Good morning, ladies and gentlemen, and welcome to the Third Quarter 2025 Arbor Realty Trust Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker for today, Paul Elenio, Chief Financial Officer. Please go ahead, sir.

Okay. Thank you, David, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended September 30, 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-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks, everyone, for joining us on today's call. As you can see from this morning's press release, we had another active and productive quarter with some very significant accomplishments that are worth noting. First, we continued our strong progress of creating substantial efficiencies on the right side of our balance sheet with a new $1 billion CLO that we issued in the third quarter with tremendously accretive terms. This deal was priced at 1.82% over, contained 89% leverage on a 30-month replenishment feature and generated an additional $75 million of liquidity. The CLO securitization market is incredibly constructive, and we're very pleased to be such a prolific multifamily originator and a well-recognized securitization platform, which allows us to consistently access the market and grow our platform. And with the pricing levels we are seeing in the market, which has only gotten tighter since our last deal, we were able to compete very effectively in today's extremely competitive market and generate strong levered returns on our capital. We also successfully called one of our legacy CLOs in October, refinancing these assets within our current banking facilities, the bulk of which have replenishment features that allow us to substitute collateral as these loans run off. This was a great trade for us as a CLO was past this replenishment period and with delevering and becoming less efficient. After the unwind, we are now financing these assets through these loans at similar prices to the CLO we redeemed and very significantly, we're able to pick up another $90 million of liquidity to enhance leverage. One of the more significant accomplishments we had this quarter was the realization of a $48 million gain from the sale of a portion of the assets in the Lexford portfolio. If you recall, our equity investment in this portfolio was a focus of the first short seller report, which claimed that this was a fraudulent transaction and that we were misleading our shareholders as to the value of these assets. In fact, the reality was exactly the opposite. This was by far one of the best restructurings we have ever accomplished. Including the large gain we recorded this quarter, this investment has generated over $100 million of income over its life span, the return of $67 million of preferred equity on top of us receiving all of our invested capital back. And there is still a portfolio of assets that we expect to be able to liquidate in the near future. We're also very successful in selling our interest in the legacy assets that we expect to close at the end of the business today. This transaction will generate approximately $7 million of additional income in the fourth quarter, which combined with the gain from the Lexford transaction, totaled $55 million of income that we generated from two of our legacy investments. This gives us a tremendous amount of flexibility to be very aggressive in addressing our legacy issues. Our goal is to resolve these noninterest earning assets, which are creating a tremendous drag on earnings as quickly as possible. We believe it will take until the second quarter of next year to accomplish our goals. When completed, we will have effectively resolved a significant amount of our troubled assets and set ourselves up with a much better improved run rate of income, which will go a long way towards increasing our earnings and being able to grow our dividend again sometime in 2026. And very importantly, we will accomplish all of this with a very minimal impact on our book value, which is something no one else can say in our space. As I mentioned on the last call, the prolonged elevated rate environment has put certain borrowers in a position where they are running out of steam and are having difficulty raising additional equity to continue to manage their assets. As we've stated before, we believe that the third and fourth quarter of this year will be the bottom of the cycle. And again, we are working very hard to quickly examine our loan book and redeploy our capital into performing assets and improve our run rate of income for the future. Certainly, with the two recent interest rate cuts and the likelihood that we could potentially see one more cut this year, we are starting to feel more optimistic about the rate environment moving forward which we believe will provide some much-needed relief for our borrowers. This positive trend gives us some wind at our backs for the first time in a while. As this trend continues, we believe we will be able to meaningfully grow our origination volumes and start to move more assets off our balance sheet, which will increase our earnings run rate and position us well for the future. As I mentioned earlier, we've taken an aggressive approach to resolving our legacy assets through a myriad of different strategies, including modifying loans, taking back assets as REOs to own and operate, and bringing in new sponsors to take over assets and assume our debt to create a more current income stream. We continue to examine all loans that are showing signs of distress and are accelerating the process of taking control of the real estate and working quickly towards an accretive resolution. This has resulted in a temporary spike in our delinquencies. And again, we look to expedite the resolution process of these loans, the number of which we have targeted to take back as REO and flip to the sponsors. This will take a few quarters to complete. And in the interim, we'll temporarily reduce our net interest spreads until we complete the resolution process. However, when the smoke clears, we will have cleaned up the vast majority of our legacy book and created a more stable and growing run rate of income in the future. Turning now to our third quarter performance, as Paul will discuss in more detail. Our quarterly results included the large gains from the Lexford investment, as I mentioned earlier. This provides us with the unique ability to be able to be very aggressive in accelerating the resolution of problem loans without materially impacting our book value. The timing of these resolutions will take place over the next few quarters, which created some lumpiness in our quarterly earnings going forward. However, we are committed to continue to make our quarterly dividend for the balance of the year. And if we accomplish our goals effectively, we'll be able to improve our earnings run rate and put us in a good position to consider an increase in our dividend again sometime in 2026. And I can't stress this enough, we are accomplishing all of these goals without a material change in our book value unlike the rest of our peers who've experienced significant book value deterioration. As I mentioned in our last call, the balance sheet lending business is incredibly competitive right now. There is a tremendous appetite for deals and a significant amount of capital out there chasing each transaction. As a result, we are being highly selective and have closed about $400 million in the third quarter, putting us just around $850 million of volume for the first nine months of the year. The guidance we gave at the beginning of the year of $1.5 billion to $2 billion of bridge production for 2025 was reflective of our views that the market would become overheated. And as a result, we dialed back our production numbers for 2025 to a more conservative level. We do have some large high-quality deals in our pipeline, and we think we are likely to close by year-end, which gives us confidence that we may be able to come in with our original guidance despite the extremely competitive landscape. The bridge lending business is an important part of our overall strategy as it generates stronger returns on our capital in the short term while continuing to build up our pipeline of future agency deals. And with the significant efficiencies we are seeing in the securitization market, we're able to continue to produce strong leverage returns on our capital despite this extremely competitive landscape. In the agency business, we had a tremendous third quarter, originating $2 billion of loans, which is the second-highest production quarter in our history. We had a very strong October, originating $750 million, which puts our ten-month volume numbers at $4.2 billion, making us very comfortable that we will easily surpass our origination guidance of $3.5 billion to $4 billion and the best year production number of $4.5 billion as well. This is a tremendous accomplishment, especially given the rate environment, which we were in for the better part of the year. This is a tremendous testament to the value of our franchise and the resiliency of our originations network with a loyal borrower base that we have cultivated over the many years. We continue to do a strong job in growing our single-family rental business. We originated approximately $150 million of new business in the third quarter and another $200 million in October, bringing our ten-month numbers to $1.2 billion. We also have a strong pipeline, giving us comfort that we were able to meet our internal guidance of between $1.5 billion to $2 billion of production for 2025. This is a great business as it offers three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong levels of returns in the short term while providing us significant long-term benefits by further diversifying our income streams. And again, with the efficiencies that we're seeing in the securitization market and in our bank lines, we are generating mid- to high teens returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up this business. In our construction lending business, we are having great success in growing out this platform with a real influx of new opportunities that we're seeing to do larger loans on high-quality assets with very experienced developers. In the third quarter, we closed $145 million of deals and another $65 million in October, bringing our ten-month numbers to around $500 million. We also have a very large pipeline of roughly $185 million on the application and another $675 million of additional applications outstanding and $900 million of deals we are currently streaming, giving us confidence that we can up our guidance for the year from an initial $250 million to $500 million to $750 million to $1 billion for 2025. And additionally, and very significantly, the size of our current pipeline gives us real visibility into how we will be starting our 2026 which, by all indications, we expect will produce meaningful growth over 2025 numbers. And so between our agency business, bridge lending program, SFR and construction platform plus our mezz and PE business, we expect to originate between $8.5 billion and $9 billion in volume this year in what was a very difficult environment for the vast majority of the year. And again, we have started to feel more optimistic about the rate environment, which we believe will lead to more robust origination volumes in the future. In summary, we had a very active and productive quarter with many notable accomplishments. Clearly, the outlook for interest rate environment has significantly improved from where it was in the beginning of the year, and we are feeling more optimistic as a result. We feel we now have some wind at our back and will allow us to continue to grow our origination volumes and generate strong returns on our capital from the significant improvements and efficiencies we've created on the right side of our balance sheet. We also feel that the gains we have generated from our legacy investments puts us in a great position to accelerate the resolution of our legacy book and create a much-improved run rate of income going without materially affecting our book value. And these improvements, coupled with the growth we are expecting in our originations platform will go a long way in allowing us to achieve our goals by being able to grow our earnings and dividends in the near future. I will now turn over the call to Paul to take you through our financial results.

