Earnings Call
Arbor Realty Trust Inc (ABR)
Earnings Call Transcript - ABR Q3 2024
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Third Quarter 2024 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Paul Elenio, CFO
Okay. Thank you, Jamie, 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, 2024. 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 our 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 unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.
Ivan Kaufman, CEO
Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had another strong quarter as we continue to effectively navigate through this challenging environment. As we discussed in the past, we appropriately positioned the Company to succeed in this market, and we are executing our business plan very effectively and in line with our expectations. We have a diversified business model with many counter-cyclical income streams, investing in the right asset class with the appropriate liability structures, and we are well capitalized, which has allowed us to consistently outperform our peers in every major financial category over a long period of time and by a wide margin. In fact, most of our peers have cut their dividends substantially, have experienced significant book value erosion, and have generated a negative total shareholder return over the last five years. As we have stated many times, and you can clearly see from the charts posted on our website, our results have been nothing short of remarkable, and we are a consistent outperformer and leader in the space. As we discussed on the last few calls, we expected the first two quarters of this year to be the most challenging part of the cycle. I also thought it could leak into the third and fourth quarters as well, with rates remaining higher for longer. With the recent 50 basis point rate cut by the Fed and a significant drop in the tenure to around $60 million, we began to see a much more positive outlook as a result of cap costs becoming far less expensive and borrowers being able to access 5- and 10-year fixed-rate agency deals, with buyers moving off the sidelines and becoming extremely active in the market. However, there's been a backdrop in the 10-year again to 425, which has somewhat changed the tenor. We now believe that the recovery will be a little bit slower and could lead to a challenging fourth quarter, which is consistent with our previous guidance. We continue to do a very effective job of working through our portfolio by getting borrowers to recap their deals and purchase interest rate caps. In the third quarter, we modified another $1.2 billion of loans with $43 million of fresh equity committed to be injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, to fund interest and renovation reserves, to bring past interest to current, and to pay down loan balances where appropriate. We also continue to make progress in line with our previous guidance on approximately $1 billion of loans that were past due at June 30, either by modifying these loans or closing them, taking them into REO, or bringing in new sponsorship either consensually or simultaneously with the foreclosure. Last quarter, we discussed our plans for these loans, and we estimated that approximately 30% to 35% of the pool would be modified, another 30% to 35% would pay off, and the remaining 30% would be taken back as REO. In the third quarter, we successfully modified $250 million of these loans or 23%, and we expect to modify about 10% in the fourth quarter. We also had one delinquent loan for $8 million payoff in full in the third quarter, and we're expecting another $300 million plus of delinquencies to pay off over the next few quarters. Additionally, we took back as REO roughly $77 million of loans in the third quarter and are expecting to take back another $250 million plus over the next few quarters. This is strong progress in one quarter and has reduced to $1 billion in delinquencies we had at June 30 down to just over $700 million at September 30, representing a 30% decrease. However, as expected, we did experience additional billing queries during the quarter of approximately $225 million, bringing our total delinquencies at September 30 to approximately $945 million, which is down 10% from our peak in the second quarter. While we anticipate having additional delinquencies in this environment, we believe our resolutions will exceed new defaults, resulting in a continued decline in total delinquencies. It is also very important to distinguish between REOs we take back and bring in a new sponsorship to operate and assume that from REOs we own and operate ourselves. Of the $77 million of REOs we took back in Q3, $20 million involved successfully bringing in new sponsors to operate and assume our debt, and $57 million we now own and operate directly. We are working exceptionally hard on resolving our delinquencies in accordance with our plan, which when achieved will convert non-interest earning assets into income-producing investments that will be highly accretive to our future earnings. This is a challenging demand and work, and I'm very pleased with the progress we are making in resolving our delinquencies in accordance with our objectives. We also continue to focus on maintaining adequate liquidity levels and the appropriate liability structures, which is critical to our success in this environment. Currently, we have approximately $600 million in cash and liquidity, providing us with the flexibility we need to manage through the balance of this downturn and to take advantage of the opportunities that exist in this market to generate attractive returns on our capital. One of these opportunities is our bridge lending platform. As I have said before, some of the best loans are made at the bottom of the cycle. We believe now is the appropriate time to start ramping up our bridge lending program again and to take advantage of the opportunities that exist in the market to originate high-quality short-term bridge loans, allowing us to generate strong returns on our capital in the short run while continuing to build up a significant pipeline of future agency deals, which is critical to our strategy. We have also done an excellent job at deleveraging our balance sheet and reducing our exposure to short-term bank debt. We have approximately $2.9 billion in outstandings with our commercial banks, which is down from a peak of $4 billion, and we have 65% of the secured nets in non-mark-to-market, non-recourse CLO vehicles. Our CLOs are a major part of our business strategy, and they provide us with a tremendous strategic advantage in times of distress and dislocation due to the nature of their non-mark-to-market non-recourse elements. In addition, they contributed significantly to providing a low-cost alternative for warehousing banks, which in times like this are fluctuating pricing and leverage points parameters. One of the significant drivers of our income changes are our low-cost CLO vehicles, as well as fixed-rate debt and equity instruments that make up a big part of our capital structure. We were very strategic in our approach to capitalizing our business with a substantial amount of low-cost, long-dated funding sources, which has allowed us to continue generating outsized returns on capital. Another major component of our unique business model is our significant agency platform, which offers premium value as it requires limited capital and generates significant long-dated predictable income streams and produces considerable annual cash flow. In the third quarter, we produced $1.1 billion of agency originations, which was in line with our second-quarter volumes. In the third quarter, we also saw a big dip in the tenure to a range of $3.60 to $3.80, which immediately resulted in a massive increase in our agency pipeline to approximately $1.9 billion, which is one of the highest levels we have ever seen. During that time frame, the agencies got significantly backed up by creating a delay of three to six weeks, which certainly affected the timing of our closures, compounded by the recent backup in rates above 4% again. As a result of these factors and given the magnitude of our pipeline, we are guiding our fourth-quarter volumes to be in the range of $1.2 billion to $1.5 billion, which is very rate-dependent. If rates stay at these levels, we are confident we can originate $1.2 billion in the fourth quarter, but if rates drop meaningfully below 4% again, we are confident we can reach the upper end of our range of $1.5 billion. We also continued to effectively convert our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. In the third quarter, we generated $520 million of payoffs, of which $385 million or 74% were refinanced into fixed-rate agency deals. For the first nine months of this year, we captured over 60% or $1.1 billion of our balance sheet runoff into agency production. If interest rates continue to decline, we expect that this will become an even more meaningful part of our business going forward. Our fee-based servicing portfolio, which grew another 2% this quarter and 10% year-over-year to $3 billion, generates approximately $125 million a year in recurring cash flow. We also generate significant earnings on our escrow and cash balances. In fact, we are earning 4.6% on about $2.3 billion of balances or roughly $120 million annually, which combined with our servicing income totals $235 million of annual gross cash earnings or $1.15 per share. This is in addition to the strong gain on sale margins we generate from our originations platform. It's extremely important to emphasize that our agency business generates over 45% of our net revenues, the vast majority of which occurs before we even turn the lights on every day. This is completely unique to our platform. We continue to do an excellent job in growing our single-family rental business. We had another strong quarter with $240 million of funding and another $375 million of commitments signed up, bringing our nine-month numbers to $1.1 billion, which is just on par with the total that we produced for all of last year, bringing our total commitment volume to $4.6 billion from this platform. Additionally, we have a large pipeline and remain committed to this business, which offers three turns on our capital through construction, bridge, and permanent lending opportunities, generating strong returns in the short term while providing significant long-term benefits by further diversifying our income streams. We also made steady progress in our newly added construction lending business, which we believe can produce very accretive returns to our capital by generating 10% to 12% unlevered returns initially, and mid- to high-level returns on our capital when we obtain leverage. We closed our first deal in the third quarter for $47 million, with growth in our pipeline of roughly $300 million under application, $200 million in letters of intent, and $600 million of additional deals in the current screening process. We believe this product is very appropriate for our platform, offering us three turns on our capital through construction, bridge, and permanent agency lending opportunities. Between our SOFR and construction lending products, we expect to continue growing our balance sheet loan book and generating strong returns on our capital while significantly enhancing our future agency production. In summary, we had another productive quarter, and we are working to manage through the balance of this dislocation. We have done an excellent job in working through our loan book, getting borrowers to recap their deals with fresh equity, as well as bringing in quality sponsors to manage underperforming assets and work through our nonperforming loans. We recognize that although the market backdrop is improving, there is still a lot of work to be done. We believe we are well positioned to execute our business plan and continue to outperform our peers. I will now turn the call over to Paul to take you through the financial results.
