Good morning, ladies and gentlemen, and welcome to the second quarter 2025 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 queue, please press star 2. Please be advised that today's conference is being recorded. If you should need any operator assistance, please press star 0. I would like to now turn the conference over to your speaker today, Paul Eliano, Chief Financial Officer. Please go ahead.

Thank you, Stephanie, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 30th, 2025. 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-lifting 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 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. Listen as a caution 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 on today's call. As you can see from this morning's press release, we have another active and productive quarter as we continue to make substantial improvements on the right side of our balance sheet and significant progress in working through our delinquencies and REO assets, despite the challenging environment. First half of the year with many significant accomplishments, we recently completed our first high-yield unsecured debt offering, raising $500 million of capital that we used to pay off all of our convertible debt and added $200 million of additional liquidity to fund the growth in our platform. This is a tremendous accomplishment, especially in this environment, and we're very pleased to report that as part of this offering, we received a double B rating on our corporate credit from both Moody's and Fitch, reinforcing the quality of our platform and the value of our diversified business model. Clearly, having access to this highly liquid market will allow us to further diversify our funding sources and push out and stagger our long-term debt maturities and continue to grow our platform and drive strong returns on our capital. This was a transformational deal for the franchise, capping off a string of its significant capital market transactions totaling $2.5 billion that we successfully completed over the first half of this year. One of these significant transactions occurred earlier in the second quarter when we issued the first built-to-rent securitization in the industry, totaling $800 million with pricing that was well inside our warehousing lines and contains enhanced leverage and a two-year replenishment period, which allows us to substitute collateral when loans pay off. As I mentioned many times, we love the single-family rental business, and it provides us free terms on our capital through construction, bridge, and permanent agency execution. And this landmark transaction has now paved the way to building a security station platform that will only increase our leverage returns significantly, but will also drive substantial efficiencies with our bank lines now that there is a takeout to a CLO market. And building this type of securitization platform will allow us to scale up this business and gain market share as these efficiencies will further increase our competitive advantage in the space. These transformational deals, these two, combined with a $1.1 billion repurchase facility, which we closed in the first quarter with J.P. Morgan to redeem two of our CLOs are tremendous examples of our ability to continue to make substantial improvements to the right side of our balance sheet and drive higher returns on our capital. And given the strong securitization market and the highly constructive and liquid environment we are currently seeing with our commercial banks, we are confident we will continue to make meaningful progress in this area and create additional efficiencies that will help mitigate the drag from some of our non-interest earning assets. The last few calls, the prolonged elevated rate environment has created a very challenging climate that is affecting the agency origination business and ability for borrowers to transition to fixed rate loans and recap their deals. We continue to see a tremendous amount of volatility and uncertainty in the market that has resulted in large swings in the five-year and 10-year indexes at times, which we believe could continue in the short term, making it very difficult to predict where rates will go for the balance of the year. We will continue to monitor the market environment and the effect it will have on our business for the balance of 2025. And again, as we've discussed in the past, if we see a meaningful sustained reduction in the five- and 10-year interest rates, it will be a positive catalysts for our business by driving increased origination volumes and allow us to move more loans off our balance sheet, which will increase our earnings run rate and position us well for 2026. We continue to do an effective job of managing through our loan book, despite the fact that we've been dealing with elevated rate environment over three years now. To date, we've had great success in getting borrowers to recap the deals and purchase interest rate caps, as well as bringing new sponsors to take over assets, either consensually or through foreclosure. In the second quarter, we took back approximately $188 million of REO assets, $115 million of which we were able to flip to new sponsors and assume our debt. This brings our REO book to approximately $300 million as of June 30th. We do expect to take back additional assets in the future, which net of dispositions we estimate result in owning and operating approximately $400 million to $600 million in REO assets, which is slightly above our previous guidance of $400 million to $500 million. This is reflective of some of the recent trends we have seen this quarter. Turning now to our second quarter performance, as Paul will discuss in more detail, our quarterly results were in line with our guidance, with us producing distributive earnings of $0.30 per share. We anticipate that the balances of this year will continue to be challenging due to the significant drag on earnings from REO assets and delinquencies, and to the effect this prolonged higher interest rate environment is having on our originations business, all of which will make 2025 a transitional year, which is reflected in our current dividend. And as we successfully resolve these assets, and if we start to see sustained rate relief, we believe we were well-positioned to grow our earnings and dividends again in 2026. In our balance sheet lending platform, we are seeing an incredibly competitive landscape. There's a tremendous appetite for deals, and there's a significant amount of capital out there chasing transactions. We are seeing shops consistently compromising on credit and structure, which is not something we will sacrifice to win a deal. As a result, we are being highly selective and have closed about $100 million in the second quarter and $215 million in July, putting us around $700 million in volume for the first seven months of the year. The guidance we gave at the beginning of the year of $1.5 to $2 billion of bridge loan production for 2025 was based on the current environment as something we still feel we can accomplish. It is highly competitive out there, and whether we come in on the low end or the high end of the range will be dependent upon the market conditions and the interest rate environment, which, again, has been volatile and unpredictable. And, again, the bridge lending businesses are very attractive to us as it generates strong leverage returns on our capital in the short term while continuing to build up a significant pipeline of future agency deals, which is critical to part of our strategy. And if we can continue to take advantage of the efficiencies and the securitization mark with our commercial banks, we can drive higher-level returns and increase returns on our capital substantially. In the agency business, we originated $850 million of loans in the second quarter and $1.5 billion for the first six months of the year. We have an incredibly strong July, originating an unprecedented $1 billion of agency loans, which includes a large deal that we have been working on for several months. We also have a very large pipeline, and we believe we could result in originating approximately $2 billion in the third quarter, which would be one of the single largest production quarters in our history. We are very fortunate to have such a resilient originations network with a very loyal borrowers, which allows us to capture some large off-market transactions, despite an extremely challenging market. And these tremendous results will put us in a position to meet and possibly beat our guidance for 2025 of between $3.5 and $4 billion of origination volume. We continue to do an excellent job in growing our single-family rental business. We had a strong second quarter with approximately $230 million in new business, and our pipeline remained strong. This is a great business as it offers three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong levy returns in the short term while providing significant long-term benefits by further diversifying our income streams. We continue to have great success in executing our business plan, converting another $200 million of construction loans into new bridge loans this quarter and $335 million already for the first six months of the year. And again, with the recent CLO we discussed, combined with enhanced efficiencies we are seeing in our bank lines, we are generating mid-to-high returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up the business. We also continue to make great progress in our construction lending business. We believe this product is very important for our platform, and it also offers us returns on our capital to construction, bridge, and permanent agency lending opportunities and generates mid-to-high returns on our capital. We closed $265 million of deals in the first six months and closed another $144 million in July. We also have a strong pipeline with roughly $100 million under application and $400 million of additional applications outstanding and $500 million of deals we are currently screening. And given this strong progress, we feel we will easily beat the guidance we gave of $250 million to $500 million of production for 2045, and we are way ahead of schedule for the first seven months of the year. In summary, we had a very active and productive first half of the year with many notable accomplishments. We continue to execute our business plan very effectively and in line with our objectives and guidance. Clearly, there has been a tremendous amount of volatility in this space, especially as it relates to our outlook for short-term and long-term rates. If the rate environment improves, it will have a positive effect on our business and outlook moving forward. Additionally, we have made great tries in improving the right side of our balance sheet through the securitization of public debt markets with our banking relationships. will continue to be a positive catalyst. As I mentioned earlier, we view 2025 as a transitional year in which we will work exceedingly hard to successfully resolve our REO assets and delinquencies providing a strong earnings foundation which we can build upon in 2026. I will now turn the call over to Paul to take you through the financial results.

Okay, thank you Ivan. In the second quarter, we produced distributable earnings of $52.1 million or $0.25 per share and $62.5 million or $0.30 a share, excluding $10.5 million of one-time realized losses in the sale of two REO assets in the second quarter. And the $0.30 a share of distributable earnings translates into a 10% ROE for the second quarter. In the second quarter, we accrued an additional $10 million of net interest on paying accrual loans. However, we only increased our interest receivable related to these loans by approximately $3 million during the quarter, mainly due to some loans that either repaid in full or had large paydowns, in which we received $7 million of back accrued interest that was outstanding on these loans. And in July, we also received accrued interest of around $7 million related to a bridge and mezzanine loan we had on our books on the same property that paid off in full. We had $187 million of loans on this asset, which was repaid with $167 million agency loan that we recaptured, an outside preferred equity that came in through the borrowing group. This is a perfect example of a tremendous execution where we generated strong returns on our invested capital, recaptured the agency loan with a much lower detachment point, and recouped all of our invested capital and back accrued interest. Our total delinquencies came in at $529 million on June 30th, compared to $654 million at March 31st. 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 that we're not recording interest income on unless we believe the cash will be received. The 60-plus state delinquent loans, or NPLs, were approximately $472 million this quarter compared to $511 million last quarter due to approximately $62 million of loans that we took back as REO, $36 million of modifications, and $21 million of payoffs during the quarter, which was partially offset by $79 million of additional defaults during the quarter. The second bucket consisted of loans that are less than 60 days past due came down to $57 million this quarter from $143 million last quarter due to $48 million in modifications and $48 million that we took back as REO, which was partially offset by approximately $10 million of new delinquencies during the quarter. And while we're making steady progress in resolving these delinquencies, we do anticipate that we will continue to experience some new delinquencies, especially if the current rate environment persists. In accordance with our plan of resolving certain delinquent loans, we've continued to take back assets as REO, and we expect to take back more over the next few quarters, as Ivan The process of foreclosing on and working to improve these assets and create more of a current income stream takes time, which again will temporarily impact our earnings. In the second quarter, we took back $188 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 at turning dead capital in a non-performing loan into an interest-earning asset, which will increase our future earnings. We sold $115 million of these assets in the second quarter, and we're in the process of bringing in new sponsors on another $40 million of REO assets, which we hope to close by the end of the third quarter. We recorded an additional $16 million of loan loss reserves on our balance sheet loan book in the second quarter, $6.5 million of which were specific reserves, with the remaining $9.5 million being general CECL reserves as a result of changes in the outlook on real estate values from the outside service providers we used to assist us in determining our loss reserves. And again, we believe we've done a good job of putting the appropriate level of reserves on our assets, which is evident by the transaction we've been able to effectuate to date at or around our carrying values net of reserves. In our agency business, we had a solid second quarter, and as Ivan mentioned, we are expected to have an exceptional third quarter as well. We produced $857 million in originations and $807 million in loan sales in the second quarter, with very strong margins of 1.69%. We also recorded $10.9 million of mortgage servicing rights income related to $853 million of committed loans in the second quarter, representing an average MSR rate of around 1.28%. Our fee-based services portfolio grew to approximately $33.8 billion at June 30th, with a weighted average servicing fee of 37.4 basis points and an estimated remaining life of six and a half years. This portfolio will continue to generate a predictable annuity of income going forward, around $126 million gross annually. In our balance sheet lending operation, our investment portfolio grew to $11.6 billion at June 30th from origination to outpacing runoff for the second straight quarter. Our all-in yield on this portfolio was 7.86% at June 30th compared to 7.85% at March 31st, mainly due to taking back non-performing assets as REO, which are separately stated on our balance sheet, which was partially offset by some new delinquencies in the second quarter. The average balance in our core investments was $11.5 billion this quarter compared to $11.4 billion last quarter. The average yield on these assets decreased to 7.95% from 8.15% last quarter, mainly due to less back interest collected on our portfolio and some additional delinquencies in the second quarter.

Total debt on our core assets was approximately $9.6 billion at June 30th.

The all-in cost of debt was approximately 6.88% at 6.30 versus 6.82% at 3.31, mainly due to slightly higher rates than our legacy CLOs from lower rate debt tranches being paid down with runoff in the second quarter. The average balance on our debt facilities was approximately $9.5 billion for the second quarter compared to $9.4 billion in the first quarter, mainly due to funding our second quarter growth. The average cost of funds on our debt facilities was 6.87% in the second quarter compared to 6.89% for the first quarter, excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet and therefore not included in our total debt on core assets. The slight reduction in the average cost of funds was mostly due to the full benefit of lower rates on the new JP Morgan facility that we closed in the first quarter as compared to the CLOs that we redeemed. Our overall net interest spreads in our core assets was down to 1.08% this quarter from 1.26% last quarter, largely due to more back interest collected last quarter on delinquent loans, combined with a few new non-performing loans in the second quarter. And our overall spot net interest spread were 0.98% at June 30th compared to 1.03% at March 31st. Lastly, and very significantly, we've managed to delever our business 25% during this very lengthy dislocation to a leverage ratio of 3 to 1 from a peak of around 4 to 1 nearly three years ago. And as Ivan mentioned, in early July, we issued our first unsecured rated debt deal, which will now provide us with a significant pocket of new institutional capital, allowing us to transform our balance sheet and fund more of our business with unsecured long-term debt. That completes our prepared remarks for this morning, and I'll now turn it over to the operator to take any questions you may have at this time. Stephanie?

Thank you. As a quick 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 you to pick up your handset for the best sound quality. Our first question will come from Steve Delaney with Citizens JMB.

Good morning, and thanks for taking the question. First question, I guess, the drop in net interest income from $75 million in the first quarter to $69 million. Can you just explain if there were any unusual items in there? Was it reversals when you took things into foreclosure? Just any color there. And I apologize if I was trying to take good notes, but I probably didn't. You may have mentioned it, and I didn't get it down. Thank you.

No, Steve, it's a great question. So, yes, there's a couple of items. One, we had a few more delinquencies in the second quarter, as I mentioned in my commentary. We also had a little less back interest collected on previously delinquent loans. Obviously, as they move through the life cycle and become further and further delinquent, and we're lining it up to take them out as REO or reposition them, the chances of getting back interest get smaller and smaller as we're taking those assets back. So that had a little bit of an impact. But to your point, and as I mentioned in my commentary, we had recorded net new paying accruals of about $10 million for the quarter. It would have been about $15 million, but we reversed $5 million of paying accrual, and $3 million of that were on loans that we foreclosed on, one of which we flipped at a loss this quarter that we mentioned in our commentary. So we do spend time every quarter looking at the performance of our assets, and depending on where things are with a particular property and a particular sponsor, we may make decisions to reverse certain back interests. And we did that again this quarter to the tune of $5 million, and that's really what's driving that difference.

And it sounds like you're being very proactive trying to move five-rated loans into REOs so you control the situation. And $365 million now, you know, more than double $176 million at the year end of 2024. Paul, do you have some idea just where that might peak out and how high could that figure go over the next two quarters before it starts rolling down? And I know you're moving some off as you did this quarter, but where should it affect the peak?