Okay. Thank you, Ivan. In the third quarter, we produced distributable earnings of $73 million or $0.35 per share. As Ivan mentioned, a portion of these earnings were associated with the large gain we recorded this quarter from the Lexford exit investment, which will partially offset some of the accelerated losses and reduced interest income we will experience temporarily from the resolution of some of our problem loans over the next few quarters. As discussed earlier, the resolution of these loans will likely occur over several months, which will cause our quarterly earnings to fluctuate during that time period. We will do our best to give as much forward guidance as we can as it relates to any realized loss we will incur as we continue to make progress in resolving the bulk of our legacy book. As to the income Ivan mentioned, that we will generate in the fourth quarter from the sale of our legacy asset, this is related to a land development deal that we've had on our books since 2006 called Homewood. We had $128 million of loans in this asset that were written down to $50 million many years ago, again, on an asset that was originated prior to the great financial crisis. We sold the note for $59 million, which should result in a $9 million reserve reversal and a $1 million distributable earnings charge in the fourth quarter. Additionally, some of these loans were in our TRS as they were not considered good REIT assets. And as a result, we will receive a $20 million tax deduction in the fourth quarter, which will reduce our tax expense by approximately $7.5 million and increased distributable earnings. With respect to accrued interest on modified loans, in the third quarter, we reversed approximately $18 million of previously accrued interest, the majority of which were related to new delinquencies during the quarter which, as we discussed earlier, is reflective of where we believe we are in the cycle. This adjustment, combined with $6 million in back interest collected on a loan payoff in July, which we referred to in our last call, has resulted in us reducing the total accrued interest on modified loans by $13 million this quarter, even after accruing an additional $11 million in interest on modified loans that are performing in accordance with their terms. We have also started the process of accelerating the resolution of problem assets by reworking some of our loans at lower interest rates in an effort to create a higher run rate of future earnings going forward on loans that were likely to default in the near future. This resulted in a reduction in interest income of approximately $8 million this quarter and will affect interest income going forward by about $4 million a quarter. As stated earlier, we have taken an aggressive approach in dealing with our troubled assets. And as a result, our delinquencies have risen this quarter to $750 million at September 30 compared to $529 million at June 30. This peak stress reflects where we are in the cycle. And again, we're working very hard to take control of these assets quickly and we rework these loans with higher quality sponsors and provide a more consistent run rate of income going forward. In fact, in October, we took back $110 million of these assets as REO and expecting another $40 million to be foreclosed on in November and December. We're working very hard at bringing in new sponsors to take over assets and assume our debt over the next few quarters, which will create a longer-term benefit of creating a more predictable run rate of income. This will come with a short-term temporary effect of reducing interest income, as I mentioned earlier, as we accelerate the process. This strategy will also result in a quicker ramp-up in our REO book as we look to accelerate the process of bringing in new sponsors to take over the real estate and assume our debt. In the third quarter, we took back $122 million of new REO assets, putting our REO book at $470 million at September 30. And as I mentioned earlier, we're expecting to take back another roughly $150 million of loans in the fourth quarter. And again, we're working hard to dispose of some of these assets very quickly, which should keep us in the range that we previously guided to of between $400 million to $600 million of REO assets that we will own and operate. In the third quarter, we recorded an additional $20 million of net loan loss reserves on our balance sheet loan book, $15.5 million of which were specific reserves with the remaining $4.5 million being general reserves. The additional specific reserves that we recorded this quarter are consistent with our strategy of accelerating the resolution of problem loans as we look to mark certain loans that we are marketing for disposition to where we think we can execute a sale. This could result in roughly $15 million to $20 million of realized losses next quarter if we're successful at liquidating all these assets quickly, which will be partially offset by the $7 million of income we generated from the sale of the Homewood asset. And again, this will very importantly allow us to increase our run rate of income going forward and create a more predictable earnings stream. In our agency business, we had an outstanding third quarter, as Ivan mentioned, with $2 billion in originations and $2 billion in loan sales, which generated $10 million more in gain on sale income this quarter. The margins on this business were 1.15%, which are down from the prior quarter due to some large off-market portfolio deals we were able to capture, which contain lower margins and smaller servicing fees. We also recorded $15.5 million of mortgage servicing rights income related to $2 billion of committed loans in the third quarter, representing an average MSR rate of around 100.78%, which again reflects the larger deals we closed this quarter with lower servicing fees. Our fee-based servicing portfolio grew 4% this quarter to approximately $35.2 billion at September 30 on record third quarter originations. This portfolio has a weighted-average servicing fee of 36.2 basis points and an estimated remaining life of around six years, and will continue to generate a predictable annuity of income going forward of around $127 million gross annually. In our balance sheet lending operation, our investment portfolio grew to $11.7 billion at September 30 from originations outpacing runoff for the third straight quarter. Our all-in yield in this portfolio was 7.27% at September 30 compared to 7.86% at June 30, mainly due to stopping the accrual of PIK interest on certain loans, modifying some loans with rate reductions, new third quarter delinquencies and a reduction in SOFR. As mentioned earlier, we do expect this run rate to improve meaningfully over the next few quarters as we look to accelerate the resolution of our delinquencies. The average balance in our core investment was $11.76 billion this quarter compared to $11.53 billion last quarter from growth in the portfolio. The average yield on these assets decreased to 6.95% from 7.95% last quarter, mainly due to the significant nonrecurring adjustments I spoke about earlier, including reversing accrued interest and lower rates on modified loans, combined with the additional delinquencies we experienced in the third quarter. Total debt on our core assets was approximately $9.9 billion at September 30, the all-in cost of debt was approximately 6.72% at 9/30 versus 6.88% at 6/30, mainly due to a reduction in SOFR. The average balance in our debt facilities was approximately $10 billion for the third quarter compared to $9.5 billion in the second quarter, mainly due to funding our third quarter growth and the addition of our new senior notes in July. The average cost of funds on our debt facilities was 6.88% in the third quarter compared to 6.87% for the second 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 and core assets. Our overall spot net interest spreads were 0.55% at September 30 compared to 0.98% at June 30 from stopping accrued interest on certain loans and from new delinquencies and modifications at lower rates. We estimate that this new run rate will temporarily reduce our quarterly earnings by $0.05 to $0.06 a share that again, we believe we will be able to improve upon meaningfully as we resolved our troubled assets over the next few quarters. So in summary, we're very pleased to have produced significant gains from a few of our legacy investments, which will put us in a good position to be able to accelerate the resolution of our legacy book. This will take us some time to complete. In the interim, we will experience some fluctuations in our quarterly earnings. When completed, we will resolve the lion's share of our legacy assets and build up a more predictable and growing run rate of income for the future, which will complement the growth in the origination platforms that we're expecting from the improved rate environment and go a long way towards helping us achieve our goal of growing our earnings and dividends in the future. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time.