Paul Elenio, CFO
Okay. Thank you, Ivan. We had another strong quarter, producing distributable earnings of $88 million or $0.43 per share, translating into ROEs of approximately 14% for the third quarter. As Ivan mentioned, we modified another 24 loans in the third quarter totaling $1.2 billion. Approximately $710 million of these loans required borrowers to invest additional capital to recap their deals, providing some form of temporary rate release through a paying accrual feature. The pay rates were modified to an average of approximately 6%, with 2.5% of the residual interest due being deferred into maturity. $240 million of these loans were delinquent last quarter and are now current under their modified terms. Our total delinquencies decreased by 10% to $945 million at September 30 compared to $1.05 billion at June 30. These delinquencies comprise two buckets: loans that are greater than 60 days past due and loans less than 60 days past due, on which we're not recording interest income unless we believe cash will be received. The 60-plus day delinquent loans or non-performing loans were approximately $625 million this quarter compared to $676 million last quarter due to approximately $152 million of modifications and $77 million of loans taken back as REO, which was partially offset by $110 million of loans progressing from less than 60 days delinquent to greater than 60 days past due and $68 million of additional defaulted loans during the quarter. The second bucket, consisting of loans less than 60 days past due, also decreased to $319 million this quarter from $368 million last quarter due to $88 million of modifications, $110 million of loans progressing to greater than 60 days past due, and an $8 million payoff, which was partially offset by approximately $157 million of new delinquencies during the quarter. While we are making good progress in resolving these delinquencies in line with our previous objectives, we do anticipate that there could be new delinquencies in this environment. As Ivan mentioned regarding our plans for resolving certain delinquencies, we have started to take back real estate in the third quarter, and we expect to take back more over the next few quarters. The process of taking control and working to improve these assets to create a current income stream takes time, which, as I mentioned on our last call, will likely result in a low watermark for net interest income over the next couple of quarters until we have worked through this portfolio. This is what we expected and is consistent with our previous guidance that this would be the period of peak stress at the bottom of the cycle. In line with our strategy of taking back REO assets, we decided to break out our REO assets into a separate line item this quarter, which was previously included in other assets on our balance sheet. As Ivan discussed earlier, we took back approximately $77 million in assets in Q3, $57 million of which we currently own and operate, accounted for as REO, and roughly $20 million that we brought in new sponsorship to operate and assume our debt, which was accounted for as a sale and a new loan in the third quarter. Additionally, we continue to build our CECL reserves given the current environment, recording an additional $16 million in reserves in our balance sheet loan book in the third quarter. It's important to emphasize that despite booking approximately $162 million in seasonal reserves across our platform in the last 18 months, $132 million in our balance sheet has already been reflected in our book value. This performance is well above our peers, the majority of whom have experienced significant book value erosion in this market. We are one of the only companies in our space that has seen significant book value appreciation over the last five years, with 28% growth in that time versus our peers, whose book values have declined by an average of approximately 22%. In our agency business, we had a solid second quarter with $1.1 billion in originations and loan sales. The margins on our loan sales increased to 1.67% for the third quarter from 1.54% last quarter. We also recorded $13.2 million of mortgage servicing rights income related to $1.1 billion of committed loans in the third quarter, representing an average MSR rate of around 1.25%. Our fee-based servicing portfolio grew to approximately $33 billion at September 30, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $125 million gross annually. This income stream, combined with our earnings on escrows and gain on sale margins, represents over 45% of our net revenues. In our balance sheet lending operation, our $11.6 billion investment portfolio had an oil and yield of 8.16% at September 30, compared to 8.60% at June 30, primarily due to a decrease in SOFR during the quarter. The average balance on core investments was $11.8 billion this quarter compared to $12.2 billion last quarter due to one-off exceeding originations in the second and third quarters. The average yield on these assets increased slightly to 9.04% from 9% last quarter, primarily due to slightly more back interest collected in the third quarter than the second quarter from third-quarter modifications, which was partially offset by some new non-accrual loans. Total debt on our core assets decreased to approximately $10 billion at September 30 from $10.3 billion at June 30, mostly due to paying down CLO debt with cash in those vehicles in the third quarter. The all-in cost of debt decreased to approximately 7.18% at September 30 versus 7.53% at June 30, primarily due to a reduction in SOFR. The average balance on our debt facilities decreased to approximately $10 billion for the third quarter compared to $10.8 billion last quarter, mainly due to the unwind of CLO 15 that occurred late in the second quarter combined with paydowns in our CLO vehicles from runoff in the third quarter. The average cost of funds in our debt facilities increased slightly to 7.58% for the third quarter from 7.54% for the second quarter. Our overall net interest spreads in our core assets were flat for both the second and third quarter at 1.46%. Our overall spot net interest spreads decreased to 0.98% at September 30 from 1.07% at June 30, primarily due to less CLO debt outstanding, which has lower cost of funds from paydowns during the quarter. We continue to improve our financing sources, adding a new banking relationship with a $400 million warehouse facility that we closed in the third quarter. As we continue to shrink our balance sheet loan book, we have deleveraged our business by 25% over the last 18 months to a leverage ratio of 3:1, down from a peak of around 4:1. Importantly, our leverage consists of about 65% non-recourse, non-mark-to-market CLO debt with pricing that is still well below the current market, providing strong leveraged returns on our capital. That completes our prepared remarks for this morning. I'll now turn it over to the operator to take any questions you may have at this time.
Operator, Operator
We'll hear first from Steve Delaney with Citizens JMP.
Steve Delaney, Analyst
Ivan and Paul, thank you for the additional insights regarding your non-performing loans and loan modifications mentioned in the press release. It's very informative. I noticed that you've built CECL reserves, with Paul mentioning $100 million or $180 million over the past 18 months. However, there's no specific information in your release about the actual amount of realized losses you've incurred this year. As you navigate through this process, do you regard these paper reserves as indicative of real losses? I'm particularly interested in understanding how the real losses compare to the loss reserves.
Paul Elenio, CFO
Sure. So, Steve, thanks for the question. It's Paul. We haven't really had any realized losses during the year. I think we had maybe a $1.5 million realized loss last quarter or the first quarter, I forget, on a small loan that we took back. For the most part, some of the REO we took back during the quarter, we had some reserves on and we took those back at fair value. So, until we dispose of those REO assets, we don't have a gain or a loss. So, we've not seen any significant realized losses or any material realized losses. As you know, the $162 million that I guided to on the call that we booked in CECL reserves, $132 million in our balance sheet is already reflected in our book value. But as you said, it hasn't been realized. And it may, we don't know how much, if any, will be realized. It takes time to work through these assets and dispose of them. But at this juncture, we just haven't had any significant realized losses at this point.
Steve Delaney, Analyst
Got it. That's helpful to understand. And we noted in the press release the $100 million three-year note issue at 9%. Could you comment on the purpose and use of proceeds? Just on the surface, it looks like expensive capital. Just curious what your thought process was with that.
Ivan Kaufman, CEO
Well, we felt it was appropriately priced capital for what it is. It's three-year capital. We didn't want to go out to a long term. Certainly, it is accretive relative to where our dividend was, and it was an easy piece of capital to put in place. We're also seeing some pretty good opportunities with mid-teen returns. So, we thought it was priced correctly given where we were in the cycle, and it was important for us to not extend out five or seven years; we went out three years and not too short. So, it's just an easy piece of capital to put in place.
Paul Elenio, CFO
Yes. And Steve, I'll just add to that. I think that was our thought process: we don't have any pending maturities coming up on any of our unsecured debt, other than a convert that's coming due at the end of 2025, which is easily replaceable. Ivan's view is correct; as we said in our commentary today, we are working to ramp back up our bridge lending opportunities. We have the SOFR business that funds over time our construction business. We're starting to see solid opportunities in the market with mid-teen returns. So, we viewed that as still cheaper capital than common, and in our view, that was accretive capital cost.
Ivan Kaufman, CEO
Yes. I think in my prepared remarks, our SOFR and construction lending business have mid- to high-teen returns that we have in place, and keep in mind that they will ramp up substantially next year. It’s in place; there's lower funding in the beginning. That will ramp up, and we'll leverage it. But having capital that generates those mid-teen returns and knowing it will be in place without putting too much on and doing a small deal is very appropriate for us.
Operator, Operator
Next, we'll hear from the line of Stephen Laws with Raymond James. Please go ahead.
Stephen Laws, Analyst
I want to follow up on Steve's question regarding the capital. You mentioned the construction opportunities. Ivan, you mentioned in your prepared remarks that some of the best loans made over the years have been at this point in the cycle as far as bridge loans. Can you talk about how that pipeline builds into next year? And how much more unsecured debt are you comfortable raising without equity? Or are you looking to tap the ATM a little bit? I'm curious about your thoughts on capital to fund the growth opportunities.
Ivan Kaufman, CEO
Okay. I'm going to meander a little bit because we made a very strategic decision to put our effort into the build-to-rent or SFR business and construction business for a couple of reasons. Number one, the spreads have been very outsized, and there wasn't a lot of competition as regional banks really got dried up. We have become a dominant lender in that space, lending in the $350 to $450 spreads, and we were able to get a lot of commitments knowing that this would be something funding up in 2025. It was a good way to look at our business. We opted not to jump into higher loan-to-value businesses. I thought that the bridge lending on multi-family was a bit too aggressive at that juncture with higher loan-to-value. We had the option to really put our capital into that space, which we did. I will tell you with clarity that spreads have tightened over the last 60 to 90 days by 75 basis points. So, we have embedded value in that pipeline. At this moment, securitization markets have come back. A year ago, you really couldn't get an effective securitization done. The CLO markets are tighter than they were in the heyday, but not that far off. So, there are many efficiencies drawn. Ramp-up now on the bridge lending platform, especially with cap costs and securitization costs coming down, we like that business. Just last quarter, spreads were in the $400 to $450 range with large cap costs. We've seen spreads in the $275 range now; those deals make more sense. We expect to see more effective originations on that side of the business. I think the securitization market will be much more efficient, and we'll be able to tap that in the first quarter, enhancing how we leverage our balance sheet. We need to manage this where interest rates are because interest rates greatly affect our runoff; if they decrease 375 basis points, we can see accelerated runoff generating enormous cash. We will be mindful of all those factors and tap different avenues for increased liquidity as needed.
Paul Elenio, CFO
Yes. And Steve, to add to that, our whole approach to capital management aligns with what I've outlined. We’ve proven over time that we have great insight and manage capital well. We're sitting on solid liquidity. We tapped into the three-year debt instrument we thought was appropriate and accretive. As Ivan said, we manage based on interest rates. If we see a lot of runoff, generating capital. If we see solid opportunities in areas such as bridge or construction, we will look to accesses liquidity as we always have—using a barbell approach between equity and debt. At present, we're low leveraged, and we like our position. Much depends on interest rates, but we will continue approaching capital markets as we always have, focusing on avoiding dilution.
Ivan Kaufman, CEO
Yes. Just to jump back into one other item. Not only are the non-performing loans important for us to manage from an interest standpoint, having $1 billion of non-interest-earning asset value allows us to make the math; as we return that back into capital, the leverage on those assets is much lower. We'll generate considerable cash as we resolve that as well. We'll keep our eye on the path to resolutions.
Stephen Laws, Analyst
That leads to my follow-up question. Paul, I know in your prepared remarks, you mentioned a low watermark on earnings in this quarter, next quarter, and for the back half of next year. Is it fair to assume we're going to see a decent lift in earnings from non-performing loan resolutions, recycling capital and from resolutions on those REO assets as well? Is that the right way to think about earnings ramping next year?
Paul Elenio, CFO
I think that's correct, but let's break it down in pieces. We talk about this over a longer-term outlook rather than in one or two quarters because we are at the bottom of the cycle. I've guided to a low watermark on interest income; as Ivan indicated, we are doing a great job resolving delinquency but expect new ones to arise. Our goal is to have resolutions exceed new delinquencies, continuing to reduce total delinquencies similarly to this quarter. SOFR, where it goes, will also impact our model. Over a longer outlook, we believe that as rates improve and non-performing loans get resolved, along with increased agency originations, all move in our favor. Some elements will work against you in the short-term, but if we can have a more favorable environment in the next 10 to 12 months, we will see a meaningful lift from those non-performing loans getting resolved while keeping an eye on keeping new delinquencies at bay.
Stephen Laws, Analyst
I appreciate the comments this morning, and you guys have done great managing through a very difficult environment over the past year. I appreciate the comments.
Ivan Kaufman, CEO
Thanks, Steve. I appreciate it.
Operator, Operator
Next, we'll hear from Rick Shane with JPMorgan. Please go ahead.
Rick Shane, Analyst
Just a couple of things. Ivan, you talked a little about the backlog associated with the agency business. Given your run rate through July, which I think last quarter you said was about $360 million, we were surprised not to see an acceleration there. I'm curious how this works from a pipeline perspective. Do your borrowers lock rates? Is this deferral, or if they didn't lock that window where rates were below 4% for two months, is that a lost opportunity until rates tick lower again?
Ivan Kaufman, CEO
I think it's a great question, and I'm thoroughly engaged because the agencies would likely have seen a backlog. Normally, things would move much quicker when agencies process loans, you can't rate lock them. There was a period where eager to rate lock these loans, but we couldn't get in position, costing us roughly in my estimation, $200 million to $300 million worth of loans that if rate locking would have closed. Rates moved against us. So if we look at those figures, we have pipeline roughly $1.8 billion, with normal fallout. We give a range based on where interest rates are, estimating where they could go, and our range is $1.2 billion to $1.5 billion. Therefore, that $250 million to $300 million I mentioned earlier—interest rate sensitive—will toggle features on loans in the pipeline that will close if rates drop. If rates remain at 425, we can hit $1.2 billion for the quarter. If it moves to lower rates, that $300 million that was in the pipeline previously will only come in when rates are favorable. That’s how we look at it.
Rick Shane, Analyst
Great, that's helpful context. I appreciate that. Just pivoting quickly to distributable income. Paul, when considering that number and thinking about the mods of the loans that are picking, I'm assuming PIK income is included in distributable. I apologize if you mentioned this; how much PIK income was there that was reported as noncash in the third quarter?
Paul Elenio, CFO
Sure. Good question, Rick. Yes, we include PIK interest from the mods in distributable earnings because we believe there's a high probability of collecting it, depending on timing. For the third quarter, there was $15 million of PIK interest included. For context, of the $15 million, $3 million related to assets we modified in a prior year with substantial guarantees, so we feel strongly about this collection. A couple of million dollars from mezzanine PE, which typically have a PIK feature. The remainder, which is about $10 million, came from mods in the first, second, and third quarters of this year, with $4 million from third-quarter mods, $2 million from second, and $4 million from first-quarter mods. That’s the breakdown for the third quarter, which I hope is helpful.
Rick Shane, Analyst
It's very helpful, and standing the second quarter transcript as you were speaking, that $15 million—I can't find the number currently—but is that comparable to what you reported, I think you said was $9 million last quarter?
Paul Elenio, CFO
I think it was about $10 million last quarter. That's right. So, it's up a bit because the first quarter mods are fully in the third quarter now since some were modified mid-quarter, then you've got your third-quarter mods; the third-quarter margins will have a bigger impact in the fourth quarter if they were modified late in the third quarter. So, you're correct; it was about $10 million, now it’s $15 million, and we’ll see where it goes going forward. Also, there are certain loans we have modded with a paying accrual, and we've chosen not to book or track that accrual. That's a couple of million dollars owed to us that's not in these numbers; that’s an offset we will get.
Rick Shane, Analyst
Okay, great. And actually, Paul, you're going to regret keep talking because I will ask you one last question that occurred to me. Please remind me your policy on REO—do you realize any loss when you take property REO?
Paul Elenio, CFO
So, it depends on the value. The way REO works in accounting is when you take back an asset, you must appraise it and allocate its value between land and building. If you're carrying the loan at X and the appraisal comes in at Y, then you either have a gain or a loss for accounting on your REO. For us, though, that gain or loss isn't considered realized until you dispose of the REO asset.
Operator, Operator
We'll turn now to the line of Jade Rahmani with KBW. Please go ahead.
Jade Rahmani, Analyst
It's great to get all those answers; they were very helpful. I know investors have many questions about that. I wanted to ask about cash flow performance; it dipped in the third quarter. Excluding timing of agency originations and loan sales, operating cash flow was $68 million, down from $94 million last quarter. I know there's some seasonality. Again, this excludes timing related to the agency business, but it's still below the dividend. Typically, we see a pickup in the fourth quarter, so can you talk about cash flow operations outlook? If the dividend is expected to be sustained?
Paul Elenio, CFO
Sure. Let's talk about cash flow. I don't have the numbers you have in front of you, Jade. The Q, which was filed this morning, has a nine-month cash flow of $415 million cash from operations. After adjusting for the timing of loan sales and changes in other assets and liabilities, it's about $328 million. The dividend for the nine months would have amounted to $265 million. So, we cover it. There are dips and increases, depending on cash collection timing and some loans that pay historically late. We're confident we have adequate cash flow from many sources to cover the dividend.
Jade Rahmani, Analyst
Great to hear. Regarding liquidity, how much liquidity do you expect to use out of the $600 million to take back the $250 million in REO that you mentioned? And I assume there will be further modifications.
Ivan Kaufman, CEO
Yes. We are thoroughly engaged now; we see that a lot of these NPLs are very low leverage compared to the rest of our business, impacting cash. We believe it could be turning point. We have many loans we have REO, with slated borrowers for, and one where leverage allows those loans—lots of loans we're seeing dispositions related to pure cash. I believe it will range somewhat consistent with past performance, providing good outlook as we hit the bottom of the cycle.
Jade Rahmani, Analyst
I also wanted to ask about loan putbacks from the GSEs. I think one of your competitors had putbacks, and another made some disclosure. I don't believe there's been any disclosure from Arbor. Have you experienced any of that?
Ivan Kaufman, CEO
No, we have not. We covered everything in our prepared remarks before; we don’t comment on that.
Jade Rahmani, Analyst
And lastly, just because investors ask about it, is there any comment or update you could provide regarding the DOJ inquiry that was reported?
Ivan Kaufman, CEO
No, we've covered everything in our prepared remarks before; we don't comment on that.
Operator, Operator
Next, we'll go to Crispin Love with Piper Sandler. Please go ahead.
Crispin Love, Analyst
Ivan, you mentioned in the prepared remarks that now would be the time to start ramping up the bridge lending program. Looking at this quarter, originations were down around $15 million or so, which have come down in this environment, which makes sense, but they were $100 million in early 2023 and significantly higher than previously. So, curious about the demand from borrowers right now, how those conversations are going, and how you might expect originations to trend on the bridge side?
Ivan Kaufman, CEO
The loans on the construction side are generating CMOs and getting leased up; we're focusing our attention on that. The math didn't work for me with spreads being 400 or 450 and SOFR at 5.25, which covered buying caps—costs were enormous. We've closed loans at 275 over, and SOFR is lower and cap costs are significantly lower. We've closed about $80 million, with an additional couple of hundred in the pipeline. I'll say we're aiming for about $300 million to $400 million of bridge lending closed between now and year-end. We’re also continuing to work on the build and construction lending side. We must look at it holistically. Moreover, we have increased capital allocations to pref and mezz, with that being a 14% business, which has been attractive. We enjoy a lot of flexibility regarding where we want to allocate capital. With the securitization market returning, and knowing short-term rates are dropping, we think the margins will be solid.
Crispin Love, Analyst
I just want to make sure I got that. Did you say you expect $300 million to $400 million of bridge originations between now and year-end?
Ivan Kaufman, CEO
About $300 million is what we're expecting.
Paul Elenio, CFO
We did $84 million in October, as Ivan referenced. We had $240 million of funding in the third quarter from our SOFR business, which as we had in our prepared remarks, has very solid committed volumes. We have $1.8 billion outstanding on our balance sheet in that business, which continues to fund up. We expect that to ramp up. We did $84 million already, and we anticipate a couple of hundred more by year-end. This is the way we're looking at it across the product lines. Ivan mentioned we’re also active in the construction lending side. We closed our first deal in the third quarter of $47 million, which will fund over time. So, there could be several other committed volumes closed by year-end on that front.
Ivan Kaufman, CEO
Yes. I think it will be impacted if short-term rates drop 50 basis points. I think the bridge side will experience growth in the first quarter, which could be substantial if things move in the right direction.
Operator, Operator
And ladies and gentlemen, that will conclude today's question-and-answer session. I'd like to turn the floor back over to Ivan Kaufman for any additional or closing comments.
Ivan Kaufman, CEO
I just want to thank everybody for their participation. It's definitely been a very challenging time for us and most people in the industry. I think we've outperformed our peers, and I really appreciate your support and your commitment to the Company. Thank you, everybody.
Operator, Operator
Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.