Yeah, so Steve, let me give you a macro outlook in terms of how we're approaching it. As I said in my commentary, we're doing 2025 a transitional year. So we want to try and accelerate this process as much as we can and get all of this behind us as much as possible behind us. Clearly, the non-performing loans is a bit of a drag. We've seen a little bit of a recent phenomenon, and we've expanded our potential REO by about $100 million, and it's a little bit of a different outlook. A lot of our REO that we have, we've mentioned, are 12 to 24 months hold, but we're seeing loans that are reasonable occupancies well above 80, like in the 85 area, where the sponsors are basically out of capital, and we feel without them putting in additional capital to continue with the unit turns and keep the assets up or buy rate caps, we're making decisions now that we're better off facilitating the disposition of those assets and bringing in new sponsors. So as a result, there will be on our books for a shorter period of time as we go through those foreclosures, maybe 90 to 120 days. It doesn't have much to do with those assets, so there'll be a little bit of a drag, and we may bubble up a little bit more in REO, but it's a lot lighter touch, and we're doing it at or about where these assets are marked on our balance sheet. And also, when we do that, as I previously mentioned, we end up with a lot of recourse liability is sponsored, which we feel will create additional income in the future which takes time to collect. So we've adjusted our philosophy of being a lot more aggressive, looking at this year as a transitional year, and really taking reposition more aggressively.

Got it. Thank you both for the added color. Thanks, Steve.

Thank you. We'll move next to Jade Romani with KBW. you?

Thank you very much for taking the question. We've seen tighter lending spreads, as I think you noted in your comments, and a pickup in theory capital markets activity with lenders across the board being much more active, including the GSEs, and multifamily still remains in favor, broadly speaking. So the question is if this is translating into Arbor's portfolio via increased interest from outside parties in the REO book, in the sub-performing loan book, and also in an uptick in repayment activities. Just if you could comment on that, that would be great.

So, you know, clearly that has a lot to do with the perception of where interest rates are. As you can see, rates are moving down. Every time rates move down, it creates an opportunity to people get it to fix rates. There is a tremendous amount of dollars chasing distress deals. And then when we do have a deal that's in the distress, we have multiple bidders. And it's a very, very competitive landscape. But as rates move down, all of that, as I said in my commentary, will be in our favor. Even as a small move like today of, you know, over the last maybe seven days of a 20 basis point drop in the five-year, I can tell you we're converting, you know, a couple of hundred million dollars off our balance sheet today and tomorrow just with that move. So that will accelerate a transition for people and an attraction of capital. And without a question, multifamily, the asset class has always been a great asset class. There's been a dislocation, but we feel it's extraordinarily resilient, and we're seeing a lot of money into this space.

I was also wondering if you think that there's an opportunity for Arbor to own key assets within the portfolio, if you've identified any assets that seem attractive, because we know there's a shortage of affordable housing in the market, and the outlook probably will improve for this asset class, you know, post the current period of elevated delinquency and non-performance.

Yeah, we're not afraid. You know, historically we've done a great job of taking back assets, doing extraordinarily well on them on our balance sheet, and at the appropriate time selling them. So clearly it's within our philosophy and capability to do that. So when we do take back these REOs, we feel we can improve them, manage them, and get great execution. So I think giving guidance to $400 million to $600 million of assets owned, when we get to a certain level, we make a decision whether it's optimum to sell it. But we do believe in workforce housing. We think that a lot of these assets have been capital-starved and under-managed. and bringing in the right management and the right amount of capital to reposition them is not only a good opportunity to get full realization on our debt, but hopefully do better than that as well.

Thanks. And on the GSE side, could you comment on credit trends within that portfolio? We did see the delinquencies pick up.

Yeah, I think across the board and in the agencies, you've seen a level of increase in delinquencies. I think we're at the bottom of the cycle, and I think that every time you're at this bottom of the cycle, you'll see them peak. I've met with the agencies, I've been with them. They've taken about a record number of REOs relative to the last several quarters. They feel they're peaking as well. But I think borrowers are at that peak stress point, and they're running out of capital. So I think you're in this period of time where you've seen a bit of a peak. We think that will continue through the next couple of quarters. And clearly, what happens with interest rates has a major impact on that. As rates go down, you know, people find a way to sell their assets or attract new capital. But we definitely are in the peak of it. And I think the next two quarters will reflect a little bit of what's happened in the last quarter.

Thank you very much. Thanks, Shady.

Thank you. We'll move next to Rick Shane with J.P. Morgan.

Thanks, guys, for taking my questions this morning. Okay, so you realized $10.5 million of losses related to REO this quarter. It sounds like one property basically you foreclosed on or took deed in lieu and sold right away. the other one perhaps more seasoned? Is that the way to look at this?

Yeah. So, Rick, I'll let Ivan give the details on the one property. But yes, there was an asset that we took back right away as soon as it went delinquent. It went delinquent in the quarter. We took it back right away and flipped it to a quality sponsor and took a loss from where we had it marked. We had it marked at about 4 million loss. We ended up taking about a 9.5 half million loss, so a little deeper than our reserve. And Ivan can talk to why we did that. The other asset we took back during the quarter as well, but we had it marked pretty much right on top of the value. We flipped it, I think, for a million-dollar loss from where we had it marked. So the one was deeper. The other one was pretty much right on top. But Ivan gave the details on the one asset at the $10 million loss.

Yeah, we just made a decision on that particular asset that if we didn't get our management in, the asset could suffer significantly. Management was stopping to put capital in. Payables were accruing. The asset could have deteriorated exponentially, so we just thought it would be best to foreclose on it, settle out with the sponsors, and move it into capable hands. That asset has been moved into capable hands balance sheet. It will improve occupancies up, and we think we made the right decision. It was in the market where there was a lot of competition for tenants, but the existing management group was not capable of continuing to maintain the value and potential deterioration of value. So that was our decision at that period of time to move that asset out.

Totally makes sense, and I also very much appreciate the transparency about where you sold it versus where your marks were. Can we talk a little bit about, given the increasing contribution from PIC, the amount of accrued interest on the balance sheet? I'm assuming that that's being capitalized in the loan balances, but want to make sure. And if we can just get some numbers around that to understand how that's building over time, that would be really helpful.

Sure, Rick, absolutely. So we're sitting at June 30th with $95 million of PIC on our balance sheet as a receivable. $15 million of that PIC is related to MEZ and PE, most of which is behind our, you know, air agency where there's a pay rate and then some accrual rate as part of the normal course of doing those loans. I will say that in my commentary I mentioned we did get a payoff yesterday on $187 million loan. It was a bridge loan and a MEZ loan, and we did get back $7 million of that PIC. So that $15 now goes down to $8 million effectively after that payoff, which is a really nice execution for us. The other $80 million is in bridge lending. And just to put some numbers around it, we're accruing about 75% of the loans we modified. So there's about 25% of loans we've modified that we're not accruing the interest on. It's been running about $15 million a quarter, as I've said in the past. It would have ran around that number this quarter, but we elected to take back and reverse some at about $5 million. Two or $3 million of it was related to the one asset, REO asset, that we sold at a loss. And we'll probably have some of that going forward. You know, as Ivan and I look at the next couple of quarters, we see it to be continually challenging with people running out of steam. And we keep looking every day and every quarter on what we think we're going to collect and what we're not going to collect. And as the situations change and things are real time, we'll make decisions to reverse some of that at times. We did reverse some of it this quarter. That trend may continue as we go forward. But we are adding that interest to the carry value of the loan. And then we continue to look at the value of those loans every quarter when we do CECL. And if the value is under our carry, then we're writing it down. So that's been our procedure. That's something we'll continue to do. And that's the way we're approaching it.

Got it. And then, thank you, Paul. And then last question for me, Ivan, you discussed tactically some of the decisions related to REO this quarter and sort of, hey, these were two first loss, best loss type properties. You now have almost $400 million of REO, as Jade pointed out. We're kind of reaching probably the cyclical peak in terms of deliveries of multifamily. Can you talk a little bit about the absorption of vacancy on the properties, where you're seeing strength, where you're seeing weakness, and how that's dictating your strategy about what you're going to sell quickly versus what you're going to hold to potentially enhance value?

Sure. First, the absorption issue that most people talk about is on Class A deliveries in some of the major metropolitan areas where there's been an older supply and a big overhang. We don't really have much concentration in that area. That doesn't affect us, but that's how people really look at it. Whether you go to, you know, areas like Austin or Nashville or Atlanta where there is just tremendous Class A deliveries in Charlotte, that really doesn't affect our portfolio. What we do is a lot of workforce housing in certain areas where you, operators who operated inefficiently, you had a lot of COVID overhang and economic occupancy issues that existed. As I said in my previous calls, economic occupancy was as high as 12%. So we're seeing tremendous growth on the REO book that we have in terms of occupancies. Our initial REOs that we took back were very deep. They're very neglected properties, very poorly run properties, and those are all being repositioned, and you'll see steady, steady growth in occupancy. I think the occupancy will grow. I think our deep REO book was probably in the mid-30s. We think that will grow over a 12-month period steadily and increase at about 5 to 10 points a month. The more recent stuff we're looking at, taking back, which is why we want to be aggressive, we're looking at occupancies in the low to mid-80s, even some at 90. And we want to take that stuff back because the sponsors are not going to manage the unit turns, increase occupancy, and improve that property. So we think that will be very short-term iteration. We think that we'll take them back. We can transition them very quickly, some simultaneously, some maybe 30, 60, 90, and 120 days. The absorption will be fine on those. It will be normal. We'll get, with the right capital improvements, we'll get those back up to the high 80s, low 90s. And once they're at that level, if the market's right, then we'll look to dispose of those. So that's kind of my overall outlook. But the absorption issue doesn't materially affect us. That's more Class A. You do have certain areas like San Antonio and Houston where you had a lot of migrant issues. You had a lot of occupancy issues due to the migrant issues. That's transitioning over. That's a transition market, and we think that market will show occupancy.

Thank you, and I apologize. I am going to ask one last follow-up on that. Hopefully it's a quick answer. Given the size of the portfolio and your description of repositioning some of it and optimizing it, what type of capital expenditure should we expect on the portfolio over the next 6 to 12 months?

That's a good question. I've got to get some numbers, and maybe Ivan can help, but there's two categories, right? There's the more heavy-lifting assets that we're owning and operating that need some reposition and need some capital, and then the lighter-touch stuff that Ivan's been talking about recently. I don't know if, Ivan, you have in your head what you think we would invest in the assets we have on our balance sheet right now to get them repositioned.

Yeah, we'll get back to you. We do have a budget on that. They've all been forecasted and budgeting. The more recent stuff we're talking about is very nominal.

It's not a huge amount of money. I mean, guessing right now, I think it's probably on everything $25 million to $50 million over time. That would be a high number.

That would be a high number.

We'll get back to that number.

Thank you, guys, and I apologize for so many.

Thank you. We'll move next to Crispin Love with Fiber Sandler.

Thank you. First on agency originations, Fannie increased materially, but Freddie has been lower in recent quarters. Can you discuss some of the dynamics there and then also just what the key drivers of the very strong July were, despite rates being relatively steep?

First of all, it's good to have two agencies that compete with each other, and sometimes one's more competitive than the other. And sometimes, you know, one provides quicker service, and it all varies. We've traditionally done a lot more Fannie Mae business than we've done Freddie. Freddie's been recently, and sometimes they're more aggressive on certain loan types, in particular some of the bigger loans. So we're pleased to be able to have both agencies and do a really good job on it. We've been working on some really significant transactions throughout the year, and as Paul mentioned, July was probably the biggest month we've had in a long time, closing a billion dollars. They represented a couple of more key big transactions with some of our sponsors who are very loyal to us. So we've done a good job. Our pipeline remains extremely strong, and we're very bullish in our numbers for the third quarter, which will put us back on track to beat or exceed what our projections are. We're looking today at a drop into five years. As I mentioned, within an hour this morning, we already had about $200 million worth of loans that are going to convert off our balance sheet just from that drop. So if the rate environment continues to drop, We should continue to increase our originations above our fall forecast. But right now.

Great. Thank you, Ivan. And then also in the quarter, you had a big pickup in SFR originations. How do you think about the longer-term strategy of SFR versus bridge multifamily for Arbor?

The SFR market is growing dramatically, and there's been a lot of, even in this location, a lot of capital put into that space. Doing the construction lending part of that requires a real level of expertise that a lot of people don't have. And if we're able to provide the whole gamut of services for those borrowers, meaning construction, bridging, permanent, we're in a great competitive advantage. Having done the CLO, it gives us the ability to really expand out how much we do. We were always concerned with being too reliant on commercial banks without having that outlet. that once we did that securitization, we really stepped up our appetite, and we'd like to actually increase and be a little bit more dominant. So we were a little cautious having too much concentration without having the CLO origination capability and non-recourse, non-mark-to-market financing. Now that we have that, we can be a little bit more aggressive, and our returns have been exceptional. So we're going to put a big effort in to continue to build our market share in that space.

Great. Thank you. And then just one last one for me. Can you share your thoughts on the net interest income trajectory over the near term in the current environment and kind of where you might expect it to bottom?

Yeah, that's a good question, Crispin. It's a tough one to answer. We are seeing, as Ivan said, we are seeing a challenging environment that we expect to continue for the third and fourth quarter. Obviously, if rates move down, that will certainly help. But we are expecting it to bottom out here over the next quarter or two. A couple of things that could offset it to the positive, though, are things we've talked about in our commentary. One is all the efficiencies we've been getting on the right side of our balance sheet is certainly helping some of that drag. And we're also seeing growth in the portfolio. As you mentioned, our SFR business is building. We're doing a nice job of converting construction loans over to bridge loans, which is helping. We're also still growing, even though it's very competitive, the balance sheet book. So I think that growth will help offset a little bit of that drag, but we do expect it to bottom out here over the next quarter or two, given what we're seeing in the market.

Great. That's it for me. I appreciate you both taking my question.

Thank you. We do have a follow-up question from Jade Ramani with KBW.

Thanks very much. I'm curious if you might be interested in launching a fund to put some of the REO and non-performing assets into raised capital around, you know, bifurcate the portfolio, create a fee stream, and also create some participation in the upside in those assets, you know, and allow the company to invest and add value there. Is that something you might consider?

A few people have approached us on it. We're going to have to evaluate, you know, how much it can be transitional, how much we're going to end up with, and whether we have a core big enough to do that. So it is something that, you know, management has been discussing, but I think it's probably a little bit premature. We want to see, you know, where interest rates go over the next month or so because if interest rates drop, I think that will be a real stimulus to move those assets out more quickly. But we will evaluate that option.

Thanks. And then just on the agency business, you know, there's quite a lot of noise with what the Trump administration might do, whether they try to take the GSEs public. I guess, number one, is that affecting the business at all in terms of, you know, the plan to originate new bridge loans and eventually get a GSE takeout? So that's just number one. And number two, you know, one of your peers, a mortgage REIT, made an acquisition. They acquired another license and, you know, pretty good valuation. Would you be interested in potentially JVing with other firms that are interested in the agency business?

Listen, we always would like to increase our agency business originations. and whether we partner up with them directly or indirectly or if there are other firms, you know, who want an affiliation to access our agency originations from their bridge lending, we're happy to do it. But I think the landscape is going to change a little bit. You know, we've talked in the past about how we've been the only effective lender to be able to do balance sheet lending and agency lending. We now have somebody else trying to replicate that. It took us years and years to be able to perfect that. It's not an easy thing to do. So we'll see how effective they are. I wish them luck. It is a process. It takes a long time to create the right culture, and, you know, we continue to be very effective at it. But we do everything we can to increase our partnerships with other people who can contribute to our agency originations.

Thanks very much.

Thanks, Jay.

Thank you. This does conclude our question and answer session for today. I'd like to now turn it back to Mr. Ivan Kaufman for any closing or additional remarks.

All right. Thank you, everybody, for your participation and support. Have a great week, and enjoy the rest of the summer.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect.