we focus and the industry focuses and those numbers are significantly lower than those total delinquencies.

You mentioned peak stress is in the next two quarters. A couple of things — that 30-day number, that's what you want us to focus on. It's 1.2%. Where do you expect that to peak? Or what do you expect the cumulative delinquency will be?

We don't provide a specific projection on that. But we will say expect this quarter and next quarter to have continued stress. I want to add one more comment: if rates stay at these levels a little longer, stress could extend into the third quarter as well. There was some outlook for rates to begin to decline which would de-stress the environment. If rates continue to rise or stay elevated, stress may continue into the third quarter.

I appreciate that. I was actually going to ask that. And then finally, just to clear some other notions, rent-regulated New York multifamily is its own troubled asset class. First of all, could you give your views on that? Are there any opportunities you see emerging there? And if you could quantify any Arbor exposure, which I believe is minimal.

Yes, I'm glad you brought that up because clearly, some institutions are loaded up with rent control and rent stabilized properties. The impact on valuation on those portfolios has been dramatic. We as a lender are not a very active participant in that space. We were not active because many acquisitions were being done at low cap rates with the concept that they would be able to remove tenants and rehab them, and the numbers going in didn't make sense to us. We didn't like the concept of removing rent-controlled or rent-stabilized tenants. Therefore, we had very, very little exposure to that asset class. We think that in the long run, a lot of that housing will re-enter the market discounted and return to healthier valuations. We do not, as a firm, have significant exposure to rent control or rent-stabilized product. On the other hand, there will be opportunities on the lending side at the right valuations with the right operators, and we have good operators we do business with who can be effective in that asset class at the right basis and lending parameters.

Thank you very much.

Our next question will come from Leon Cooperman with Omega Family Office. Please go ahead.

Thank you. Let me just say this, nobody has given you a shout out. I've been an investor in the company for well over a decade, and I speak with you periodically. And I got to tell you, a year ago, you told me you were very pessimistic about the outlook and you were getting very defensively postured, which was a brilliant call. And then three years ago, you started moving the company into multifamily. And everybody is now looking at multifamily like they're looking at office, it makes no sense to me. You get all these immigrants coming over the border, they have to live somewhere, and they're employed and we've seen, to me, that you're in a good sector. So that's an observation. I'm just going to give you a shout out. My question is as follows. I have a lot of money with the guy that's done a sensational job for me in doing real estate lending. And I've noticed many times when he has a foreclosure, he makes a profit. So I assume if the assets are well underwritten, you may even be a beneficiary of foreclosures. What is — do you feel comfortable that the book value of $12.80 or $12.50, wherever it is, is accurate? And how do you feel about the quality of your underwriting, given the environment. I congratulate you on being very correct in your assessment of the environment. Thank you.

First of all, multifamily is still a great asset class, a phenomenal asset class. In 2009 and 2010, when we were more diversified across asset classes, we concluded that even though there were defaults, the significant losses came in other asset classes. Multifamily losses are not as dramatic on a relative basis. We made a decision as a firm to be predominantly multifamily and we're glad we did. I'm not sure why people are comparing multifamily to office; losses on office can be extraordinarily significant. With respect to the foreclosure process, do we win or lose? The fact is we will have some losses, we put up reserves. Our reserves have been pretty accurate historically and we're very comfortable with the reserves. We're very comfortable with our book value and we'll continue to put up reserves as appropriate. There are many times that we'll head towards a foreclosure and there is a gain there, and there are many times we'll head towards a foreclosure and we've properly reserved. So far, we've done a good job. When borrowers default, sometimes the assets are worth significantly more than the debt and we will proceed accordingly. We have guarantees and we will pursue judgments and collect on guarantees when necessary. We have hired staff to pursue judgments and collect money where appropriate. This is hard work but we feel very comfortable with our process and our book value.

I'm just curious if you can comment on this — I just got an e-mail from someone with the headline Multifamily Construction is Collapsing. I've been a great believer that excess returns brings within new competition and inadequate returns drives out competition. So are we heading — is this headline reasonable from what you're seeing? Is multifamily construction turning down quite a bit next in response to the increased supply?

There were too many deliveries recently — too many deliveries. I think there's a very high level of deliveries being completed in 2024 compared to need. Costs were high due to COVID, so you get more supply where demand isn't keeping up in some segments. We're seeing absorption issues in certain submarkets. We're not very active in that part of the market; we focus on workforce housing, where there's a shortage. Even as workforce housing goes through this period of difficulty, it will emerge strongly.

Well, I congratulate you again on your very intelligent call about a year ago and the way you've positioned the company. Thank you. I appreciate it.

Our next question will come from Rick Shane with JPMorgan. Please go ahead.

Thanks for taking my questions this morning. Ivan, you talked and Paul, you referenced the delinquency data. I believe that's related to the CLO, which I estimate represents about two-thirds of the assets. If that's the correct description, if we look at the overall portfolio, can you provide the delinquency statistics for the total portfolio, not just the CLO?

Okay. So Rick, you're correct. What I was referring to was the CLOs because I thought that was the question people were asking from the short report. We do have the 60-day-plus delinquencies disclosed in our filings. There are some loans that are 30 days or inside of 30 days delinquent that we conservatively chose not to accrue at year-end. I don't have that number with me now, but that number will be in our filings. You can take those numbers and extrapolate to the overall portfolio to get the delinquency rate, if that's what you're looking to do.

Got it. So is there a difference between the 60-day delinquencies in the CLO that you cited and the 60-day delinquencies in the managed portfolio because that's how we would think about it. Is there a difference there?

No. The nonperforming loans that are disclosed in our filing today of $262 million are all our loans, whether they're in the CLO or not, that are over 60 days delinquent. So that's the crossover. What we gave you today was numbers on 30-plus day delinquent in our CLOs. What you don't have is the 30-plus delinquent in the total portfolio, although it's not substantively different because, as you said, most of the loans are in the vehicles.

And can you talk about buyouts from the CLOs, both in the fourth quarter and quarter-to-date because I suspect there'll be some questions about whether or not the CLO decline in delinquencies related to buyouts?

For the quarter, it was fairly light. We only bought out one loan for $38 million out of the CLOs in the fourth quarter. We did buy $90 million of loans out of the vehicles in February. For the year, we bought out $453 million of loans out of our vehicles for all of 2023. $95 million of those loans subsequently paid off before the end of the year, $290 million of those loans were modified and restructured and got relevered on. Another $69 million we're holding on our balance sheet without leverage, but on a bulk of those loans, we're very close to a satisfactory resolution through a sale in the market. On the $90 million that we brought out in February, we're very close to finishing a modification on two of those loans and actually relevering those loans again.

It's an active part of our business — how we manage assets. The amount Paul mentioned is not a tremendous amount and it's transitional. You can either take a loan out, foreclose on it, sell it, bring in new ownership. The process generally runs 30 to 90 days. We typically get leverage back on those assets when we do them. Some need to be sold to the market. It's a constant process.

Got it. And when we think about that $90 million that was repurchased in February — and you can hear me typing in the background, trying to figure this out — how impactful was that on the delta in the delinquency rate?

Those loans were already in my nonperforming bucket at year-end. So in the $262 million we disclosed, those are two loans that were already nonperforming that we bought out of the CLO, if that's what you're asking.

No, I'm trying to figure out you cited a decline in the delinquency rate, but if you bought out $90 million that were presumably delinquent and you're discussing the CLO, that comes out of the numerator in terms of that delinquency rate. That's what I'm trying to understand.

It will be in the overall number and included in the totals — it's part of the total numbers. It doesn't disappear from the overall stat set; it's part of the total picture.

Got it. And then last question for me. When we look at the reserves, and we look at the specific reserves, there's a $70 million reserve related to a very old loan, 2008, I believe. The specific reserves are, I believe, in the $120 million range. The general reserve is now about 57 or 58 basis points. Should we expect that to increase given your outlook over the next two to three quarters?

You're exactly right. We have $120 million of specific reserves. $78 million of that is actually on a very old legacy land development deal out in California we've talked about in the past. We haven't put an additional reserve on that deal in a while. The rest of the reserves throughout the asset class are mostly multifamily. We have $75 million in general reserves on our book; $73 million of those are multifamily. As far as outlook, it's hard to talk about reserves because CECL requires you to build the reserve when you think you have stress, which we do. Having said that, we do think the next couple of quarters will be increasingly challenging. And as Ivan said, if rates stay elevated for longer, that stress could leak into the third quarter. We will continue to evaluate our deals and determine whether we need additional reserves. While I can't predict exactly what the model will show, intuitively I believe reserves will stay elevated for the next couple of quarters.

Thanks for taking my question this morning.

Our next question will come from Stephen Laws with Raymond James. Please go ahead.

Thanks. Good morning. And very nice quarter in a very difficult environment. I know you're working through a lot like all multifamily lenders are here. I really want to circle back to a couple of your comments. I think one of the big misconceptions I hear from people is the assumption that all delinquencies lead to a loss. Can you talk a little more about your process, how the modifications and extensions work, your gives and takes? Are you providing mezzanine or subordinate financing — how much mezz you guys provide? Are borrowers finding that elsewhere? And again, about the new equity sponsor stepping in — you mentioned that there's a lot of liquidity around multifamily. Can you maybe talk a bit more about the delinquencies, how you think about collateral values, how you think about which loans are subject to potential losses and which ones are just going to go through a process and come out performing with a new sponsor?

I would say it's an art, not a science. Different sponsors have different capabilities and different assets have different needs for capital. We approach each situation independently. For some borrowers we will foreclose and transition the asset when we're deep in the money and there are buyers ready to step in; we collect penalty interest through foreclosure and transition to new ownership and then produce an agency loan in the future. For others we will give concessions to attract more capital and be a good partner because we'll do additional business with the client. In some cases we have to designate a loan nonaccrual while we work to resolve it. We have sponsors with personal guarantees on loans and we factor those guarantees into our decisions. We have staff dedicated to pursuing judgments and collecting on guarantees. Our originators are involved in the asset management process — they don't just originate and walk away. This is a fully integrated approach top to bottom to achieve the best economic result on each loan.

I appreciate the color. I wanted to follow up on buying loans out of the CLOs and overall liquidity. One thing I noticed is you guys did not use the ATM in the fourth quarter like you did in Q3, and maybe I'm over reading that, but you're trading in the mid-teens and comfortably above book. That gives me a signal you feel pretty good about your liquidity and capital to not hit your ATM during the quarter. Can you talk about how you see your liquidity managing through the next six months? And then when you do buy out a loan from CLOs, say the $90 million in February, what is the impact to liquidity to move that to a bank line which has a lower advance rate than CLO? How does that process impact liquidity?

Buying loans out of CLOs to work them or create the best economic result is important to us. When we buy them out, we typically re-leverage and usually there's a 10 to 20 percentage point haircut difference, so we need to come up with that incremental equity. We have capacity with our banking relationships, and it's mostly transitional. The loans generally sit on our balance sheet for three to six months or sometimes nine months, and very often when we buy them out they're restructured and recapitalized and then relevered again. We're comfortable with our banking partners and we forecast these transactions in our cash projections, so we feel comfortable about our cash needs for buying out loans when appropriate.

And Stephen, I'll add on the liquidity side. One of the things we've been focused on is maintaining a strong liquidity position. We have a lot of dexterity in buying loans out and having our warehouse lenders re-lever those deals at a slight discount. We've been operating our business with runoff exceeding originations, and as loans transition to the agencies we recoup capital and generate long-dated income streams. When rates tick down, we can be opportunistic in bringing loans over from the balance sheet and converting them to agency. That helps our cash flow. Our current cash position is about $1.1 billion, which we consider a strong position and we constantly monitor it.

I appreciate it. One last small question — on mezzanine loans, do you do these as preferred equity investments? Are borrowers finding that capital elsewhere if they need it?

Yes. We like the mezz and preferred equity business, not only to help borrowers reposition balance sheet loans into agency loans but to originate new agency loans as well. We're one of the few lenders active with agencies doing that kind of lending. We expect it to be a growing part of our business and have budgeted accordingly. It's stable with attractive risk-adjusted returns.

We're locking in that fixed rate spread for five to ten years which we really like.

And then I think you mentioned the sale or buyouts in Q4 and February. Were there any in January or was that February year-to-date?

I believe that $90 million happened in early February. That's the total number to date for this year. For the quarter we bought out $38 million, as I mentioned earlier.

Awesome. Thanks again, and I know it's a lot of hard work, and we'll let you get back to it. Talk soon.

Thanks, Steve.

Our next question will come from Crispin Love with Piper Sandler. Please go ahead.

Thanks. Good morning. I appreciate you taking my questions. First on the servicing book, how much of the servicing book are in programs with GSE risk retention, such as the Fannie DUS program? And how have those loans been performing credit quality-wise, any delinquency stats or expected losses to share there?

Sure. So $21.3 billion of the $30.9 billion or $31 billion is in the Fannie Mae DUS world. That's about 80% of the book and has the risk sharing. Delinquencies have been fairly stable. We did see a little uptick this quarter. We have $187 million of loans on the agency side that are delinquent and we have about $12 million of specific reserves against those and those are in the foreclosure process. We booked another $3 million of specific reserves this quarter on the agency business. Freddie Mac delinquencies were flat quarter-over-quarter. Traditionally and through the history of the agencies, loss levels on agency business are very, very small relative to the broader market. We're not expecting material losses from the agency servicing portfolio.

Okay. Thanks, Paul. That makes sense. And then can you share your current LTVs and DSCRs in the CLOs and in the total portfolio?

I don't have CLO-specific LTVs and DSCRs. We don't break it out that way in our disclosures. We do have the blended LTV, which you'll see in our 10-K when it's filed. Our blended LTV on the consolidated book of $12.6 billion is about 78% on an as-is basis. Some assets are higher, some are lower; single-family rental business tends to be a lower LTV. I don't have consolidated DSCR figures in front of me because DSCR requires factoring in interest reserves and caps, which vary loan by loan.

Okay. And then just one last question, later in the year there were articles about potential fraud and a broker named Meridian. Can you size any exposure that you have there to Meridian and any ramifications you would expect from that?

We really can't speak to individual broker investigations here, but I can say the industry is changing and broker interactions for agency lending are being modified. Brokers historically were involved in bringing borrowers and documents which created problems in some cases. The agencies are changing broker documentation and disclosures. Quite frankly, we never fully understood why borrowers would go through a broker to get to a lender when they could come directly to us. We think there's going to be a real benefit to our franchise as borrowers increasingly come directly to lenders like us rather than through brokers. That should be a benefit to our agency business.

Okay. Thanks, Ivan. I appreciate you both taking my questions.

And our final question will be a follow-up from Lee Cooperman with Omega Family Office. Please go ahead.

I would just observe Ivan, welcome to the world of short sellers, the 64 million shares short. These guys are smart and they play a very vicious game. They put out information at times that is false and you got to deal with it. Now I'm reminding the expression when the going gets tough, the tough get going. I think you're a very tough guy. I don't think that they realize what they're dealing with. I wish you good luck.

Thank you, Lee. This has been several quarters of public reports and it's created an enormous amount of stress on the organization and additional cost because of the extra work required. But we will continue to work hard and provide numbers. Thank you, Lee, we appreciate it.

Thanks, everybody. Ivan, you want closing remarks?

Sure. It was a long call and we covered a lot of data. Clearly, it's been a sustained period of elevated interest rates and elevated distress. As I've mentioned previously, the fourth quarter was going to be a difficult quarter and the first and second quarters will continue to be similar to the first quarter and may be even slightly more stressful. If rates remain somewhat elevated as they are right now, the stress can drip into the third quarter. I pay close attention to where the 10-year goes and where short-term rates go because that will have a significant impact on stress in the system. We really appreciate everybody's commitment to the company and the time on this call. We look forward to the next earnings call. Everybody, have a great weekend. Take care. Bye-bye.

And thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect.