Earnings Call Transcript - ABR Q2 2025

Operator, Operator

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

Paul Anthony Elenio, CFO

Thank you, Stephanie, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 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.

Ivan Paul Kaufman, CEO

Thank you, Paul, and thank you all for joining today's call. As highlighted in this morning's press release, we had an active and productive quarter with significant improvements to our balance sheet and progress in managing our delinquencies and REO assets, despite the challenging environment. The first half of the year was very active, marked by important achievements. We recently completed our first high-yield unsecured debt offering, raising $500 million, which allowed us to pay off our convertible debt and added $200 million in liquidity to support our platform's growth. This is a significant milestone, especially considering the current climate, and we are pleased to announce that this offering earned us a BB corporate credit rating from both Moody's and Fitch, highlighting the strength of our platform and the value of our diversified business model. Accessing this liquid market will enable us to diversify our funding sources, extend our long-term debt maturities, and continue platform growth while generating solid returns on our capital. This transaction was transformative for our franchise, complementing a series of capital market activities amounting to $2.5 billion that we successfully executed in the first half of the year. One of these key transactions was the industry's first build-to-rent securitization totaling $800 million, priced favorably compared to our warehousing lines. It includes enhanced leverage and a 2-year replenishment period, enabling us to swap collateral as loans are paid off. We remain enthusiastic about the single-family rental sector, as it provides profitable returns through construction, bridge, and permanent agency executions. This landmark transaction sets the stage for establishing a securitization platform for this sector, significantly enhancing our leveraged returns and creating efficiencies with our bank facilities now that we have a takeout option to the CLO market. Building this platform will allow us to grow this business and capture market share, further strengthening our competitive edge. These pivotal deals, together with a $1.1 billion repurchase facility we closed in the first quarter with JPMorgan to redeem two of our CLOs, are prime examples of our dedication to improving our balance sheet while driving better returns on capital. Given the robust securitization market and supportive environment from commercial banks, we are confident in our ability to continue making meaningful progress and create efficiencies to offset the impact of some noninterest-earning assets. As we have outlined in previous discussions, the extended high-interest rate environment has made conditions challenging, specifically impacting our agency originations and borrowers' capacity to transition to fixed-rate loans. We continue to experience significant volatility in the market, resulting in unpredictable shifts in 5-year and 10-year indexes, which we believe may persist in the short term, complicating rate forecasts for the remainder of the year. We will keep a close watch on the market and its impact on our operations throughout 2025. Should there be a notable and consistent decline in 5- and 10-year interest rates, it would serve as a beneficial catalyst for our business by enhancing our origination volume and facilitating the movement of more loans off our balance sheet, boosting our earnings run rate and positioning us favorably for 2026. We have effectively managed our loan portfolio, successfully securing borrower recaps and bringing in new sponsors to assume assets through various means. In the second quarter, we reclaimed about $188 million in REO assets, of which we have flipped $115 million to new sponsors, thereby taking on our debt. This increased our REO holdings to roughly $300 million as of June 30. We expect to reclaim more assets in the future, which, after accounting for dispositions, should result in owning and operating around $400 million to $600 million in REO assets, slightly above our earlier guidance of $400 million to $500 million due to recent trends. Now turning to our second quarter performance, our results were consistent with our expectations, producing distributable earnings of $0.30 per share, though we anticipate challenges for the remainder of the year due to the earnings drag from REO assets and delinquencies, along with the impact of a prolonged high-interest rate environment affecting our origination business, making 2025 a transitional year as reflected in our current dividend. As we resolve these assets and potentially see sustained rate relief, we believe we are well-positioned to enhance our earnings and dividends again in 2026. In our balance sheet lending platform, we face an extremely competitive landscape with a considerable appetite for deals and significant capital looking for transactions. Many lenders are compromising on credit and structure, which is something we refuse to do to secure a deal. Consequently, we are being selective, closing about $100 million in the second quarter and $215 million in July, bringing our total volume for the first seven months of the year to around $700 million. We remain confident in our earlier guidance of producing $1.5 billion to $2 billion in bridge loans for 2025, although actual performance will very much depend on prevailing market and interest rate conditions, which continue to fluctuate unpredictably. Nevertheless, the bridge lending segment remains attractive as it yields significant leveraged returns on capital while building a robust pipeline for future agency deals, essential to our strategy. Leveraging efficiencies in the securitization market with commercial banks will substantially increase our returns. In our agency business, we originated $850 million in loans during the second quarter and $1.5 billion in the first half of the year. We had a record-setting July, originating an exceptional $1 billion in agency loans, including a large deal we have been working on for several months. Our pipeline looks robust, and we estimate we could originate around $2 billion in the third quarter, which would be one of the highest production quarters in our history. We are fortunate to have a strong origination network with loyal clients that enables us to capture significant off-market deals, even amid challenging conditions. These impressive results position us well to meet or potentially exceed our guidance of origination volume between $3.5 billion and $4 billion for 2025. Our single-family rental business continues to grow successfully, with a strong second quarter generating approximately $230 million in new business and a healthy pipeline. This segment is beneficial as it yields three turns on our capital through construction, bridge, and permanent lending, providing solid leveraged returns in the short term and significant long-term value by diversifying income streams. We have successfully converted another $200 million of construction loans to new bridge loans this quarter and $335 million in the first half of the year. Alongside the recent CLO and improved efficiencies with our bank lines, we are achieving mid-to-high returns on our capital, which will enhance future earnings as we expand the business. Additionally, our construction lending segment is progressing well. This product is vital to our platform, presenting returns through construction, bridge, and permanent lending. We closed $265 million in deals in the first half and another $144 million in July. Our strong pipeline consists of roughly $100 million under application, with $400 million in outstanding applications and $500 million in deals currently being evaluated. Given this positive outlook, we believe we will easily surpass our guidance of producing between $250 million to $500 million for 2025, significantly ahead of our targets through the first seven months of the year. In summary, the first half of the year has been very active and productive, demonstrating many notable achievements. We continue to execute our business strategy effectively and align with our objectives and guidance. While we are navigating significant volatility, especially regarding short-term and long-term rate outlooks, improvements in the rate environment would positively influence our business and forward outlook. We've made considerable progress in strengthening our balance sheet through securitization and public debt markets, supported by our banking relationships, which will remain beneficial. As I mentioned earlier, we see 2025 as a transitional year in which we will diligently work to resolve our REO assets and delinquencies, laying a solid earnings foundation for growth in 2026. I will now hand the call over to Paul to walk us through the financial results.

Paul Anthony Elenio, CFO

Okay. Thank you, Ivan. In the second quarter, we produced distributable earnings of $52.1 million or $0.25 per share and $62.5 million or $0.30 per share, excluding $10.5 million of one-time realized losses from the sale of two REO assets in the second quarter. And the $0.30 per share of distributable earnings translates into a 10% ROE for the second quarter. In the second quarter, we accrued an additional $10 million of net interest on paying accrual loans. However, we only increased our interest receivable related to these loans by approximately $3 million during the quarter, mainly due to some loans that either repaid in full or had large paydowns in which we received $7 million of back accrued interest that was outstanding on these loans. And in July, we also received accrued interest of around $7 million related to a bridge and mezzanine loan we had on our books on the same property that paid off in full. We had $187 million of loans on this asset, which was repaid with a $167 million agency loan that we recaptured an outside preferred equity that came in through the borrowing group. This is a perfect example of a tremendous execution where we generated strong returns on our invested capital, recaptured the agency loan with a much lower detachment point and recouped all of our invested capital and back accrued interest. Our total delinquencies came in at $529 million at June 30 compared to $654 million at March 31. These delinquencies are made up of two buckets: loans that are greater than 60 days past due and loans that are less than 60 days past due that we're not recording interest income on unless we believe the cash will be received. The 60-plus-day delinquent loans or NPLs were approximately $472 million this quarter compared to $511 million last quarter due to approximately $62 million of loans that we took back as REO, $36 million of modifications, and $21 million of payoffs during the quarter, which was partially offset by $79 million of additional defaults during the quarter. The second bucket consists of loans that are less than 60 days past due that came down to $57 million this quarter from $143 million last quarter due to $48 million of modifications and $48 million that we took back as REO, which was partially offset by approximately $10 million of new delinquencies during the quarter. And while we're making steady progress in resolving these delinquencies, we do anticipate that we will continue to experience some new delinquencies, especially if the current rate environment persists. In accordance with our plan of resolving certain delinquent loans, we've continued to take back assets as REO, and we expect to take back more over the next few quarters, as Ivan mentioned. The process of foreclosing on and working to improve these assets and create more of a current income stream takes time, which again will temporarily impact our earnings. In the second quarter, we took back $188 million of REO assets. We've been highly successful at bringing in new sponsors on certain assets to take over the real estate and assume our debt. This strategy is a very effective tool at turning debt capital in a nonperforming loan into an interest-earning asset, which will increase our future earnings. We sold $115 million of these assets in the second quarter, and we're in the process of bringing in new sponsors on another $40 million of REO assets, which we hope to close by the end of the third quarter. We recorded an additional $16 million of loan loss reserves on our balance sheet loan book in the second quarter, $6.5 million of which were specific reserves with the remaining $9.5 million being general CECL reserves as a result of changes in the outlook on real estate values from the outside service providers we use to assist us in determining our loss reserves. And again, we believe we've done a good job of putting the appropriate level of reserves on our assets, which is evident by the transaction we've been able to effectuate to date at or around our carrying values net of reserves. In our agency business, we had a solid second quarter. And as Ivan mentioned, we are expected to have an exceptional third quarter as well. We produced $857 million in originations and $807 million in loan sales in the second quarter with very strong margins of 1.69%. We also recorded $10.9 million of mortgage servicing rights income related to $853 million of committed loans in the second quarter, representing an average MSR rate of around 1.28%. Our fee-based services portfolio grew to approximately $33.8 billion at June 30, with a weighted average servicing fee of 37.4 basis points and an estimated remaining life of 6.5 years. This portfolio will continue to generate a predictable annuity of income going forward of around $126 million gross annually. In our balance sheet lending operation, our investment portfolio grew to $11.6 billion at June 30 from originations outpacing runoff for the second straight quarter. Our all-in yield on this portfolio was 7.86% at June 30 compared to 7.85% at March 31, mainly due to taking back nonperforming assets as REO, which are separately stated on our balance sheet, which was partially offset by some new delinquencies in the second quarter. The average balance in our core investments was $11.5 billion this quarter compared to $11.4 billion last quarter. The average yield on these assets decreased to 7.95% from 8.15% last quarter, mainly due to less back interest collected on our portfolio and some additional delinquencies in the second quarter. Total debt on our core assets was approximately $9.6 billion at June 30, the all-in cost of debt was approximately 6.88% at June 30 versus 6.82% at March 31, mainly due to slightly higher rates in our legacy CLOs from lower rate debt tranches being paid down with runoff in the second quarter. The average balance on our debt facilities was approximately $9.5 billion for the second quarter compared to $9.4 billion in the first quarter, mainly due to funding our second quarter growth. The average cost of funds on our debt facilities was 6.87% in the second quarter compared to 6.89% for the first quarter, excluding interest expense from leveraging our REO assets, the debt balance of which is separately stated on our balance sheet and therefore, not included in our total debt on core assets. The slight reduction in the average cost of funds was mostly due to the full benefit of lower rates on the new JPMorgan facility that we closed in the first quarter as compared to the CLOs that we redeemed. Our overall net interest spreads in our core assets was down to 1.08% this quarter from 1.26% last quarter, largely due to more back interest collected last quarter on delinquent loans, combined with a few new nonperforming loans in the second quarter. Our overall spot net interest spread was 0.98% at June 30 compared to 1.03% at March 31. Lastly and very significantly, we've managed to deleverage our business by 25% during this very lengthy dislocation to a leverage ratio of 3:1 from a peak of around 4:1 nearly three years ago. And as Ivan mentioned, in early July, we issued our first unsecured rated debt deal, which will now provide us with a significant pocket of new institutional capital, allowing us to transform our balance sheet and fund more of our business with unsecured long-term debt. That completes our prepared remarks for this morning, and I'll now turn it over to the operator to take any questions you may have at this time.

Operator, Operator

Our first question will come from Steve Delaney with Citizens JMP.

Steven Cole Delaney, Analyst

First question, regarding the decrease in net interest income from $75 million in the first quarter to $69 million. Could you clarify if there were any unusual factors involved? Was there any reversals related to foreclosures? Any insights would be appreciated. I apologize if I missed this information while taking notes.

Paul Anthony Elenio, CFO

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

Steven Cole Delaney, Analyst

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

Ivan Paul Kaufman, CEO

Yes, let me provide a broader perspective on our approach. As I mentioned earlier, we see 2025 as a year of transition. Our goal is to expedite this process and move past it as quickly as possible. The presence of nonperforming loans is somewhat of a burden. Recently, we have expanded our potential real estate owned by about $100 million. This situation has a different outlook; many of our real estate owned assets, which we’ve noted, are expected to be held for 12 to 24 months. However, we are observing loans with reasonable occupancy rates exceeding 80%—around 85%—where the sponsors are essentially capital constrained. Without additional capital to manage unit turnovers and maintain the assets or to purchase rate caps, we believe it is better to facilitate the sale of these assets and welcome new sponsors. Consequently, these assets will remain on our books for a shorter duration during the foreclosure process, potentially 90 to 120 days, but they won't significantly impact our overall performance. While we might see a slight increase in real estate owned, our approach is much less intensive and we are operating around the valuations reflected on our balance sheet. Additionally, when we take this route, we incur recourse liabilities to sponsors, which we believe will generate extra income over time, even though it requires time to realize that. Thus, we have revised our strategy to be bolder in our approach, viewing this year as transitional and actively pursuing repositioning.

Operator, Operator

We'll move next to Jade Rahmani with KBW.

Jade Joseph Rahmani, Analyst

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

Ivan Paul Kaufman, CEO

So clearly, that has a lot to do with the perception of where interest rates are. And as you could see, rates are moving down. Every time rates move down, it creates an opportunity for people to get into fixed rates. There is a tremendous amount of dollars chasing distressed deals. And then when we do have a deal that's in distress, we have multiple bidders and it's a very, very competitive landscape. But as rates move down, all of that, as I said in my commentary, will be in our favor. Even as a small move like today over the last maybe seven days of a 20 basis point drop in the 5-year, I could tell you, we're converting a couple of hundred million dollars off our balance sheet today and tomorrow just with that move. So that will accelerate a transition for people and an attraction of capital. And without a question, multifamily, the asset class has always been a great asset class. There's been a dislocation, but we feel it's extraordinarily resilient, and we're seeing a lot of money in this space.

Jade Joseph Rahmani, Analyst

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

Ivan Paul Kaufman, CEO

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

Jade Joseph Rahmani, Analyst

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

Ivan Paul Kaufman, CEO

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

Operator, Operator

We'll move next to Rick Shane with JPMorgan.

Richard Barry Shane, Analyst

Okay. So you realized $10.5 million of losses related to REO this quarter. It sounds like one property basically you foreclosed on or took a deed in lieu and sold right away. The other one perhaps more seasoned. Is that the way to look at this?

Paul Anthony Elenio, CFO

Yes. So Rick, I'll let Ivan give the details on the one property. But yes, there was an asset that we took back right away as soon as it went delinquent. It went delinquent in the quarter. We took it back right away and flipped it to a quality sponsor and took a loss from where we had it marked. We had it marked at about a $4 million loss. We ended up taking about a $9.5 million loss. So a little deeper than our reserve, and Ivan can talk to why we did that. The other asset we took back during the quarter as well, but we had it marked pretty much right on top of the value we flipped it, I think, for a $1 million loss from where we had it marked. So the one was deeper. The other one was pretty much right on top. But Ivan can give the details on the one asset at the $10 million loss.

Ivan Paul Kaufman, CEO

Yes. We just made a decision on that particular asset that if we didn't get our management in, the asset could suffer significantly. Management was stopping to put capital in, payables were accruing and the asset could have deteriorated exponentially. So we just thought it would be best to foreclose on it, settle out with the sponsors, and move it into capable hands. That asset has been moving into capable hands, now an interest-earning asset on our balance sheet. It will improve, occupancy is up, and we think we made the right decision. It was in a market where there was a lot of competition for tenants. And we thought the existing management group was not capable of continuing to maintain the value, and we felt we were at risk of potential deterioration of value. So that was our decision at that period of time to move that asset out.

Richard Barry Shane, Analyst

It completely makes sense. I also appreciate the transparency regarding the difference between the selling price and your valuations. Could we discuss the impact of the increasing contribution from PIK on the amount of accrued interest on the balance sheet? I assume that this is being added to the loan balances, but I want to confirm that. Additionally, if we could get some figures to understand how this is accumulating over time, that would be very helpful.

Paul Anthony Elenio, CFO

Sure, Rick. So as of June 30, we have $95 million of PIK on our balance sheet as a receivable. Out of this, $15 million is related to mezzanine and private equity, mostly tied to our agency, which includes both a pay rate and an accrual rate as part of our normal loan operations. I mentioned earlier that we received a payoff yesterday on a $187 million loan, which consisted of a bridge loan and a mezz mezzanine loan. From that, we got back $7 million of PIK. Consequently, the $15 million is effectively reduced to $8 million after that payoff, which is a good outcome for us. The remaining $80 million pertains to bridge lending. To provide some context, we are accruing interest on about 75% of the loans we modified, leaving 25% of modified loans without any accrued interest. This has typically amounted to about $15 million per quarter. While we expected to see similar numbers this quarter, we chose to reverse some of it, amounting to around $5 million, with $2 million or $3 million relating to a real estate owned asset we sold at a loss. We anticipate this type of reversal might occur going forward. Ivan and I recognize that the next few quarters will continue to be challenging as people run out of steam. We are continually assessing what we expect to collect, making real-time decisions on reversals as necessary. This quarter, we did reverse some amounts, and that trend could persist in the future. However, we are adding the interest to the carry value of the loan and reassessing the value of those loans quarterly when we do CECL. If the value falls below our carry amount, we write it down. This has been our approach, and we will maintain it moving forward.

Richard Barry Shane, Analyst

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

Ivan Paul Kaufman, CEO

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

Richard Barry Shane, Analyst

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

Paul Anthony Elenio, CFO

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

Ivan Paul Kaufman, CEO

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

Paul Anthony Elenio, CFO

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

Ivan Paul Kaufman, CEO

That will be a high number. We'll get back to that number.

Operator, Operator

We'll move next to Crispin Love with Piper Sandler.

Crispin Elliot Love, Analyst

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

Ivan Paul Kaufman, CEO

So first of all, it's good to have two agencies that compete with each other. And sometimes one is more competitive than the other. And sometimes one provides quicker service, and it all varies. We've traditionally done a lot more Fannie Mae business than we've done Freddie. Freddie has been really stepping up our relationship recently. And sometimes they're more aggressive on certain loan types, in particular, some of the bigger loans. So we're pleased to be able to have both agencies and do a really good job on it. We've been working on some really significant transactions throughout the year. And as Paul mentioned, July was probably the biggest month we've had in a long time, closing $1 billion. They represented a couple of marquee big transactions with some of our sponsors who are very loyal to us. So we've done a good job. Our pipeline remains extremely strong, and we're very bullish on our numbers for the third quarter, which will put us back on track to meet or exceed what our projections are. We're looking today at a drop in the 5 years, as I mentioned, within an hour this morning, we already had about $200 million worth of loans that are going to convert off our balance sheet just from that drop. So if the rate environment continues to drop, we should continue to increase our originations above our forecast. But right now, we're looking at a pretty good third quarter.

Crispin Elliot Love, Analyst

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

Ivan Paul Kaufman, CEO

The SFR market is experiencing significant growth, with substantial capital being invested in this area even locally. Engaging in construction lending requires a level of expertise that many lack. If we can offer a full range of services to those borrowers, such as construction, bridge, and permanent financing, we gain a significant competitive edge. Having completed the CLO allows us to expand our operations considerably. We were previously wary of being overly dependent on commercial banks without that option. The successful securitization enabled us to increase our ambitions, and we aim to become a more dominant player. We were cautious about maintaining too much concentration without the capability for CLO origination and nonrecourse financing. Now that we have it, we can adopt a more aggressive approach, and our returns have been exceptional. We will focus on building our market share in this sector.

Crispin Elliot Love, Analyst

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

Paul Anthony Elenio, CFO

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

Operator, Operator

We do have a follow-up question from Jade Rahmani with KBW.

Jade Joseph Rahmani, Analyst

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

Ivan Paul Kaufman, CEO

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

Jade Joseph Rahmani, Analyst

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

Ivan Paul Kaufman, CEO

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

Operator, Operator

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

Ivan Paul Kaufman, CEO

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

Operator, Operator

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