We'll take our first question from Steve Delaney with Citizens Capital Markets.

Thank you for the thorough overview. It seems you have a lot on your plate and are facing challenges from multiple angles, but you clearly have a strong understanding of your strategy. I’m trying to grasp it better. It appears you have three actions regarding your portfolio: modifying where you can with suitable partners and properties, avoiding foreclosures, and eventually selling any foreclosed properties. Regarding the loan portfolio, can you share your assessment of where we currently stand with the remaining loans that are performing and haven't required modifications? Do you have an idea of how stable those loans and properties might be in the next six to twelve months? Are you mostly working with reliable borrowers in improving market conditions, or is this more of a triage situation? I’m trying to gauge how many additional loan modifications might emerge in the upcoming quarters. I apologize for the lengthy question.

Sure. Let me walk through from a macro standpoint where we are. And in terms of what inning we're in, it also depends on what market we're in. Different markets react a little differently. But generally, when we do a modification, people are bringing capital to the table. And remember, this is a long period of time that people had to continue to bring capital to the table with the elevated interest rates. So it's one thing when you bring capital to the table and rates remain elevated and you keep on having to bring capital to the table. So most modifications have a duration to them. And then if rates remain elevated and the market doesn't recover, they have to bring more capital to the table or there is a future modification potentially that will happen if the asset doesn't improve. Where we become very aggressive is if the asset is not improving because the people are not managing effectively or don't have the capital to maintain that asset. That's where we've become extraordinarily aggressive. So we don't want a deteriorating asset, and that's where we stepped up our efforts. We're at a different point in the cycle. And we also view that these assets with the right amount of capital and right amount of management, they will stabilize. And that's why you see a little bit of a peak. There are certain markets that have been extraordinarily hard hit and kind of been whiplashed. I would say markets like San Antonio, like Houston. Those are markets that under the prior administration really took over these assets and negatively impacted them. And there are quite a few of them. And we're not the only ones who have had these happen to our assets, it's across the board. And then, of course, with the change in administration, that began to change and we got control back on those assets. Unfortunately, with the new administration, and what we've seen is they’ve had massive regulations and emptying of properties that were perhaps 88% or 90% occupied, and they're stripping down 20% to 25%. And that's why we've seen a little bit of an acceleration on our part now in Houston and in those markets that we're going to take control over those assets and restabilize those. So that's a little unique to those markets. But what we are seeing, which is great interest, is when we do take back assets where in the past, maybe we had one or two people interested in buying these assets. We probably have three or four people, and the appetite for these assets is growing and growing and with the drop in rates and a little bit of return of liquidity, we're seeing some real strength. We're also seeing a lot of benefit right now to good management, where if you have good management and you have the right CapEx to improve your units, where we've had a lot of economic issues in terms of economic collections on some of these assets, we're seeing if these assets are run correctly, they'll fill up and they'll be the right paying tenants, and that's why we're stepping in as well. So the peak in our delinquencies are reflective of our attitude that some of these assets are better in our hands or even transition to new people. Paul mentioned, we have about $750 million in delinquencies. We have resolution and clear sight that within the next 45 days, about $500 million of those will be resolved either through recapitalization of modifications or finding new borrowers and stepping into those deals. So we are being aggressive. We're very optimistic that we'll get through those. We do expect one more wave until in the fourth quarter, which we're prepared for and we're taking an aggressive approach to try and resolving the majority of these legacy issues. So we're hopeful that by the end of the fourth quarter, we would have really addressed each and every one of these transition issues, out of ownership that's not doing a good job. And that aligns with my comments that by the end of the first quarter, we should be in a real position to change our run rate and get these either resolved as income-producing or disposed of appropriately. I want to point out that there are two aspects that we focus on maybe a little different than everybody else, which are important to note. We focus not only on our dividend, which, of course, has outperformed everybody else and our guidance was to maintain our dividend for the year because we believe that this is just a little lumpy right now, but more significantly, Steve, if you look at the company's performance, we really have a growth in book value of 23% over the last five years, and everybody else has declined 27%. There's a 50% change in book value relative to us and everybody else. So we're managing through this with a nominal change in book value, we're maintaining a tremendous dividend. And I think that is where we're looking at as business operators to manage both of those items. It's a long-winded response, but it wasn't an easy question.

Paul, I understand it wasn't an easy question. We've observed the stability in our book value, particularly as some of our peers have experienced significant declines due to additional 5 rated loans. To summarize, I appreciate your thoughtful response. It appears to me that we are one to two quarters away from having the problematic loans on our books classified as real estate owned. The first step is to transition them into REO. By mid-2026, it looks like you'll be engaged in a very active REO sales process. As for completing the loan modifications, we hope to reclaim what is necessary in 2026 and sell a substantial amount of real estate.

Yes. But I want to point this out, and I think this is important because we're a little different than everybody else. We have a very diversified business with a lot of skill sets. And if you take a look at the Lexford transaction, which was something everybody said, 'Oh my God, you're taking that back.' We had $67 million of preferred equity on that portfolio. Not only do I get back the $67 million, not only do we make hundreds of millions of dollars on these and get a good income stream going forward. We took assets that were in the mid-80s, low 80s in occupancy, improved these assets, got them in a great position, had a great asset. And now look at the impact of creating another $50 million. We still have assets on our books. So we have to be guided as good operators as producing what we need to produce, and we have very diversified income streams. And yes, we can generate gains, and we can have the patience to have the right kind of gains. And what we will do is we look at the REOs and see, is it quicker to dispose of them now at the right levels? Or do we need to give them a little TLC and get them a little bit better? We can be patient unlike other people.

We'll take our next question from Jade Rawani with KBW.

The $18 million accrued interest reversal that was booked a quarter, does that mean that the current level of interest income for the third quarter is a reasonable baseline to use? It was $208 million, reflects most recent interest rates as well as interest rates on most modified loans. And then I think it sounds like you expect originations potentially to drive either a flat to slightly higher portfolio in 4Q. So do you have any comments on the run rate of interest income?

Yes. Jade, it's Paul. It's a good question. And the answer is no to the first part, and let me give you some guidance. As I laid out in my prepared remarks, we did see, as Ivan mentioned, some elevated defaults this quarter given where we are in the cycle and how aggressive we're being to be able to resolve things quickly and take back assets before they deteriorate. So we did reverse $18 million of accrued interest, mostly related to delinquent loans and loans we remodified, but on a run rate, that's a one-time adjustment in my mind. On a run rate, that's going to cost us $4 million going forward because we reversed interest as of June 30 that we had accrued of $18 million, but we're losing interest on those accruals going forward of about $4 million. So the $18 million is one-time, the $4 million is recurring. Additionally, we had modified loans during the quarter, some we had to remodify where we gave additional relief. Due to the structure of some of those modifications, it cost us $8 million for the quarter in interest, but it's only going to cost us $4 million going forward on the rate reduction. So we have $4 million going forward in a run rate reduction from stopping PIK interest on certain loans. We have $4 million in reduction from lower interest rates on modifications. And on the new delinquencies, right now, and I want to go through this, that would affect the run rate going forward by $8 million. If you add up those three numbers, that's $16 million in reduced interest income on a run rate going forward. However, that's before we resolve anything. And we've already agreed to on $225 million of loans. We've already agreed to reposition and sale with new interest rates of like SOFR plus 250 for the most part and that's picking us up $3 million in the fourth quarter alone before we even get into the items that Ivan mentioned, getting our delinquencies down even further to like 250. Some of that will happen at the end of the quarter. It won't impact the fourth quarter as much but it will impact the run rate in the first quarter going forward. So the long answer is interest income went down by about $34 million this quarter, roughly due to $18 million of reversed accrued interest, another $4 million from stopping the accrued interest, $8 million from modified loans, $5 million from delinquencies. That $34 million was offset by about $7 million or $8 million in back interest and fees we collected and about $5 million in growth in our portfolio for a reduction in interest income of $22 million. I see the reduction of interest income going forward, starting at $16 million for the reasons I talked about the $4 million of PIK, the $4 million of mods, and the $8 million of delinquencies, but we've already improved that by $3 million on loans we know we've executed. So now I'm down to $13 million of a reduced interest income going forward.

Jade, I want to make one comment. Paul mentioned that we reduced our spread on a loan to 250. I want to be very clear that the market spreads today on new originations are 225 to 275. So some of the relief that we're giving is really reflective of where the market is and adjusting the borrowers down to today's market and giving them consideration for where lending spreads are. So while we're seeing spreads come in a little bit, it's really reflective of the current market spreads. It's not really a discounted spread to the market.

That's helpful. I'll have to go through the numbers in more detail after this. But on interest expense, similar question. I went in the wrong direction despite the positive developments on financing. So were there any one-time items in interest expense causing it to be elevated for the structured business at that $176.2 million for the third quarter?

Yes. Jade, there were a couple of things to note. First, interest income decreased by $22 million, which I've outlined for you. On the other hand, interest expense increased by about $10 million, of which $5 million can be attributed to the growth in our portfolio. I had around $6 million or $7 million in income from that portfolio growth, but we also saw an increase in debt as I leveraged that growth. Additionally, we issued $500 million in senior bonds in early July, so the full impact of that was reflected in the third quarter as mentioned in our last quarter's run rate. We also experienced some double interest in the third quarter, which won't happen again since we paid off our convertible debt in August; we couldn't pay it off until then because we issued the senior bonds in July. This resulted in about a month of double interest on those two bonds that will no longer occur. However, the primary reason for the rise in interest expense is due to the issuance of the $500 million in senior bonds to expand our portfolio.

Got it. That's clear. Lastly, if I could, GAC credit has been pretty benign. I don't know if you follow Greystone, which is owned in joint venture by a CRE services company, but it looks like they had a big spike in credit loss provisions in their agency multifamily business. Now I'm seeing Arbor's results and the provision was for risk sharing $8 million, double what it was last quarter and higher than the recent run rate. So can you comment on what drove the increase, if there were any loan book putbacks, any cases of fraud, or if it's just broader credit deterioration and if that's something that will be a headwind going forward?

Yes. I think if you look at Fannie Mae and if you look at our all-in numbers, they were in peak stress right now. They run at a very low delinquency and constant right now, it increased a little bit. Like all lenders who had a little bit of a portfolio in New York City, you've had some distress on the rent control and rent stabilization, not material, but it does move the needle a little bit. We're all working through a change in the economic climate, which shows in across the board delinquencies at the agencies. It's just where we are in the cycle.

Yes, Jade. And given Ivan's commentary, what we said with everything else, we think peak stress is Q3, Q4 leak into Q1 a little bit. So we are expecting, I guess, similar reserves for Q4, maybe a little bit less in Q1, given where we are, but it's just based on where the peak stress is.

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

First, could you provide some insights regarding Homewood and the sale of that property? It appears from the disclosures that you're selling it at approximately the reserve value, possibly with a slight increase. However, the original carrying amount of the loans was $112 million. I'm interested to know if there will be a realized loss this quarter that we should consider when evaluating distributable income?

Yes. So Rick, it's Paul. Great question, and I'm glad you asked it, and I'll give a lot of color on it. So we did have between all the Homewood pieces, we had about $128 million of UPB on the loans. We wrote it down to $50 million by taking almost $80 million reserves many years ago. All but $10 million of those reserves that brought it to a net carry of $50 million, we're taking way before COVID when AFFO and FFO reflected reserves as realized losses. So the only portion that has not been brought into AFFO, FFO, which has been superseded by distributable earnings was $10 million of reserves we took around the time of COVID. So as you pointed out, we have a carry value of $50 million, we sold it for $59 million. When the accounting gets done, we believe what's going to happen is we're going to have a reversal of a reserve of $9 million, right, because we have more reserve than we sold it for, but we'll have a distributable earnings hit of $1 million because technically, the distributable earnings carrying value is $60 million, and we sold it for $59 million. So we'll have only a $1 million realized loss, we believe, on that sale because all the other reserves had already been taken through AFFO and FFO before we went to distributable earnings because this is an asset that goes way before the great financial crisis, as you know. And then we're going to pick up $7.5 million of real GAAP income and distributable income and book value growth from the savings on the tax side because a lot of these loans are in our TRS, and we are a taxpaying entity in the TRS and we get to save the taxes on that.

Got it. Okay. That makes sense. And thank you for walking me down GAAP accounting memory lane. I did not actually remember that. So that's very helpful. The other thing is that contractually, that was a loan that had about a 10% coupon, you did not accrue interest on that. Is there any accrual reversal associated with that? Or should we just look at this as you sold a loan that was effectively generating a 0% interest rate and there was no cash flow associated with that. So there's no nuance there.

Yes. So there's a couple of nuances we should talk about. You're exactly right. Per disclosures, which you read correctly. This loan had an accrual rate for many, many years. But when it was struggling, we did not accrue any of that interest; none of that interest is accrued in my books. So there's no reversal of interest. And in this deal, as Ivan will point out, we are providing a little bit of seller financing, and we are ended up with a performing loan now at 10%. So not only are we going from alone that was 0%, we're getting about $6 million or $7 million of cash in the door, we're saving $7.5 million in taxes with an offset of about $1 million distributable earnings hit, but we have like a $53 million loan that's going to earn 10% now and be current. So we took an asset that was earning 0%. We created some cash. We created some income, GAAP and distributable, and we have a performing asset going forward that's adding to our run rate.

Got it. And was that loan unlevered on your balance sheet?

Yes.

Okay. That's really helpful. And the other thing I'd just like to talk about is when we look at the income from REO, property income fell 20-plus percent sequentially and property operating expenses went up modestly. And that's despite the fact that there is more REO. So trying to understand what is going on there. And I would like to understand potentially the implications for lower cash flows in terms of recovery values.

Okay. I'm going to let Ivan talk globally about the REOs. Let me give you some numbers, and then he's going to go into where the market is. You have to remember, some of the loans we're taking back is REO, we're taking them back because we want to make sure that we won't see significant deterioration. Some of them are coming back, and we've been emptying some parts of the building. Their occupancies are super low, probably 40% occupancy. So now our job is to go in there, do what we need to do to get to manage these assets and get the occupancies up. So right now, some of those assets are, as you said, throwing off negative NOI, and I think it was about $3 million for the quarter in the third quarter and that spiked up because we took some more assets back. We're getting our hands around those assets. We are taking back more REO. I have it probably projecting around the same number despite bringing more REO back. But that number will improve quickly. And I'll let Ivan talk about it as we get in there and we rework these assets, you're going to see occupancy go up a lot. And when it does, that NOI will turn positive at some point, correct, Ivan?

Yes. And I think, Rick, you're hitting on something very important. When we take back REOs that need a lot of work. We will empty those buildings out and do the work and get the occupancy up. When the occupancy gets up, we're going to sell those assets. So you'll see a little bit of the spike. You'll see them all down. And then as they get leased up, those will be disposed of, and then new ones will come in. So expect that to go up and down. We track that. We track the occupancy. We track the CapEx. And we've had a few on our books that we've actually stripped down to 0%. We have all the units, and now they're going to start to lease up very quickly, and we're targeting those which were deeply damaged to dispose of in the third quarter of next year. And right now, they're going from 0 and they're gaining like 10 to 20 points in occupancy. And when they get to 70, 75, we'll look to dispose of those. So it's going to be very lumpy, but the philosophy is strip them down, take the pain and then move them on.

Okay. That's very helpful to understand what's going on. And then just one last housekeeping question associated with it. It sounds like when you were doing this, you're obviously making significant investments in the properties, are you capitalizing those investments? Or are you expensing them?

Yes. Most of the time, if you're making improvements to the real estate, you're capitalizing them, it's increasing your basis. Most of the work is done to improve the asset's value, correct.

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

Paul, just based on your comments on an earlier question on interest income, there was a lot there, so I just want to make sure I'm thinking about it correctly. It seems that you're confident that the third quarter is trough in NII, just given the one-time hits being larger than the go-forward impact. Is that accurate or prior to potential forward stress that could impact that run rate?

Yes, I believe that's correct. We anticipate some additional delinquencies, but we expect to resolve many more than we incur. Thus, we think we are at a peak. There were some one-time adjustments and reversals of accrued interest related to certain delinquencies that we accelerated. We do not project that the fourth quarter will match the run rate of the third quarter. If you examine the figures provided in today's press release, and what I discussed earlier, we are indicating a spot rate of 7.27% as of September 30, representing an all-in yield on our $11.7 billion portfolio. This compares to a spot rate of 7.86% as of June 30. Based on this, net interest income decreased by $22 million after accounting for growth, but it actually fell by $34 million due to the adjustments I mentioned. Currently, we anticipate a potential drop of $16 million in the spot rate, although this has already improved by $3 million from loans we've worked out and sold, bringing it down to a net reduction of $13 million. While new delinquencies may arise, as mentioned by Ivan, we are engaging in many real-time resolutions that are not reflected in my numbers, allowing us to resolve more delinquencies than initially planned. By the end of the fourth quarter, I expect to have made significant progress in resolving these, leading to a considerable improvement in the run rate during the first and second quarters of next year. That’s why we communicated that achieving our goals may take until around the second quarter of next year. Once we achieve those goals, our run rate should recover, and combined with growth in our portfolio from an improved environment and our origination platforms, we should start to see a positive turnaround.

Great. And then just on the $48 million gain on the Lexford portfolio. Can you just give a little bit more detail on that transaction? How long has that been in process? And who was the buyer there?

So I guess, it's an asset that we took back from the great financial crisis, and we've been managing that and creating significant gains. And I guess we made a decision based on where we are in the cycle that it would be good to monetize those gains, especially in light of the criticism that we got that they were really degraded and caused a lot of the short interest in the short reports as bad transactions. So for us, wanted to be very clear that they were good transactions. And that not only were they good, there was substantial profitability. As an operator, we felt by creating those gains, it gives us a lot of flexibility in trying to manage our business and accelerate these legacy issues. And keep in mind, we still have a good portion of those assets left as said in my script. So we just thought it was good timing. It spoke about the credibility of our performance on those assets. And it really negated some of the accusations that have been thrown at us with clarity, and that's kind of the reason we did it. In terms of the buyers, we don't really disclose. We had very heavy interest. We had five buyers for them. This was a very competitive process. And it was a good portfolio. We had a great experience with the buyer. It's public record. I'm not really exposed who they are, but they were well bid and there's a deep audience for that portfolio as well as for the balance of the portfolio that we have.

Okay. Great. And then just a final question. You mentioned the $48 million gain that you did talk about in the prepared remarks, I believe, an additional $7 million you expect to come through. Should that come through in income from equity affiliates as well?

No, that $7 million, Crispin, was referred to the Homewood transaction. So what we said is that we had a $48 million gain. What we said in our prepared remarks is we had a $48 million gain from Lexford. We still have a portfolio of assets that we'll look to dispose of in the near future. So whatever comes out of that, comes out of that when it happens. And then in addition to that, in October, which should close today, we're closing on the sale of the Homewood note, which will generate about $6.5 million, $7 million of GAAP income and distributable income in the fourth quarter.

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

I have an observation and a question. First, based on your experience with the real estate once you took control, it appears that the property was originally underwritten well. You've had a strong experience after foreclosing and defaulting on the property. Shouldn't you take some credit for that? Secondly, now that your stock is trading below book value and you have an optimistic outlook for the second half of next year, are you open to considering capital buybacks, or do you prefer to retain that capital?

We have a share buyback program in place, and we will evaluate the best use of our capital. Many insiders, including myself, are continuing to purchase stock as it trades below book value. When the company has sufficient capital, we will assess the situation further. We see this as an opportunity. Regarding the REOs, it’s quite interesting. The loans we are originating today can endure a rate spike, much like I mentioned four or five years ago. At the time we took on these loans, SOFR was at a quarter, and it surged to 5%. No one could have predicted a 4.75% increase in SOFR. We have always stated we can handle a spike of 200 to 250 basis points in SOFR, but this is unprecedented. Additionally, the treasury yields were around 150 to 125 and jumped to five, which are atypical movements that extend over time. This has created a challenging environment. However, when we recover these REOs and make necessary improvements, we believe we will perform well. We are getting very close to our valuation marks, sometimes exceeding them, and our assessments have been quite accurate. We have the expertise to manage this effectively and are pleased with the properties we have repossessed. As I mentioned, we plan to sell these properties, likely in the third quarter of next year, and we are confident in their progress.

And there are no further questions on the line at this time. I'll turn the program back to Ivan Kaufman for any additional or closing remarks.

Okay. Thank you, everybody, for participating. We are at a very difficult point in the cycle. We're prepared for it. We've actually anticipated it. We'd rather not be here. But as operators, we're addressing it. We have a lot of tools to address it. Thanks for your participation, and we look forward to next quarter's call. Take care. Have a great weekend.

This does conclude today's program. Thank you for your participation, and you may now disconnect.