Earnings Call Transcript - ABR Q4 2024

Operator, Operator

Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Full Year 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, Chief Financial Officer

Okay. Thank you. Good morning, everyone. And welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 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 and 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 beliefs, assumptions, and expectations of our future performance taking into account the information that's currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. This means the caution not to place undue reliance on these forward-looking statements which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events, or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to our operations and CEO, Ivan Kaufman.

Ivan Kaufman, President and Chief Executive Officer

Thank you, Paul. Thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had a solid fourth quarter posted in 2024. It has been another very strong year despite an extremely challenging environment. We've executed our business plan very effectively and in line with our expectations. Despite a tremendously volatile and elevated interest rate environment for almost three years now, we've managed to continue to outperform all our peers in every major financial category, including our dividend, shareholder return, and book value preservation. We're well-positioned for this dislocation, and we're going into the cycle. We have a large cushion between our earnings and dividends. We're well-capitalized and invested in the right asset class, with the appropriate liability structures. This allowed us to outperform our peers and continue to pay our dividend while most of our peers had to cut their dividend substantially, some multiple times during the cycle, also experiencing significant book value erosion. One of the guidance points we have consistently discussed on our calls is how we felt that this dislocation will persist and result in a much slower recovery, with rates remaining higher for longer. This is something we were well-prepared for. However, rates have not just remained elevated; they've actually increased significantly with the ten-year rising from 3.6% in September to as high as 4.80% in January, and now it's hovering around 4.50%. With the current outlook suggesting we'll remain at these levels for the near term, this is a material change in the market resulting in significant headwinds that will affect everybody in the space. These elevated rates are creating a very challenging environment as it relates to agency origination volumes. While we've experienced success over the last few years in getting borrowers to transition into fixed-rate bonds and recap their deals, we expect this environment will create a deceleration in this area as well. We have also seen a 100 basis point decrease in SOFR over the last few months, which is reducing the earnings on our escrows and cash balances. Additionally, we expect there will be a temporary drag on earnings from the REO assets we are repositioning over the next 12 to 24 months, which we will discuss in later detail. However, this will partially be offset by efficiencies we expect to carry from reducing bond costs in the securitization market and with our commercial banks, as well as growth in our servicing portfolio. As a result of these changing macroeconomic events, we have revised our earnings outlook for the foreseeable future until we see improvements in the rate environment. Based on these factors, we are now estimating our earnings for 2025 will be in the range of $0.30 to $0.35 a quarter. We'll likely reset our dividends starting in the first quarter of this year in accordance with this new guidance. This outlook is reflective of the newly elevated rate environment. However, if there is a material change in short-term or long-term rates in the future, we will revise our outlook accordingly. It's important to note that we were the only firm in our peer group to grow our dividend over the last five years by 43%, while every other company in our space has cut their dividends multiple times, by 40% on average, with only one company keeping their dividend flat over the last five years. And we assume that we reset our dividend to the midpoint of our earnings guidance. Our dividend will be approximately 8%, which again is compared to our peers, who are down at an average of 40%. Additionally, over the last five years, we have also grown our book value by 26%, while recording significant reserves, which is an incredible accomplishment, especially considering that our peers have actually experienced a 25% erosion in net asset values. We've done a very effective job despite elevated rates, importantly to our old portfolio, by getting borrowers to recap their deals and purchase interest rate caps. In 2024, we were able to successfully modify $4.1 billion of loans with borrowers committing to inject $130 million of additional capital into their deals. We also modified another $600 million of loans in 2023, bringing our total loan modification over the last two years to $4.7 billion or roughly 60% of the remaining legacy loan mark. This is tremendous progress, especially in light of the elevated rate environment. That has resulted in the last portion of our loan book being successfully repositioned in only assets with enhanced collateral buys. We've also done an exceptional job of bringing in new sponsors to take over assets, even essentially what we foreclosed on. In fact, in the last two years, we have brought in new sponsors to recap deals with substantial direct money on approximately $900 million of loans. This is a very important strategy that again successfully repositions assets with appropriate capital, putting our loans in a much more secure position with experienced sponsors and creating more predictable future income streams. And again, our performance is reflective of us recording the appropriate level of reserves on these expressed assets. Despite elevated rates, we've still generated strong runoff over the last two years, with $3.4 billion of runoff in 2023 and $2.7 billion in 2024. An amazing accomplishment. We've also continued to make strong progress despite the unprecedented move up in rates on the approximate $1 billion of loans that were past due at September 30. In the fourth quarter, we successfully modified $140 million of defaults, generated $151 million of payoffs, and took back approximately $120 million of REO assets, all of which we were able to bring in new sponsors to operate under somewhat debt. This has formed progress in one quarter and has reduced the $944 million of billing plus we had at September 30 down to $534 million at December 31, or a 44% decrease. We did experience additional delinquency during the quarter of approximately $186 million, bringing that total delinquencies December 31 to approximately $819 million, which is down 13% for the quarter and down 22% from last year, which is in line with our previous guidance even in the face of rising interest rates. Our plans for resolving that remaining delay from Jesus. PayFac is already out, including bringing this bus of approximately 40% to 50% of this with the other 40% to 50% have been paying off of the modified in the future. This should put our REO assets on our balance sheet in a range of $400 million to $500 million with another roughly $150 million to $200 million that we won't have to worry about any sponsorship to operate. This $400 million to $500 million of REO assets is the heavy lifting portion of our loan book we estimate will take approximately 12 to 24 months to reposition. The performance of these assets has been greatly affected by poor management and from being undercapitalized. Today, these properties have an average odds of 35% and an estimated NOI of around $7 million, which is very low and will temporarily affect our earnings. We believe there's great economic opportunity for us to step in and reposition these assets and significantly grow the asset is around 90% and NOI to approximately $30 million over the next 12 to 24 months, which will increase our future earnings significantly. We are working exceptionally hard to resolve and manage delinquencies. As I mentioned, these have been significantly affected by the current rate environment. Rates coming down sooner than we expected will have a positive impact on our ability to work non-interest earning assets, income-producing investments earlier, which will be accretive to future earnings. This is a challenging and demanding work and despite the increasing headwinds, I am very pleased with the progress we have made to date. In our balance sheet lending platform, we have had an active fourth quarter originating $370 million of new bridge loans and $36 million of preferred equity investments behind our agency originations. As we said in our last call, we have started to ramp up our bridge funding program to take advantage of the opportunities we're seeing in today's market to originate high-quality short-term bridge loans and generate long-term loan returns on that capital in the short term, while maintaining to build up a significant pipeline of future agency deals. A critical part of our strategy. Depending on the rate environment, we believe we can bridge $1.5 billion to $2 billion on bridge loans products in 2025 and enhance our returns to increase efficiency preceding the securitization model with our commercial banks. Another major component of our unique business model is our capital-light agency platform that provides this advantage. It allows us to continue to delever our balance sheet. To generate significant long-dated income streams, which is a key part of our business strategy. We've been a significant player in the agency business for twenty years, and now we've been a top ten player for eighteen years in a row. Coming in at number six in 2023, and on an eighth in 2024. We had a very strong fourth quarter originating $1.35 billion of new agency loans, if you remember, was what's the top end of the range that we guided on last quarter's call. We explained that our origination targets were $1.2 billion to $1.5 billion in Q3 of Q4 depending on the rate environment. Despite a significant uptick in rates in the fourth quarter, we're well above what we had anticipated in these very small volumes. We close out 2024 with $4.3 billion of GSP agent fee volume, despite the volatile rate environment across the year. If rates remain where they are today, we expect we will be experiencing a very challenging visitation climate. They continue to remain elevated despite Fine. Likely gone forward result of the ten to twenty percent decline in our agency production. 2025 to a range of $3.5 billion to $4 billion, which will again be very dependent. We also did a good job converting our balance sheet loans into agency products in 2024 despite elevated rates. In the fourth quarter, we generated $900 million of payoffs, and $530 million or 59% of these loans being refinanced into fixed-rate agency deals for the full year 2024. We recaptured 65% or $1.6 billion of $2.5 billion of all the family balance sheet rental and agency production. This is on top of the $3 billion of multifamily runoff generated in 2023 with a 56% recapture rate agency loan. As I stated earlier, with rates at these levels, it's become more challenging for borrowers to obtain an agency takeout on our balance sheet loans. We continue to do an excellent job in growing our single-family rental business. It was a strong quarter with $1.7 billion in new loans in 2024. Best year yet. And well above our 2023 production of $1.2 billion. We have now eclipsed $5 billion of production in this platform to date, and we're very excited about the opportunities we're seeing to continue to grow this platform. Making it a bigger contributor to our overall business. This is a great business that offers us returns on our capital, through construction, bridge, and permanent lending opportunities, generating high returns in the short term providing significant long-term benefits by further diversifying our income streams. We've also continued to make the same progress on our newly added lending business. We believe this product is very appropriate for our platform as well as free terms on our capital production, purchase, and permanent agents lending opportunities. It generates mid to high returns on our capital. We closed our first deal in the third quarter for thirty-seven million. Our second deal in the fourth quarter for fifty-four million. We've a long timeline of roughly two hundred million on our applications, and two hundred million in allies and eight hundred million of additional fields with the cardless trainings. Based on our deal flow, we are confident in our ability to create two hundred and fifty to five hundred million of this business in 2025. In summary, we had a strong 2024 once again, significantly outperforming our peers. We've executed our business plan very effectively and aligned with our objectives. Clearly, the landscape has shifted significantly in the last ninety days. We expect there to be a substantial headwind in the future. We do believe we'll have some positive offsets from reduced bond costs across our bank lines, including greater efficiencies in the securitization market as well as continuing to fund our bridge as a foreign collection lending business, which generates foreign leverage, not capital. Additionally, if short-term and long-term rates decline further with a case of the hedge we're currently experiencing, we could see increased future earnings. In the meantime, we'll remain heavily focused on working through and managing along with one continued growth in areas of our business to increase the many diverse channels that we've developed. We have a very seasoned and experienced management team that is operating actively for multiple cycles. In your work history, the positive balance is monthly. I am confident we will continue our long-standing track records of being a top performer in this space. I will now turn the call over to Paul to take you through the financial results.

Paul Elenio, Chief Financial Officer

Thank you, Ivan. We had a strong fourth quarter and full year 2024, producing distributable earnings of $81.6 million or $0.40 per share for the fourth quarter and $1.74 for the year, which translates into ROEs of approximately 14% to 1.4. As Ivan mentioned, due to drastic changes in the macroeconomic climate, we are adjusting our forecasted distributable earnings for 2025 to $0.30 to $0.35 per quarter. Legal and consulting fees have played a big factor in the product earning network. Future changes in the interest rate environment will most certainly dictate whether we can grow our earnings to the new plan. We've also been affected by elevated legal and consulting fees as a direct result of the short-sell reports, which is something we expect will continue for the foreseeable future. We estimate these fees will be approximately $0.03 to $0.05 a share going forward, which is reflective in our new guidance. In the fourth quarter, we modified another fifteen loans totaling approximately $206 million of these funds we require borrowers to invest additional capital to capitalize their deals, thus providing some form of temporary rate relief for paying the full feature. The pay rates will modify an average to approximately 5% to 9%, with 2.3% of the residual interest due being deferred from maturity. $140 million of these loans were delinquent last quarter, and now are recurring in accordance with their modified terms. In the fourth quarter, we accrued $18.7 million of interest related to all modifications data cool features, $7.6 million is related to modifications that were completed in years prior to 2024. And $1 million is on MES and PE loans originated in 2024 behind agency loans that have a paid approval feature as part of their normal structure. This leaves $10 million worth of accrued interest in the fourth quarter related to modifications of grid loans in 2024, with $1.5 million of which is related to our fourth quarter modifications. The table summarizing all our 2023 and 2024 material modifications and the related accrued interest on these loans is detailed at our 10-K which we expect to file later this afternoon. Our total delinquencies are down 13% to $819 million as of December 31, compared to $945 million at September 30. These delinquencies are made up of two buckets. Loans that are greater than sixty days past due and loans that are less than sixty days past due; we're not reporting interest income on unless we believe the cash we received. The sixty-plus delinquent loans or NPLs were approximately $652 million this quarter, down to $625 million last quarter due to approximately $128 million of loans progressing from less than sixty days delinquent to greater than sixty days past due, and $153 million of additional defaulted loans during the quarter which was largely offset by $134 million of payoffs and modifications and $120 million of loans taken back as REO. The second bucket consisting of loans that are less than sixty days past due, came down to $167 billion this quarter, from $319 million last quarter, to $157 million in modifications that ran off $128 million of loans progressing greater than sixty days past due, which was partially offset by approximately $133 million of new delinquencies during the quarter. While we're making good progress in resolving these delinquencies, at the same time, we do anticipate that we will continue to experience new delinquencies, especially in this current rate environment. In accordance with our plan for resolving certain delinquent loans, we have foreclosed on some real estate, and we expect to take back more over the next few quarters as Ivan guided to earlier. The process of taking control and working to improve these assets and create more of the current income stream takes time, which is even more challenging in this climate. Initially, we've been very successful over the last few quarters in collecting back interest owed we would modify certain loans. A good portion of our remaining delinquencies are more of a heavy lift through foreclosure and repositioning over time, which will likely result in less back interest being collected going forward on workouts. These are some of the reasons we're guiding to reduce earnings in the near term. In the fourth quarter, we took back $120 million of REO assets. We've been highly successful at bringing in new sponsors on certain assets. This strategy is a very effective tool turning dead capital into nonperforming loans into earning assets, which will increase our future earnings. The fourth quarter was accomplished just on two REO assets, totaling about $70 million which were accounted for in sales and new loans. The other $51 million of REO is related to one asset that we took back in the fourth quarter that we subsequently decided to flip to a new sponsor and provide a new loan. We closed on this deal yesterday, and the purchase price was at our net carry value of $45 million which is net of $5.7 million specific reserves that we took on this asset in 2023 and 2024. As a result, we will have a one-time realized loss in the first quarter of approximately $6 million, which we've already reserved for and is reflected in our book value. We will now have a performing loan that will add twelve hundred income. We believe we've done a very effective job of properly reserving for our assets. Over the last two years, we did not incur any material losses in 2024. We are expecting to have some realized losses in 2025 through similar executions on REO assets and by repositioning certain loans with new sponsors, which we expect will be in line with our prior reserves on these assets. The timing and magnitude of these losses is hard to predict at this point, but once we know a transaction is likely to occur, we'll continue to signal that result ahead of time if possible. Again, please keep in mind that these potential losses reflect reserves we've already taken, which demonstrate how prudent we've been in recording the right level of reserves on our loan book. As a result of this environment, we continue to build our CECL reserves recording an additional $13 million in specific reserves in our balance sheet loan book in the fourth quarter. Again, we feel we've done a good job of putting the right level of reserves in our assets, which is evident by transactions we have been able to effectuate to date at or around our carrying values net of reserves. It's also important to emphasize that despite booking approximately $170 million in seasonal reserves across our platform in the last two years, $135 million of which was in our balance sheet business, we saw a very nominal decrease in book value of around 2%, while peers experienced an average book value decline of approximately 20% over that same time period. Additionally, we are one of the only companies in our space that has seen significant book value appreciation of less five years, with 26% growth during that time period, versus our peers whose book value has actually declined an average of approximately 25%. In our agency business, we had an exceptional fourth quarter despite headwinds from higher rates. We produced $1.4 million in originations and $1.3 billion in loan sales with very strong margins of 1.75% for the fourth quarter compared to 1.67% last quarter. We were also incredibly pleased with the margin we generated in 2024 of 1.63% which exceeds 2023's pace of 1.48% by 10%. We reported $13.3 million of mortgage servicing rights income related to $1.35 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1% which is down from 1.25% last quarter due to a higher mix of Freddie Mac loans in the fourth quarter, which contained lower servicing fees. Our fee-based servicing portfolio also grew 8% year over year to approximately $33.5 billion as of December 31, 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 income going forward around $127 million gross annually. As Ivan mentioned earlier, a 100 basis point decline in short-term rates has reduced the earnings on our cash and escrow balances. We are now at a run rate of between $80 million and $85 million compared to approximately $120 million that we earned in 2024 for a $35 million to $40 million reduction, which holds back our 2025 earnings. Our balance sheet lending operation, our $11.3 billion investment portfolio, has a rolling yield of 7.8% as of December 31 compared to 8.16% at September 30 mainly due to a decrease in SOFR during the quarter. The average balance in our core investments was $11.5 million this quarter compared to $11.8 billion last quarter. We were wrong off exceeding originations in the third and fourth quarters. The average yield of these assets decreased to 8.52% from 9.04% last quarter mainly due to reduction in SOFR, which is partially offset by more back interest collected in the fourth quarter on loan modifications and paydowns. Total debt on our core assets decreased to approximately $9.5 billion at December 31 from $10 billion in September 30, mostly due to paying down CLO debt with cash in those vehicles in the fourth quarter. The only positive debt was down to approximately 6.88% at December 31 versus 7.18% at September 30, mostly due to a reduction in SOFR, which was partially offset by lower-rate debt charges being paid down from CLO runoff and the new $100 million unsecured debt instrument being posted in the fourth quarter. The average balance on our debt facilities was down to approximately $9.7 billion for the fourth quarter compared to $10.1 billion last quarter, mainly due to paydowns in our CLO vehicles from runoff in the fourth quarter. The average spot fund in our debt facilities was 7.10% in the fourth quarter compared to 7.58% for the third quarter, again from a decline in SOFR. Our overall net interest spread in our core assets was relatively flat at 1.42% this quarter versus 1.46% last quarter. Our overall spot managed for spreads were 0.92% as of December 31 and 0.98% as of September 30. Lastly, and very significantly, we've managed to delever our business by 30% for our disposition, to a leverage ratio of 2.8 to 1 from a peak of around 4.0 to 1 two years ago. That completes our prepared remarks this morning. I'll now turn it back to the operator to take any questions you may have at this time.

Operator, Operator

Thank you. And as a reminder, to ask a question, please press star one on your telephone keypad. And we'll take our first question from Steve Delaney with Citizens JMP. Please go ahead.

Steve Delaney, Analyst

Good morning, Ivan and Paul. Thanks for taking the question. For starters, I really appreciate you guys being upfront with us today about your expectations for the dividend in 2025. I think it's a lot easier for the market to hear that today than in March when you have to declare the first quarter. So thank you for that clarity. Ivan, you talked about some resolutions involving outside money. I'm curious if you see opportunity in distressed bridge loans that eventually rolls into REO. Are you seeing institutional money coming in as a unique opportunity? Is that money coming in? And if it's not coming in, do we need that to get this problem cleaned up in the next one to two years?

Ivan Kaufman, President and Chief Executive Officer

I'm going to bifurcate my response because you have, and I'll add a little color. In the third or fourth quarter, when the ten-year or five-year thought considerably, you were seeing a high level of activity in May and April. And then right prior to the election, the ten-year jumped from 3.60 to 4.80, everything went on pause. There's a bit of a pause period. But there are two types of collaboration that we're looking at. Mentioned in my comments, the ones that we effectively transitioned to these sponsors, there's a lot of them name Okay. And there is plenty of capital, and plenty of that in the real capital. Would a lot of it is people have access to institutional money or network. Federal network and there's plenty of activity for every time we look at it in multiples, there's not a lot of assets. The more difficult part is the ones where the heavy lift goes, which is kind of where it takes time to get your hands on those assets. Sponsors are kind of rascals. You can still look cash flow and don't manage those assets. They get brought down to a level where we need to bring in our own capability to get those up to speed. Once they're up to speed, I'll be allowing them. But I think there's a little bit of a pause in the market, and that's really reflective of our comments. I'm sure why everybody's phone excited, and I went to NMHC about a month and a month and a half ago, and I was shocked at how people were thinking they're gonna have a great year. To find out the increased rate environment. A lot will have to do with where rates settle in, around four-fifty. If you see rates go down to where they were, you'll see tons of money flood back into the space and have the exuberance of the experience off our last quarter's call where the refinance volumes, the activity was stopped and picked up. It's already much greater.

Steve Delaney, Analyst

So I'm hearing you say there is outside money right now as you sit today. You rework a bridge loan and there's new sponsors, there are some people willing to step in there. The heavier lift is if you've got an REO thirty percent leased and needs further renovation. That's something you feel like your team at Arbor is better equipped to take that property over and manage the property, and then look to sell that property in twelve to twenty-four months. Am I hearing you correctly?

Ivan Kaufman, President and Chief Executive Officer

That's correct. Every time we get our hands on them, they do the ones where it's more difficult. Hands-on. Just like I said, these sponsorships were a bit of bad players in the market using the legal system, dealing with cash flow and how to manage the assets. So every single asset that we take back, as we're taking them back, we have a twenty-four month plan. We’re able to show how we can get it to from where it is today monthly, increase the NOI by putting the right CapEx to get the stuff to speed. Our guess is we're gonna know we’ll be able to sell those assets at some point in the future.

Steve Delaney, Analyst

Thanks, Paul, a quick one for you to close out. In December, Fitch upgraded Arbor's primary servicing rating to CP f two plus. It looks like a large focus of that would be on your agency servicing. But to any extent, did that servicing upgrade reflect the work you were doing on the bridge loans in your CLOs?

Paul Elenio, Chief Financial Officer

I don't have the definitive answer, but I do believe you are correct, Steve, that the majority of that rating is not old. It has to do with how we're servicing the agency book. It may have some impact with the balance sheet book, but we just upgraded because of the quality of our servicing shop. We have made a lot of investment in that division, both from a technology perspective and staffing perspective, and our rating just keeps getting better and better, which I think should not be overlooked as you just mentioned.

Steve Delaney, Analyst

In getting back to your comment, I was just reflecting on the assets. We've done very well. Since we talked to sponsors, the level of improvement is remarkable. You're taking assets that will probably have a mid-seventies and well on their way to ninety. The cost matters.

Operator, Operator

Thank you. We will take our next question from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws, Analyst

Hi. Good morning. I wanted to touch on modifications from last year. I think it was around $4 billion, a lot of which was done in the early part of the year, maybe when borrowers had a different interest rate outlook. Can you talk about how you expect those modified loans to perform over 2025? Were those modifications reliant on some relief from rates over the course of 2025, and how do you expect or are those modifications typically twelve or six-month duration extensions? How do we think about those modified loans maturing over the course of this year?

Ivan Kaufman, President and Chief Executive Officer

I think it's important to have a little bit of an overall view. Keep in mind that we have run off in our portfolio over the last two years of almost $6.1 billion. The amount has been dramatic. Regarding the modified loans, keep in mind that bridge loans are term loans in nature, and it's very, very normal to modify in this kind of rate environment. Give people a little bit more runway. They bring more capital. There's a period of time when Salford was set at five thirty when it dropped. It was a lot of relief for borrowers who got my caps and then, you know, their lifetime to give them more opportunity. So when we look at a modification of a loan, we check if the sponsor could bring more capital, if he has the capability to improve the performance of those assets. The majority of those times, the supermajority of times, we track that performance and they are doing extremely well.

Paul Elenio, Chief Financial Officer

Sure. So when I speak of earnings on our escrows and cash, it is two components. We lump it into one. We’re sitting with about a billion five of escrow balances right now. And we have about $500 million of cash between cash on hand and cash in the CLOs. So that's called $2 billion. Right now, we’re earning slightly below that probably about $4.15 is what we're earning currently. If you take $2 billion, multiply it by $4.15, you're probably at $85 million both in earnings on the cash that we have on our balance sheet and in the vehicles and on our escrows. Last year, we earned $120 million between earnings on escrows and earnings on cash for two reasons. One, SOFR was higher throughout the year. Remember, SOFR has been dropping, so the full effect of the drop of SOFR is not in 2024 numbers. It'll be in the 2025 numbers. And our cash has come down, obviously, as we've used some of our cash to run our business.

Rick Shane, Analyst

Hey, guys. Thanks for taking my questions this morning. You mentioned $500 million of nonaccrual loans. Can we just go through in the $0.30 to $0.35 guidance? What's the drag from non-accruals? What's the contribution from PIC?

Paul Elenio, Chief Financial Officer

The three to five cents is annually. You know, we run probably two cents to two and a half cents already in 2024, and we're expecting that number will just be the same number, but for a longer period of time because it really wasn't ramping up until the second quarter. I would say that it's three to five cents for the year. On the cost between consulting, legal, administrative related to the short sellers if it continues. And then, you know, as far as the drag on earnings, I $819 million of one of our loans earning zero. We've commented that we do think in this environment, we'll resolve some and will have some new ones. Our track record has been and we still think even in this rate environment, we'll be able to make progress in the ten percent range. We did thirteen percent this quarter, which we were impressed with. But it'll also impact us on the REO side because I think the big temporary drag is that as Ivan alluded to, we already took back a hundred billion of loans in the first quarter. And we have fifty million on our books right now that aren't legacy. We have a hundred and seventy-six million in REO on our balance sheet. As a result, the drag is that four to five hundred million has an NOI of about seven million. But certainly not nearly what it would have been had it been paying a current interest rate. And then that's gonna be temporary until we can reposition those assets and hopefully we’ll have a significant upside in the future, but that's probably twenty-four months out.

Rick Shane, Analyst

Can you help us sort of understand the context of that expense?

Paul Elenio, Chief Financial Officer

I think we can definitely work through this. If you need any more context for me to address this, please just follow up. The consulting and legal costs are about $3 to $5 million.

Operator, Operator

Thank you. We will take our next question from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani, Analyst

Thank you very much. Can you discuss the lower cash balance and the structure of the business? What drove the quarter-on-quarter decline? And, also, did you experience any margin calls?

Paul Elenio, Chief Financial Officer

We did not experience any margin calls. We have great relationships with our lenders. The CLO market is strong right now, so we're not facing any significant issues. The cash balance dropped due to a combination of funding up our SFR business, which requires liquidity, and the timing of taking back REO assets. We’re sitting at about $450 million of cash as of today, which we have been using to grow our platform.

Ivan Kaufman, President and Chief Executive Officer

The CLO market and the bank lending market has improved dramatically and those are some of the benefits that will offset some of these other factors. The CLO market is getting deals done in the one fifty to one seventy-five, compared to rates that had been higher. We are seeing huge efficiencies on that side. The commercial banks have strong relationships with us and have been more aggressive with higher advance rates and lower spreads. This will translate to better margins moving forward.

Jade Rahmani, Analyst

Just on the GSE side, have you gotten any put-backs? I know JLO has done some.

Paul Elenio, Chief Financial Officer

We have not received any loan put-backs as it stands.

Crispin Love, Analyst

Thanks. Good morning, everyone. First, you've had $370 million of bridge origination in the fourth quarter, the highest level in a long time, in line with your previous guidance. Can you speak to expectations going forward as rates have backed up since September?

Ivan Kaufman, President and Chief Executive Officer

The $370 million of bridge is a good quarter. We are expecting about $1.5 billion to $2 billion for the year and we expect it to look fairly even over the year. If short-term rates drop, we see that number going up considerably. The agency business is off to a slow start. We expect a much lower first quarter in the agencies, and then we expect it to build from there as borrowers get more comfortable with the rates. Just to recap, we close out Q4 with strong numbers. We have this huge pipeline sitting on the side, so if we see a meaningful move for the ten-year down, it'll make a substantial difference.

Operator, Operator

Thank you. It appears that we have reached our allotted time for questions. I will now turn the program back to Ivan Kaufman for any additional or closing remarks.

Ivan Kaufman, President and Chief Executive Officer

Thank you everybody for your time. We expect next year to be able to get through this current environment. Appreciate your participation in the call. Even with this adjusted market price environment, we're still very solid with strong performing assets that we're confident in. Thank you, and have a great weekend.