Operator
Good morning, ladies and gentlemen, and welcome to the fourth quarter in full year 2024 Arbor Realty Trust Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. If you need operator assistance, please press star 0. I would now like to turn the call over to your speaker today, Paul Elanillo, Chief Financial Officer. Please go ahead.
Okay, thank you, Madison. Good morning, everyone, and welcome to the quarterly earnings call for auto-realty trust. This morning, we'll discuss the results for the quarter and year-end of December 31st, 2024. With me on 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 risk 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 beliefs, assumptions, and expectations of our future performance, taking into account the information that's 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 now turn the call over to Arbor's President and CEO, Ivan Calford.
Thank you, Paul. Thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had a solid fourth quarter and closed out 2024 as another very strong year, despite an extremely challenging environment. We've executed our business plan very effectively and in line with our expectation. And despite a tremendously volatile and elevated interest rate environment for almost three years now, we've managed to continue to help our peers in every major financial category, included our dividend, shareholder return, and book value preservation. We were well positioned for this location, but as we're going into the cycle, we had a large cushion between our earnings and dividends. We're well capitalized, or invested in the right asset class with the appropriate viability structures. This allowed us to outperform our peers and continue to pay our dividend, while mostly all of our peers had to cut their dividend substantially, some multiple times during the cycle, and also experienced significant both dying erroneum. One of the items we have consistently discussed on our calls is how we felt that this dislocation would persist and result in the rate remain higher for longer, which is something we were well prepared for. However, rates have not just remained elevated, they have actually increased significantly with the 10-year rising from 360 in September to as high as 480 in January and now is hovering around $450,000, with current outlook suggesting we'll remain at these levels for the near term. This is a material change in the market, resulting in significant headwinds that will affect everybody in the space. These elevated rates are creating a very challenging environment as it relates to agency origination volumes, and where we've experienced success over the last few years in getting borrowers through the transition of fixed-rate loans and recapped their deals, we expect this environment to create a deceleration in this area as well. We have also seen a 100 basis point decrease in SOPRA over the last 12 months, which is reducing the earnings on our escrow and cash balances. Additionally, we expect there will be a temporary drag on earnings from the REO assets that we're repositioning over the next 12 to 24 months, and that I will discuss in later detail. However, this will partially be offset by efficiencies we expect to generate from the gruesome bottom costs in the securitization market and with our commercial banks, as well as growth in our service report in Ontario. As a result of these changing macroeconomic events, we are revising our earnings outlook for the foreseeable future until we see improvements in the rain environment. Based on these factors, we are now estimating our earnings for 2025 will be in the range of 30 to 35 cents a quarter and will likely reset our dividends starting the first quarter of this year in accordance with this new guidance. This outlook is reflective of the newly elevated rate environment, however, if there is a material change in short-term or long-term rates in the future, we will revise our outlook accordingly. It's important to note that we were the only firm in our peer group to set our dividend, to grow our dividend over the last five years by 43%, while every other company in our space has cut their dividend some multiple times by 40% on average, with only one company keeping their dividend flat in the last five years. And we assume that we set our dividend to the midpoint of our New Orleans Gardens. Our dividend will be on approximately 8%, which is, again, which, again, is compared to our peers, who are down at an average of 40%. Additionally, over the last five years, we have also grown our book value by 26% in reserves, especially considering that our peers actually experience a 25% erosions in their book values. We have done a very effective job, despite elevated rates of working through our loan portfolio, by getting borrowers to recap their deals and purchase interest rate caps. In 2024, we were able to successfully modify $4.1 billion of loans with borrowers committing to inject $130 million of additional capital into their deals. We also modified another $600 million of loans in 2023, bringing our total loan modifications over the last two years to $4.7 billion for roughly 60% of the remaining legacy loan book. This is tremendous progress, especially in light of the elevated rate environment that has resulted in a large portion of our loan book being successfully repositioned for performing assets with enhanced collateral bonds. We've also done an exceptional job in bringing in new sponsors to take over assets, either consensually or through foreclosure. In fact, in the last two years, we have brought in new sponsors to recap deals with substantial new equity on approximately 900 million of loans. This is a very important strategy that, again, successfully repositions assets with the appropriate capital, putting our loans in a much more secure position with experienced sponsors and creates more predictable future income streams. And again, it's reflective of us recording the appropriate level of reserves on these distressed assets. And despite elevated rates, we also generated strong runoff over the last two years, $4 billion of runoff in 2023 and $2.7 billion of 2024, an amazing accomplishment. We also continue to make strong progress despite the unprecedented move up in rates on the money, approximately $1 billion of loans that were passed due at September 30th. In the fourth quarter, we successfully modified $140 million of these loans, generated $151 million of payoffs, and took back approximately $120 million of REO assets, able to bring in new sponsors to operate and assume our debt. This has formed progress in one quarter and has reduced the $944 million of delinquents If we hadn't, at September 30, it's down to 534 million. At December 34, our 44% decrease. We did experience additional delinquencies during the quarter of approximately 286 million, bringing our total delinquencies at December 31st to approximately 819 million, which is down 13% in the quarter, and now 22% from our peak, which is in line with our previous guidance, even in the face of rising interest rates. And our plans for resolving our remaining delay procedures to take back as REO, including bringing in the sponsorship of approximately 40 to 50 percent of this report, with the other 40 to 50 percent of the paywall for being modified in the future. This should put our REO assets on our balance sheet in a range of $400 to $500 million, dollars with another roughly 150 to 200 million that we will have brought in these sponsorship to operate. And this 400 to 500 million of REO assets on the heavy lifting portion of our loan book we estimate will take approximately 12 to 24 months to reposition. The performance of these assets has been greatly affected by poor management and from being undercapitalized. Today these properties have an average occupancy of 35 percent and an estimated NOI of around 7 million, which is very low and will temporarily affect our earnings. We believe there's great economic occupancy for us to step in and reposition these assets and significantly lower the occupancy to around 90 percent and NOI to approximately 30 million over the next 12 to 24 months, which will increase our future earnings significantly. We are working exceptionally of resolving our delinquencies, as I mentioned, has been significantly affected by the current rate environment. If rates come down sooner, then we expect it will have a positive impact on our ability to convert non-interrupted earning assets to income-producing investments earlier, which will be creative for future earnings. This is a challenging and demanding work, and despite the increasing headwinds, I am very pleased with the progress we have made today. In our balance sheet lending platform, we have had an active fourth quarter originating 370 million of new bridge loans and 36 million of preferred equity investors behind our agency originations. As we said in our last call, we have started to ramp up our bridge lending program to take advantage of the opportunities we are seeing in today's market to originate high-quality, short-term bridge loans and generate 411 returns on our capital in the short term, We want to continue to build up a significant pipeline in future agency deals, which is a critical part of our strategy. Depending on the innovative rate environment, we believe we can originate $1.5 to $2 billion on Bridge Mall's product in 2025 and enhance our lending returns to increase the efficiency we've seen in the securitization model with our commercial banks. Another major component of our unique business model is our capital-life agency plan advantage, allowing us to continue to deal up our balance sheet to generate significant long-dated income streams. We have been a significant player in the agency, the Danny May Dust Lender, for 18 years in a row, coming in at number six in 2023 and eight for 2024. We had a very strong fourth quarter, originating $1.35 billion of new agency laws, which is the top end of the range that we guided in the last quarter. We explained that our origination targets were $1.2 to $1.5 billion on the rain environment. And despite the significant uptick in rates in the fourth quarter, we were well above what we had anticipated. We closed down 2023 to where they are today. We are experiencing a very challenging origination climate. And if they continue to remain elevated, it's likely a percent decline to 3.5% before converting our balance sheet loans into Asia. We generated $900 million of payoffs and $530 million, or 59% of these loans being refinanced. It's actually 65%, or $1.6 billion of the $2.5 billion multifamily balance sheet runoff in H&T production. This is on top of the $3 billion of multifamily runoff we generated in 2023 with a 56% recapture rate, as I stated earlier, with rates at these levels of balance sheet loans. We continue to do an excellent job in growing our single-family rental business. We had a strong quarter with $1.7 billion in new loans in 2024, which is our best year yet, and was well above our 2023 production of $1.2 billion. We have now equipped $5 billion in production in this platform to date, and we're very excited about the opportunity on this platform to make it a bigger contributor to our overall business. This is a great business as it offers us free terms on our capital through construction, to break in permanent lending opportunities, generates strong lending returns in the short-term while providing significant long-term benefits. We'll continue to make stable restraining. Over the edge of time, we'll remain-
Our forecast of distributable earnings for 2025 clearly rates of future changes in the interest rate environment will more certainly dictate whether we can grow our earnings sooner than planned. As a direct result of the short salary reports, which is something we expect will continue with the specific share going forward, and another 15 loans totaling $470 million, and approximately $206 million of these loans would require borrowers to invest additional capital to recap their deals, thus providing some form of temporary rate relief for paying the cool feature. The pay rates were modified on average to approximately 5.5%, with 2.3% of the residual interest due being deferred until maturity. 140 million of these loans with the link with last quarter are now current in accordance with their modified terms. In the fourth quarter, we accrued 18.7 million of interest related to all modifications, pay-in and cool features. 7.6 million is related to modifications that were completed in years prior to 2024. And 1 million is on MEs and PE loans originated in 24 behind agency loans that have a pay-in and cool feature as part of their normal structure. This leaves $10 million worth of accrued interest in the fourth quarter related to modifications of bridge loans in 2024, $1.5 million of which is related to our fourth quarter modifications. The table summarizing all of our 2023 and 2024 material modifications and related accrued interest on these loans is detailed in our 10-K, which we expect to file later this afternoon. Our total delinquencies are down 13% to $819 million in September 31st, compared to $945 million in September 30th. These delinquencies are made up of two buckets, loans that are greater than 60 days past due and loans that are less than 60 days past due who are not recording interest income on unless we believe the cash we receive. The 60-plus delinquent loans, or NPLs, were approximately $652 million this quarter compared to $625 million last quarter due to approximately $128 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, and $153 million of additional defaulted loans during the quarter, which was largely offset by $134 million of payoffs and modifications and $120 million of loans taken back as REO. The second bucket consisting of loans in less than 60 days past due came down to $167 million this quarter from $319 million last quarter, due to $157 million in modifications and runoff, $128 million of loans progressing to greater than 60 days past due, which was partially offset by approximately $133 million of new delinquencies during the quarter. And while we are making good progress in resolving these delinquencies, At the same time, we do anticipate that we will continue to experience new delinquencies, especially in this current rate environment. In accordance with our plan of resolving certain delinquent loans, we have foreclosed on some real estate and we expect to take back more over the next few quarters, as Ivan guided to earlier. The process of taking control and working to improve these assets and create more of a current income stream takes time, which is even more challenging in this climate. Additionally, we have been very successful over the last few quarters in collecting back interest owed when we would modify certain loans. A good portion of our remaining delinquencies are more of a heavy lift for foreclosure and repositioning over time, which will likely result in less back interest being collected going forward on workouts. These are some of the reasons we're guiding to reduce earnings in the near term. In the fourth quarter, we took back 120 million of REO assets. We've been highly successful at bringing in new sponsors on certain assets to take over the real estate and assume our debt. This strategy is a very effective tool of turning debt capital and a non-performing loan into an interest earning asset, which will increase our future earnings. In the fourth quarter, we accomplished this on two REO assets totaling about $70 million, which were accounted for as sales and new loans. The other $51 million of REO is related to one asset that we took back in the fourth quarter that we subsequently decided to flip to a new sponsor and provide a new loan. We closed on this deal yesterday, and the purchase price was at our net carry value of $45 million, which is net of $5.7 million in specific reserves that we took on this asset in 2023 and 2024. As a result, we will have a one-time realized loss in the first quarter of approximately $6 million, which we've already reserved for and is reflected in our book value, and we will now have a performing loan, which will add to our run rate of income. We believe we've done a very effective job of properly reserving for our assets over the last two years. We did not incur any material losses in 2024. We are expecting to have some realized losses in 2025 through similar executions on REO assets and by repositioning certain loans with new sponsors which we expect will be in line with our prior reserves on these assets. The timing and magnitude of these losses is hard to predict at this point but once we know a transaction is likely to occur we will continue to signal that result ahead of time if possible and again please keep in mind that these potential losses reflect the reserves we've already taken which demonstrates how prudent we've been in recording the right level reserves on our loan book. As a result of this environment, we continue to build our CECL reserves, recording an additional $13 million of specific reserves in our balance sheet loan book in the fourth quarter. And again, we feel we've done a good job of putting the right level of reserves in our assets, which is evident by transactions we have been able to effectuate to date at or around our carrying values net of reserves. It's also important to emphasize that despite booking approximately $170 million in CECL reserves across our platform in the last two years, $135 million of which was in our balance sheet business, we saw a very nominal decrease in book value of around 2%, while our peers experienced an average book value decline of approximately 20% over that same time period. Additionally, we are one of the only companies in our space that have seen significant book value appreciation over the last five years with 26% growth during that time period versus our peers whose book values have actually declined an average of approximately 25 percent. In our agency business, we had an exceptional fourth quarter despite headwinds from higher rates. We produced 1.4 billion in origination and 1.3 billion in loan sales with very strong margins of 1.75 percent for the fourth quarter compared to 1.67 percent last quarter. We were also incredibly pleased with the margin to be generated in 2024 of 1.63 percent which exceeds 2023's pace of 1.48 percent by 10 percent and we recorded 13.3 million of mortgage servicing rights income related to 1.35 billion of committed loans the fourth quarter representing an average MSR rate of around one percent which is down from 1.25 percent last quarter due to a higher mix of Freddie Mac loans in the fourth quarter, which contained low servicing fees. Our fee-based servicing portfolio also grew 8% year-over-year to approximately $33.5 billion December 31st, with a weighted average servicing fee of 38 basis points, an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $127 million gross annually. As Iva mentioned earlier, the 100 basis point decline in short-term rates has reduced the earnings on our cash and escrow balances. We are now at a run rate of between $80 and $85 million at $1,125, compared to approximately $120 million that we earned in 2024, or a $35 to $40 million reduction, which will affect our 2025 earnings. In our balance sheet lending operation, our $11.3 billion investment portfolio has an all-in yield of 7.8% December 31st compared to 8.16% at September 30th, mainly due to a decrease in SOFR during the quarter. The average balance in our core investments was $11.5 billion this quarter compared to $11.8 billion last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield of these assets decreased to 8.52% from 9.04% last quarter, mainly due to a reduction in SOFR, which was partially offset by more back interest collected in the fourth quarter on loan modifications and paydowns. Total debt on our core assets decreased to approximately $9.5 billion at December 31st from $10 billion in September 30th, mostly due to paying down CLO debt with cash in those vehicles in the fourth quarter. The all-in cost of debt was down to approximately 6.88% at 1231 versus 7.18% at 930, mostly due to a reduction in so far, which was partially offset by lower rate debt tranches being paid down from CLO runoff and the new $100 million unsecured debt instrument being closed in the fourth quarter. The average balance on our debt facilities was down to approximately $9.7 billion for the fourth quarter compared to $10.1 billion last quarter, mainly due to paydowns in our CLO vehicles from runoff in the fourth quarter. And the average was the funds in our debt facilities was 7.10 percent in the fourth quarter compared to 7.58 percent for the third quarter again from a decline and so forth. Our overall net interest spreads on our core assets was relatively flat at 1.42 percent this quarter versus 1.46 percent last quarter and our overall spot net interest spreads were 0.92 percent December 31st and 0.98 percent September 30th. And lastly, and very significantly, we've managed to deliver our business 30% during this dislocation to a leverage ratio of 2.8 to 1 from a peak of around 4.0 to 1 two years ago. That completes our prepared remarks for this morning, and I'll now turn it back to the operator and take any questions you may have at this time. Madison?
Operator
Thank you. And as a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. And we'll take our first question from Steve Delaney with Citizens J&P. Please go ahead.
Good morning, Ivan and Paul. Thanks for taking the question. And look, for starters, just really appreciate you guys being up front with us today about your expectations for the dividend in 2025. It's just a lot easier for the market to hear that today than, you know, in March when you have to declare first quarter. So thank you for that clarity. Ivan, you talked about some resolutions involving outside money. I'm curious, you know, this opportunity that starts with your stress bridge loans and eventually just it rolls into REO. So I think we're talking about the same investment opportunity. Are you seeing institutional money, you know, big money, fresh money, looking at this space, you know, as a unique, maybe once in a decade opportunity? Is that money coming in? And if it's not coming in, you know, do we need that to get this problem cleaned up in the next one to two years?
So I'm going to bifurcate my response because you have, and add a little, in the third quarter or fourth quarter when the 10-year and the 5-year drop considerably, you were seeing a real level of activity re-entry into the space. And then right prior to the election, as you know, the 10-year jumped from 360 to 480. I think everything went on pause. So there's a bit of a pause there. There are two types of collateral that we're looking at, I mentioned in my comments. The ones that we effectively transition to these sponsors, and there's plenty of capital and plenty of entrepreneurs, you know, people who have access to institutions, and there's plenty of activity. The more difficult part is the ones where the heavy lift are, which is kind of where it takes time to get your hands on those assets. Sponsors are kind of rascals. They steal the cash flow, don't manage those assets. And they get brought down to a level where we need to bring in our own capability, get those up to speed. Once they're up to speed, there'll be a lot of demand for them. But I think there's a little bit of a pause in the market, and that's really reflective of our comments. I'm not sure why everybody's so excited. I went to NMHC about a month and a month and a half ago, And I was shocked at how people were thinking they're going to have a great year in light of the increased rate environment. So I think a lot will have to do with where rates settle in. You know, clearly we're all running off to 50. If you see rates go down to where they were, you'll see tons of money flood back into space. And I'll give you some of our experience on our last quarters, the refinance volumes, the activity was starting to pick up. So it's very much great.
So I'm hearing you say the outside money right now as you sit today, you rework a bridge loan and there's new sponsors, there's people willing to step in there. The heavier lift, if you've got an REO, 30% lease, needs further renovation, whatever, that's something you feel like your team at Arbor is better equipped to take that property over, manage the property, and then look to sell that property in 12 to 24 months. Am I hearing you clear on that? That's correct.
That's correct. Every time we get our hands, and these are the ones where it's more difficult to pay your hands on. It's just like add players in the market, using the legal system, delay the process, steal the cash flow, and how to manage the assets. So every single asset that we take back shows how we can get it from where it is today, monthly, monthly, monthly, increase the NOI, put in the right capex, get the stuff to speed. And our guess is we're going to, you know, be able to sell those assets somewhere between 12 and 24 months, by God you wish, once we spend it.
Quick one for you to close out. In December, Stitch upgraded Arbor's primary servicing rating to CPF2+. It looks like a large focus of that was on your agency servicing. But to any extent, did that servicing upgrade reflect the work you were doing on the bridge loans in your CLOs?
I don't have the definitive answer, but I do believe you are correct, Steve, that the majority of that rating is not all that has to do with how we're servicing the agency book. It may have some impact on the balance sheet, but we were just upgraded because of the quality of servicing shop we have. We've made a lot of investment in that division, both from a technology perspective and staffing perspective, and our rating just keeps getting better and better, which I think, you know, should not be overlooked, as you just mentioned. I'm glad you pointed that out.
Steve, getting back to your comment, I was just reflecting on in terms of the assets. We tried very well the assets that we put to the sponsors, and the level of improvement and you're taking assets that were probably having occupancies in the mid-70s, you're well on their way to 90. The fact that the cosmetics and improvements are remarkable. So when we're able to transition to new ownership, we end up with an asset that becomes extremely more valuable in a very, very short period of time because we're able to bring our expertise to the table where that expertise and capital we're lacking. The stuff that we retain, our goal is to get these assets in that position in 12, you know, 18 months and then bring in those sponsors so we can get the right valuations. We have a great track record on it. In fact, we have only come back two years ago, which is 70% occupied. We're just selling it right now for, you know, probably closer, more than the debt. We've got the occupancy up to 93%. So that's kind of standard for how we run our business.
Thank you both for the call this morning. Thanks, Stephen.
Operator
Thank you. And we will take our next question from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning. I wanted to touch on modifications from last year. I think it was around $4 billion, you know, a lot of which was done in early part of the year, maybe when borrowers and everybody had a different interest rate outlook. You know, can you talk about how you expect those modified loans to perform over $25, You know, were those modifications, you know, how many were somewhat reliant on some relief from rates over the course of 25? And how do you expect, you know, are those modifications typically 12 or six-month duration extensions? Or how do we think about those modified loans maturing over the course of this year?
I think it's important to have a little bit of an overall view. keep in mind that we have run off in our portfolio over the last two years of over 6.1 billion, and that's when we needed to refinance our sale or other people taking them out. So, the amount has been dramatic. With respect to the modified loans, keep in mind bridge loans are short-term loans of nature, and they have a lot of tests, so it's very, very normal to modify a loan in this kind of rate environment and give people a little bit more runway to bring more capital. There was a period of time when sulfur was sitting at 530 when it dropped, it was a lot of relief for bars who brought white caps and their lifetime to give them more opportunity. So when we look at a modification of a loan, we take a look at whether the sponsor could bring more capital, whether the sponsor is doing a good job, and whether he has a capability to improve the performance of those assets. And the majority of those times, the supermajority of the cost, we track their performance and they're doing extremely well. There are periods of time when, you know, they don't quite do what they're supposed to do, and they could resolve in additional dependencies and takebacks, but on the whole, you know, the strategy has been extremely effective. But keep in mind that almost all our loans have recourse per day. So it's not like people can just hand back the keys. And there are many circumstances where we do take over loans. So for the most part, comments there.
And, Paul, could you touch on the servicing escrow balances again? I think you said $80 million to $85 million. But I want to make sure I understand the new level we should think about and kind of what's driving the change in that, what the components are driving that reduction.
Sure. So when I speak of earnings on our escrows and cash, it's two components. We lump it into one, but we can break it out. So we're sitting with, you know, $1.5 billion of escrow balances right now. And we have, you know, at year end, we had about $500 million of cash between cash on hand and cash in the CLOs. So that's called a $2 billion. And right now, so we're at, you know, under $430. We're earning slightly below that, probably about $415 is what we're earning currently. So if you take that $2 billion, multiply it by $415,000, you probably get $85 million both in earnings on the cash that we have on our balance sheet and in the vehicles and on our escrows. Last year, we earned $120 million between earnings on escrows and earnings on cash for two reasons. One, SOFR was higher throughout the year. Remember, SOFR has been dropping, so the full effect of the drop in SOFR is not in the 24 numbers. It will be in the 25 numbers. And our cash has come down, obviously, as we've used some of our cash to run our business. So that's the two components that are driving the 120 versus the 85. The one thing I will say is that's a number that's math. The one thing I'll say that will partially offset that is we are expecting, even though we're guiding to lower agency volume today, if rates stay where they are, we still believe our agency volume will eclipse our runoff in the agency business. So we will have some growth in the servicing portfolio that will partially offset that. But that's the math.
Great. I think I want to add to that slightly and reflect on a comment that I've given you before. We experienced 3.4 billion in certain interest rate environment that existed. In today's interest rate environment, we're forecasting if it remains at this 450 level to 475 or 480 level, numbers will be more like 1.5. However, if we go back to the interest rate, we'll rise up our numbers of runoff to about $3 billion. That's a material difference. And that material difference will result in a real rise in our agency. Now, what is really reflected in this elevated interest rate two-point is really going to be the five and the 10-year. If we see the 10-year and the five-year get back, it's the same trend that we were seeing.
Steve, one of the things I want to add is, you know, we were obviously very aware SOFR was dropping and we knew it would have an impact on our escrows and our cash. But I think that the real fundamental change over the last 90 days that was a little bit surprising to us, and we talked about this on prior calls, we knew, and you could look at our filings, it shows what the shock would be if rates go down or up on our cash and escrows and our portfolio. But we thought there would be, you know, a pretty big offset in the fact that the 10-year would be low and we'd have significantly more origination volume on the agency side. That is not happening right now. It may change, as Ivan said, with the rates, but that's the big change. So it's not a surprise to us that escrows and cash earnings go down with silver dropping. But we also thought we'd have a lower tenure, which is where we were last quarter, and we'd have a much more robust origination platform to offset that.
MR. Yep, yep. Appreciate the comments on that. And one last question regarding a new dividend level being determined you know i know the 30 to 35 uh guide for the quarterly distributable earnings you know are you going to base the dividend on that or will you look at kind of distributable earnings less pick income and think about the dividend closer to a cash earnings level how do we think about or how will you and the board think about determining that new dividend level thank you yeah so i think we will look at it as distributable with pick um but again we we we adjust as we go Just to give an example, we've modified $4.7 billion of loans in the last two years, as Ivan said in his commentary.
$2.4 billion of those have pay and accrual features, but we're only accruing on $1.7 billion of them. So there's another $500 million that we've decided not to accrue on. So we make decisions as we go along, and we adjust as we go along on whether we think we still should be accruing this or not based on value. But the ones we are accruing, we feel really confident we're going to receive. So we have those in distributable earnings. But again, none of this has been decided yet with the board. We need to see what we've done today is give you, as of today, where we think the short-term guidance would be. We need to see where the first quarter comes in. We need to see a couple more months of this market. And by May, when we're on our first quarter call, we'll have three months in the books and another month of market data. And we will base our dividend on what we think it looks like going forward, not just for one quarter. So we'll look at about 12 months and we'll say, wait, where do we think we get it to and where are we comfortable? Today was just a guide of a range of what we're seeing right now.
I mean, just to give you a concept, we're sitting with a billion dollars worth of loans in our pipeline that are interest rate sensitive. That can't close unless the 10-year drops to, you know, the four to four and quarter range. So I'm glad this couldn't change to the upside with the change in interest rates. But to be realistic, we don't want to mislead anybody. We want to take into consideration where this new elevated range may stay, this huge volatility with the election, as we know. And it seems like we're in a range, whether it be a quarter, two quarters, three quarters, or four quarters, we're not sure who adjusts accordingly. We think we're just responsible by laying out where this current rate environment is, which is different than where it's been.
That makes sense. appreciate the comments this morning thank you thank you thank you and we will take our next question from leon cooperman with omega family office please go ahead yeah i missed most this call because i had a conflict with another company i jumped off their call unless there's something said differently let me just say that i think that you guys have done a terrific job in managing through a difficult environment and i personally am offended by the cost of dealing with these short sellers you know because i think you've been extremely transparent here dealing with the with the investors no surprises here i think you've done a very good job of navigating the environment but let me ask you some questions rather than give you a shout out you know what's your confidence in your book value number one and secondly were you willing to use liquidity to your buyback equity if it drops below state of book value? What kind of return do you think you should earn on a recurring basis?
Relative to book value, I'm glad you asked that question because we've had a tremendous success in either having – when we modify our loan, I don't think it's highlighted on the account if any major modification to do reappraisals. Based on those reappraisals, we're for reserves that necessary. We've been right on the mark, so extraordinarily the reserves that we take.
I just think the book value where it is today, Lee, if the market stays where it is today, we may have to take some more level of reserves on certain assets as we move through this higher for longer scenario, and it may ding book value a little bit, but we don't think it'll be material because we think we have provided the right level of reserves to date. So I think it could go down a little bit, but I don't think it goes down significantly, and our track record has been that it has moved down significantly over the last two years in a very difficult market. As far as returns on equity, I think, yeah, it depends on where we set our dividend. But if you look at our range, on the low end of the range, we're probably 10% or 11%. On the high end of the range, we're 12% return on equity, right, Ivan, given where it is. So we did a 14 for 2024. I think we did similar for 23. I think 10% to 12% is realistic. And I think there's upside on top of that if this market doesn't stay where it is longer than we're expecting, right?
And, you know, in terms of buying back stock and things at each point, keep in mind that we have a very, very vibrant business, specifically on the SFR side, generating outside returns. We have to fund that business. A construction lending business, we have to fund in addition. We're expected to do one and a half to two billion of bridge loans. So we have a $5 billion worth of growth business, which is important to us. Surely we'll have $5 billion to have a runoff, and we'll use some capital to not runoff. But we have to be sensitive to keep our business growing. We've done an outstanding job of that, and that's where our focus is going to be. Teal returns on a new business is in the mid-teens, which is very accretive.
Out of 10 or 11 bucks, you would not buy it?
It would be a strong possibility. I think what you have to do is if you ask me if I would buy it, watch what, you know, listen to what I say and watch what I do. So I've always been very forward and covered in my own actions. I'm the largest shareholder of me, and I'm sure plenty of management. I'll be active in the spot.
Congratulations. You did a very good job in the short sales of your shady sales for better understanding the quality of the earnings and the quality of the management.
Well, you know, Leon, you said a lot more than I could usually say about the short sellers, but anyone who cares to take their time can look up the history of the problems of the short sellers and their founders, and, you know, they can look at the reports and see the issues they've had with the regulators and the courts around the world, and they can take their comments for what they're worth. You've done your research, I've done mine, and we'll let our rest in support of it.
Gotcha. Well, good luck. Thank you very much. Appreciate your performance.
Operator
Thank you. And we'll take our next question from Rick Shane with J.P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions this morning. Sort of two lines. First, a little housekeeping. Paul, you mentioned $500 million of non-accruing loans. Can we just go through in the 30 to 35 cent guidance, what's the drag from non-accruals? What's the contribution from PIC?
And was the three to five cents that you cited for legal and regulatory quarterly and can you help us on sort of understand the context of that expense yeah no so the three or five cents is annually you know we've run we've run probably two cents to two and a half cents already in 2024 and we're expecting that number will just be the same number but for a longer period of time because it really wasn't ramping up until the second a quarter. So I would say that it's three to five cents for the year on the cost between consulting, legal, administrative, related to the short sellers if it continues. That's our view. And then, you know, as far as the drag on earnings, I think we have $819 million of loans earning zero. What we've commented is that we do think in this environment we'll resolve some and we'll have some new ones. I think our track record has been that we We still think, even in this rate environment, we'll be able to make progress in the 10% range. We did 13% this quarter, which we were impressed with, but it will also impact us on the REO side, because I think the big temporary drag, Rick, is that, as Ivan alluded to, we already took back $100 million of loans in the first quarter, and we have $50 million on our books right now that aren't legacy. We have a hundred, and to look at the numbers, we have 176 million in REO on our balance Forty-five million is a loan we flipped yesterday that I mentioned, so now you're down to 131. Eighty million of that are legacy assets we've had on our books before the crisis, and we're working through to try to dispose of them. So about 50 to 55 is due for this crisis. We took back another 100 in January already, so we're up to 150, and as Ivan said, we're probably going to end up between $400 and $500 million. So the drag is that $400 to $500 million has an NOI of about $7 million, but certainly not nearly what it would have been had it been paying the current interest rates. And then that's going to be temporary until we can reposition those assets, and then hopefully we'll have a significant upside in the future, but that's probably 24 months out. So I think the drags from where we are now to where we're guiding to $0.30, $0.35 sense are these are the components reduced agency origination volumes which obviously hit earnings right the full effect of sulfur on your escrows and your cash balances offset slightly by servicing the full effect of the delinquencies for for a longer period of time than they've been outstanding and the drag in the reo assets will we have some positive offsets yes we'll probably be you know largely more efficient through the securitization markets. And obviously, if rates change, we can pick up volumes and have a better performance on our assets.
But those are kind of the components. And how much of the quarterly 30 to 35 cents is from PIC?
I don't have those numbers here, but I would say it's probably going to be similar to what we've had. It's probably 10 to 15 million a quarter.
Okay, great. Thank you. And then, pivoting, that was sort of the housekeeping stuff. In the quarter, you guys did $35, almost $36 million of PREPS and MEZ, 97 for the year. Are those part of – is that loans on outside investments opportunistically, or is that related to the structured portfolio where you're providing additional capital to existing borrowers? And I'd love to relate that to some extent to the $130 million of capital contributed on the mods during the year.
Yeah. So I think they're a little different. We may be combining concepts, but so the $97 million that you referred to, if not all, the vast majority are not new investment opportunities there. Kraft and Mez were putting behind agency loans that are taken off our balance sheet. So what happens? The guy has a balance sheet loan, and he wants to convert it to a fixed rate loan, and depending where rates are, he'll come to the table. He'll be short capital because of the restrictions in the agencies on the debt cover and the LTV. And he'll bring to the table some money, and we'll put some money in the form of meds and PE behind him, which puts us in a better spot, right? Because if we were 80% LTV on a bridge loan that's struggling, and now he has a 70% LTV loan on the agencies, he had a kick in 5%, we had a kick in 5%. Our P.E. or M.E.S. is behind 70, not behind 80, right? So, and then they usually get about a 14% return, and then there's a pick on it because you have to give, you have to have the current pay has to be a debt cover like 110 through your M.E.S. and P.E. So, it's just a calculation of, like, some of the ones we did this quarter were 9, 10, 11% pay, and the rest was picked because we had good coverage through our P.E. I wanted to just add to that.
That's been a lull, of course, about this.
I really appreciate the clarification on that. It is helpful. And if I can just pivot to my very last question. So during the year you guys modded $4.1 billion, you took in $130 million of additional capital associated with that, which equates to about 3%. Can you put that 3% additional capital in the context of what you see, the decline in property values? How does that sort of match up in terms of, you know, how much property is actually down?
I don't understand your question.
So you had borrowers put in 3% in order to modify loans. And I think anecdotally, property values are down substantially more than that. So I'm kind of curious how you think about how much additional capital a borrower needs to put in in order to maintain an LTV.
Every case is different, Rick. Not all properties decline. Some improve. I can't answer your question in the macro. We take each situation, we evaluate the capital income put in, how the assets perform and how we're going to improve. So each one's different.
Hey, guys, thanks. I always appreciate you taking my questions. Thanks, sir.
Operator
Thank you. And we will take our next question from Jade Romani with KPW. Please go ahead.
Thank you very much. Can you discuss the lower cash balance in the structure of the business?
What drove the quarter-on-quarter decline?
And also, did you experience any margin calls?
Sure. So we did not experience any margin calls. We have great relationships with our lenders. In fact, Ivan could probably give some color that the market for commercial banks and securitizations is really, really strong right now.
So maybe it's a good time to comment on that. I'm sure you're aware the CLO market and the bank lending market has improved dramatically. And those are some of the benefits. Some of these other factors, the CLO market, I'm sure you've seen deals are getting done in the 150 to 175 range, as opposed to deals that two years ago couldn't get done and then spreads were in the 275 range. So we've seen huge efficiencies on that side. The commercial banks, our partners, and relationships we've had, they've been more and more aggressive at higher advance rates and lower spreads. And these things will translate to a better margin for us going forward. It's a lagging effect. It's all beginning over the last couple of months, and we should offset some of these negative issues.
And as far as the cash balance dropping, it's math, right? We had put on, as you saw, $377 million of bridge in our new product that we love. We funded up our SFR business, which continues to grow. So that requires cash. And obviously, the runoff has partially offset that. There's also timing on cash, right? When you are taking back an REO asset, you may have to buy it out of a vehicle, and then you re-lever it. So there's always timing on why those cash numbers move. But we're sitting at about $450 million of cash in liquidity today. And obviously, we've used some of that cash to grow the platform.
And then just the agency business cash balance, when you break out the different segments, is that more akin to corporate cash?
How fungible is that cash? yeah it's all fungible you just the agency business obviously generates cash it's capital white and then it gets you know moved up to the it's just the way you break out the segments but when you look at a company like ours and you're managing cash all of that cash is fungible and all of that is corporate cash lastly just on the gfc side have you gotten any putbacks I know JLO closed one.
Walker and Dunlop talked about what they've received. Be helpful to hear if you've received any loan putbacks.
We have not. We have not had a putback or had a buyback loan. Thanks a lot.
Operator
Thank you. And we will take our next question from Crispin Love with Piper Sandler. Please go ahead.
Thanks. Good morning, everyone. First, you had $307 million-plus of bridge originations in the fourth quarter, highest level in a long time, in line with your guys in the last quarter. Can you speak to expectations going forward in bridge as rates have backed up since September? And then do you have an outlook for agency originations for the first quarter?
The $370 million of bridge is a good quarter. As I mentioned in my comments, we're expecting to do about $1.5 to $2 billion for the year. and we expect it to move fairly evenly over the year. I think if short-term rates drop, you can see that number going up considerably, but that's the level that we think it's rate of iron.
And as far as your second part of your question, the reason we've given a 30 to 35 cent kind of guidance per quarter is it won't be linear, right? Certainly the first quarter or two, maybe on the lower end of that range, then it will grow from there. And a lot has to do with the fact that the agency business, given where rates are, is off to a slow start. So we're expecting a much lower first quarter in the agencies, and then we expect it to build from there for two reasons. One, historically, the first quarter is usually a slower quarter because a lot of people close all their loans at the end of the year. And two, the back of a race has put some people on the sidelines. We've got a big pipeline. We've got a lot of loans ready to go. It's just a matter of convincing borrowers to transact at these levels, and a lot of them are still patiently waiting to see where the 10-year goes. So we are expecting the numbers to be much lighter in the first quarter, and then hopefully grow from there.
What you did see is a strong fourth quarter, not only with Auburn, but all agencies, the agencies themselves. If you look at the comments I had, we've even done more, but the agencies were backed up. And when rates jump, we have this huge pipeline sitting on the side. So, the first quarter is going to be, you know, a little light because so much was done today. It's just a ton sitting on the side of the balance sheet on the pipeline. And if you do see a meaningful move for the 10-year down, you'll see that number increase substantially.
Yeah, and it wouldn't be surprising if the agency business for the quarter was, you know, $600 to $800 million. It all depends on what's going to happen. Great. Thank you. I appreciate all the color there. And then just last one for me, can you provide any update on the DOJ-SEC investigation from last year? And you mentioned legal fees related to short seller reports and your prepared remarks. Does that also include legal fees related to these investigations as well?
Well, as you know, we don't comment on regulatory inquiries with respect to the elevated cost. We are double and triple as we're going to meet.
Operator
Thank you. And it appears that we have reached our allotted time for questions. I will now turn the program back to Ivan Kaufman for any additional or closing remarks.
Well, thank you, everybody, for your time. We expect the next year to be a little different given this carbon rate environment. We appreciate your participation for the call. And thank you, Rachel, for this adjusted interest rate environment to be extremely strong.
Operator
Thank you. this does conclude today's presentation thank you for your participation you may disconnect
