Arbor Realty Trust Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

Key Takeaways

  • Positive Sentiment: Distributable earnings of $88 million, or $0.43 per share, delivered a 14% annualized return on equity in Q3.
  • Positive Sentiment: $1.2 billion of Q3 loan modifications secured with $43 million of sponsor equity, cutting total delinquencies by 30% since June 30.
  • Negative Sentiment: Remaining delinquencies stand at ~$945 million, with over $250 million expected to convert to REO in upcoming quarters.
  • Neutral Sentiment: Q4 agency origination guidance of $1.2 billion–$1.5 billion is rate‐sensitive amid a $1.9 billion pipeline backlog.
  • Positive Sentiment: $600 million of liquidity, a 3:1 leverage ratio, and plans to ramp up bridge, single‐family rental, and construction lending for mid‐teens returns.
AI Generated. May Contain Errors.
Earnings Conference Call
Arbor Realty Trust Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Q3 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 I would now like to turn the call over to your speaker today, Paul L'Emio, Chief Financial Officer. Please go ahead.

Speaker 1

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 these 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.

Speaker 1

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.

Speaker 1

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 position 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 countercyclical income streams, are invested in the right asset class with the appropriate liability structures and 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 dividend substantially, have experienced significant book value erosion and have generated a negative total shareholder return over the last 5 years.

Speaker 1

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 consistent outperforming and leader in this space. As we discussed on the last few calls, we expected the 1st 2 quarters of this year to be the most challenging part of the cycle. And we also thought it could leak into the 3rd and 4th quarters as well if rates remain higher for longer. With the recent 50 basis point rate cut by the Fed and a significant drop in the tenure to a low of around 3.60, we began to see a much more positive outlook as a result of cap costs becoming less becoming far less expensive and borrowers being able to access 5 10 year fixed rate agency deals and buyers moving off the sidelines and becoming extremely active in the market. However, there has been a backdrop in the 10 year again to 4.25%, which has somewhat changed the tenor and we now believe that the recovery will be a little bit slower and could lead to a challenging 4th quarter, which is consistent with our previous guidance.

Speaker 1

We continue to do a very effective job of working for our portfolio by getting borrowers to recap their deals and purchase interest rate caps. In the Q3, we modified another $1,200,000,000 of loans with $43,000,000 of fresh equity committed to be injected into these deals from the sponsors. This includes collect cash to purchase new interest rate caps, fund interest and renovation reserves, bring past interest due, current and pay down loan balances where appropriate. We also continue to make progress in line with our previous guidance on the approximately $1,000,000,000 of loans that were past due at June 30 by either modifying these loans for closing and 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.

Speaker 1

In the Q3, we successfully modified $250,000,000 of these loans or 23% and we expect to modify another roughly 10% in the Q4. We also had one delinquent loan for $8,000,000 payoff in full in the Q3 and we're expecting another $300,000,000 plus of these delinquencies to payoff over the next few quarters. Additionally, we took back as REO roughly $77,000,000 of loans in the 3rd quarter and are expecting to take back another $250,000,000 plus over the next few quarters. This is strong progress in 1 quarter and has reduced to $1,000,000,000 in delinquencies we had as June 30 down to just over $700,000,000 at September 30 or 30% decrease. But as expected, we did experience additional delinquencies during the quarter of approximately 2 $25,000,000 bringing our total delinquencies at September 30 to approximately $945,000,000 which is down 10% from our peak in the 2nd quarter.

Speaker 1

And while we anticipate having additional delinquencies in this environment, we believe our resolutions will exceed new defaults resulting in a continued decline in our total delinquencies. It is also very important to distinguish between REOs we take back and bring into a new sponsorship to operate and assume debt and REOs we own and operate ourselves. Of the $77,000,000 of REOs we put back in Q3, dollars 20,000,000 we successfully brought in new sponsors to operate and assume our debt and $57,000,000 we now own and operate directly. We are working exceptionally hard in resolving our voting proceeds 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 and demanding work and I'm very pleased with the progress we are making in resolving our delinquencies in accordance with our objectives.

Speaker 1

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 $600,000,000 cash and liquidity, providing us with the flexibility needed to manage through the balance of this downturn and take advantage of the opportunities that exist in this market to generate strong returns on our capital. One of these opportunities is our bridge lending platform. And I have said before, some of the best times some of the best loans are made in the bottom of the cycle. We believe now is the appropriate time to start ramping up our bridge lending program again and take advantage of the opportunities that exist in the market to originate high quality short term bridge loans, allowing us to generate strong levered 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.

Speaker 1

We have also done an excellent job of deleveraging our balance sheet and reducing our exposure to short term bank debt. We have approximately $2,900,000,000 outstanding with our commercial banks, which is down from a peak of $4,000,000,000 and we have 65% of our securities net in this and non mark to market non recourse low 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 lower cost alternative to warehousing banks, which in times like this have fluctuating pricing and leverage points parameters. In fact, one of the significant drivers of our income change are our low cost CLO vehicles as well as a fixed rate debt and equity instruments that make up a big part of our capital structure.

Speaker 1

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 to generate outsized returns on our capital. Another major component of our unique business model is our significant agency platform, which offers a premium value as it requires limited capital and generates significant long dated predictable income streams and produces considerable annual cash flow. In the Q3, we produced $1,100,000,000 of agency originations, which was in line with our 2nd quarter volumes. In the Q3, we also saw a big dip in the 10 year to a range of $360,000,000 to 3.80, which immediately resulted in a massive increase in our agency pipeline to approximately $1,900,000,000 which is one of the highest levels we have ever seen. During that timeframe, the agencies got significantly backed up by creating a delay of 3 to 6 weeks, which certainly affected the timing of our closings, which was compounded by the recent backup in rates to solidly above 4% again.

Speaker 1

As a result of these factors and given the magnitude of our pipeline, we are guiding our 4th quarter volumes to be in the range of $1,200,000,000 to $1,500,000,000 which is very rate dependent. If rates stay at these levels, we are confident we can originate $1,200,000,000 in the 4th quarter, but if rates get meaningfully below 4% again, we can produce the top end of our range to $1,500,000,000 We also continue to do an effective job at converting 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 Q3, we generated $520,000,000 of payoffs and $385,000,000 or seventy 4% of these loans being refinanced into fixed rate agency deals for the 1st 9 months of this year, we recaptured over 60% or $1,100,000,000 of our balance sheet runoff into agency production. And as I have said in the past, 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 $3,000,000,000 generates approximately $125,000,000 a year in reoccurring cash flow.

Speaker 1

We also generate significant earnings on our escrow and cash balances. In fact, we are earning 4.6% on around $2,300,000,000 of balances or roughly $120,000,000 annually, which combined with our servicing income and annuity totals $235,000,000 of annual gross cash earnings or $1.15 a share. This is in addition to the strong gain on sale margins we generate from our originations platform. And 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.

Speaker 1

We continue to do an excellent job in growing our single family rental business. We had another strong quarter with $240,000,000 of fundings and another $375,000,000 of commitment signed up, which now brings our 9 month numbers to $1,100,000,000 which is already right on top of the total that we've produced for all of last year and brings our total commitment volume to $4,600,000,000 from this platform. Additionally, we have a large pipeline and remain committed to doing this business that is offers us 3 turns on our capital through construction, bridge and permanent lending opportunities and generate strong lender returns in the short term while providing significant long term benefits by further diversifying our income streams. We also continue to make steady progress in our newly added construction lending business. This is a business we believe can produce a very accretive return side to our capital by generating 10% to 12% unlevered returns initially and mid to high 11 returns on our capital when we obtain leverage.

Speaker 1

We closed our first deal in the 3rd quarter for $47,000,000 and we continue to see growth in our pipeline with roughly $300,000,000 under application and $200,000,000 in LOIs and $600,000,000 of additional deals in the current screening. We believe this product is very appropriate for our platform as it offers us 3 turns on our capital through construction, bridge and permanent agency lending opportunities. And again, between our SFR and construction lending products, we expect to be able to continue to grow our balance sheet loan book and generate strong returns on our capital, very importantly, seeding a significant amount of our future agency production. In summary, we had another productive quarter and we are working very hard to manage through the balance of this dislocation. We feel we have done an excellent job in working through our loan book and in getting borrowers to recap their deals with Fresh Equity as well as bringing in quality sponsors to manage underperforming assets and working through our nonperforming loans.

Speaker 1

We realize that although the market backdrop is improving, there's still a lot of work to be done to manage through this environment and 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 financial results. Okay. Thank you, Ivan. We had another strong quarter producing distributable earnings of $88,000,000 or $0.43 per share, which translated into operations of approximately 14% for the 3rd quarter.

Speaker 1

As Ivan mentioned, we modified another 24 loans in the 3rd quarter, totaling 1,200,000,000 Approximately $710,000,000 of those loans, we required borrowers to invest additional capital to recap their deals with us providing some form of temporary rate relief through a paying accrual feature. The pay rates were modified and averaged to approximately 6% with 2.5% of the residual interest due being deferred until maturity. $240,000,000 of these loans were delinquent last quarter and are now current in accordance with their modified terms. Our total delinquencies are down 10% to $945,000,000 at September 30, compared to $1,050,000,000 at June 30. These delinquencies are made up of 2 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.

Speaker 1

The 60 plus day delinquent loans or non performing loans were approximately $625,000,000 this quarter compared to $676,000,000 last quarter due to approximately $152,000,000 of modifications, dollars 77,000,000 of loans taken back as REO, which was partially offset by $110,000,000 of loans progressing from less than 60 days delinquent to greater than 60 days past due and $68,000,000 of additional defaulted loans during the quarter. The second bucket consisting of loans that are less than 60 days past due also came down to $319,000,000 this quarter from $368,000,000 last quarter due to $88,000,000 in modifications, dollars 1 $110,000,000 of loans progressing to greater than 60 days past due, an $8,000,000 payoff, which was partially offset by approximately $157,000,000 of new delinquencies during the quarter. And while we're making good progress in resolving these delinquencies in accordance with our objectives that we discussed earlier, at the same time, we do anticipate that there could be new delinquencies in this environment. As Ivan mentioned, in accordance with our plans of resolving certain delinquencies, we have started to take back real estate in the Q3 and we expect to take back more over the next few quarters. The process of taking control and working to improve these assets and create more of 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.

Speaker 1

This is what we expected and it's consistent with our previous guidance that this would be the period of peak stress and the bottom of the cycle. In line with our strategy of taking back OREO assets, we decided to break out our OREO 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 $77,000,000 in assets in Q3, dollars 57,000,000 of which we currently own and operate, which was accounted for as REO and roughly $20,000,000 that we had brought in new sponsorship to run and assume our debt, which was accounted for as a sale and a new loan in the 3rd quarter. The other roughly $78,000,000 in REO on our balance sheet at ninethirty with yields taken back in previous years that were included in other assets in the past. We also continue to build our CECL reserves given the current environment, recording an additional $16,000,000 in reserves in our balance sheet loan book in the Q3.

Speaker 1

It's important to continue to emphasize that despite booking approximately $162,000,000 in CECL reserves across our platform in the last 18 months, $132,000,000 of which were in our balance sheet business, we were still able to maintain our book value. This performance is well above our peers, the vast majority of which have experienced significant book value erosion in this market. Additionally, we are one of the only companies in our space that has seen significant book value appreciation over the last 5 years with 28% growth in that time period versus our peers whose book values have declined on average approximately 22%. In our agency business, we had a solid 2nd quarter with $1,100,000,000 in originations and loan sales. The margins on our loan sales was up to 1.67% for the 3rd quarter from 1.54% last quarter.

Speaker 1

We also recorded $13,200,000 of mortgage servicing rights income related to $1,100,000,000 of committed loans in the 3rd quarter, representing an average MSR rate of around 1.25%. Our fee based servicing portfolio also grew to approximately $33,000,000,000 at September 30 with a weighted average servicing fee of 38 basis points and an estimated remaining life of 7 years. This portfolio will continue to generate a predictable annuity of income going forward of around $125,000,000 gross annually. And 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 $11,600,000,000 investment portfolio had an oil yield of 8.16% at September 30 compared to 8.60% at June 30, mainly due to a decrease in sulfur during the quarter.

Speaker 1

The average balance on our core investments was $11,800,000,000 this quarter compared to $12,200,000,000 last quarter due to one off exceeding originations in the 2nd 3rd quarters. The average yield on these assets increased slightly to 9.04% from 9% last quarter, mainly due to slightly more back interest collected in the 3rd quarter than the 2nd quarter from 3rd quarter modifications, which was partially offset by some new non accrual loans in the 3rd quarter. Total debt in our core assets decreased to approximately $10,000,000,000 at September 30 from $10,300,000,000 at June 30, mostly due to paying down CLO debt with cash in those vehicles in the 3rd quarter. The all in cost of debt was down to approximately 7.18 percent at ninethirty versus 7.53% at sixthirty mostly due to a reduction in sulfur. The average balance on our debt facilities was down to approximately $10,000,000,000 for the 3rd quarter compared to $10,800,000,000 last quarter, mainly due to the unwind of CLO 15 that occurred late in the Q2, combined with pay downs in our CLO vehicles from runoff in the 3rd quarter.

Speaker 1

The average cost of funds on our debt facilities was up slightly to 7.58 percent for the 3rd quarter from 7.54% for the 2nd quarter. Our overall net interest spreads in our core assets was flat for both the 2nd and third quarter at 1.46% and our overall spot net interest spreads were down to 0.98% September 30 from 1.07% at June 30, mostly due to less CLO debt outstanding, which has a lower cost of funds from pay downs during the quarter. We also continue to improve our financing sources, adding a new banking relationship with a $400,000,000 warehouse facility that we closed in the Q3. And lastly, but very significantly, as we continue to shrink our balance sheet loan book, we have delevered our business 25% over the last 18 months to a leverage ratio of 3:one from a peak of around 4:one. Equally as important, our leverage consists of around 65% non recourse, non mark to market CLO debt with pricing that is still well below the current market, providing strong levered returns on our capital.

Speaker 1

That completes our prepared remarks for this morning. And I'll now turn it over to the operator to take any questions you may at this time. Jamie?

Operator

Thank you. We'll hear first from Steve Delaney with Citizens JMP.

Speaker 2

Thanks. Good morning, Ivan and Paul. Thanks for the helpful additional details on your NPLs and loan mods in the press release. That's very helpful. I was wondering, you've obviously built CECL reserves.

Speaker 2

I think Paul said 100 and whatever it was, dollars 180,000,000 over the last 18 months. One thing that's not in your release, I guess we could find it in the reconciliation of your loss reserve. Could you comment about the actual amount of realized losses that you've taken this year? As you work through the whole process, do you think about it that way, Ivan, that there's paper reserves, but at some point in time, there's a real loss? And that's kind of what I'm getting at, if you could give us some idea of what the real losses look like compared to the loss reserves.

Speaker 2

Thank you.

Speaker 1

Sure. So Steve, thanks for the question. It's Paul. So we haven't really had really any realized losses during the year. I think we had maybe a $1,500,000 realized loss in last quarter or the Q1, I forget, on a small loan that we took back.

Speaker 1

But 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 real significant realized losses or any material realized losses. As you know, the $162,000,000 that I guided to on the call that we booked in CECL reserves, dollars 132,000,000 in our balance sheet is already reflected in our book value. But as you said, it hasn't been realized.

Speaker 1

And it may we don't know if how much, if any, will be realized. And it takes time to work through those assets and dispose of them. But at this juncture, we just haven't had any significant realized losses at this point.

Speaker 2

Got it. That's helpful to understand. Thank you, Paul. And just note we noted in the press release the $100,000,000 3 year note issue at 9%. Could you comment on the purpose and use of proceeds?

Speaker 2

Just on the surface, it looks like expensive capital. So I'm just curious what your thought process was with that?

Speaker 1

Well, we felt it was appropriate price capital for what it is. It's 3 year capital. We didn't want to go out too long term. And certainly it was 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 in the mid teens returns.

Speaker 1

So we thought it was properly priced given where we were in the cycle and it was also important to us to not go out 5 or 7 years, to go out 3 years and not be too short. So it's just an easy piece of capital to put in place. Yes. And Steve, I'll just add to that. I think that was our thought process is we don't really 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.

Speaker 1

But Ivan's view is correct. I mean, as we said in our commentary today, we're starting to ramp back up our bridge lending opportunities. We have the SFR business that funds over time. We have our construction business. We're starting to see real solid opportunities to market to get mid teens returns.

Speaker 1

So we looked at that as still cheaper capital than common. And in our view, that's accretive capital for us. Yes. And I think in my prepared remarks about our SFR and construction lending business, that's mid to high teens returns that we put in place and keep in mind that that's going to fund up substantially next year, right? It's in place, it's longer fund in the beginning.

Speaker 1

That will ramp up and we'll get to leverage that up. But having 9% capital and that's big teens returns and knowing it's going to be in place and not having to put too much on and doing a small deal is very appropriate for us.

Speaker 2

Yes, makes sense. Thank you both for your comments this morning.

Speaker 3

Thanks, Steve.

Operator

Next, we'll hear from the line of Stephen Laws with Raymond James. Please go ahead.

Speaker 4

Hi, good morning. I want to follow-up on Steve's question there on the capital. You mentioned the construction opportunities. Ivan, you mentioned in your prepared remarks, some of the best loans over the years have been done at kind of this point in the cycle as far as the bridge loans. Can you talk about how that pipeline builds into next year?

Speaker 4

And as you need more capital, how much more unsecured debt are you comfortable raising without equity? Or will you look at hitting the tapping the ATM a little bit? Curious to get your thoughts on how you'll raise capital to fund the growth opportunities.

Speaker 1

Okay. I'm going to meander a little bit because we've made a very strategic decision to put our effort into the built to rent or SFR business and construction business for a couple of reasons. Number 1, the spreads were very outsized and there wasn't a lot of competition as regional banks really got dried up and we really become a dominant lender in that space. We were lending in the, I would say, 3.50 to 4.50 spread and we were able to get a lot of commitments knowing that would be something that would be funding up in 2025. So it was a good way to look at our business.

Speaker 1

We opted not to jump into and it's also very low loan to value business. I think our average loan to value on that's like 65% or 60%. I thought that the bridge lending on multi was a little too aggressive at that juncture and it was higher loan to value and I wasn't as comfortable and we had the optionality of really putting our capital into that space, which we did. So we have embedded value in that pipeline. Now what's So we have embedded value in that pipeline.

Speaker 1

Now what's really happened in the marketplace is that securitization market has come roaring back and maybe a year ago you really couldn't get an effective securitization done. The CLO markets are not as tight as they were in the heyday. They're not that far off, maybe they're 3 eighths out. So there are a lot of efficiencies that have been drawn. And I think ramping up right now on the bridge lending platform, especially with cap costs coming down and securitization costs coming down, we like that business.

Speaker 1

About a year ago, spreads were in the 4 to 4.50, cap costs were a fortune and I didn't like the make sense in that business, I stepped away from it. Now you're seeing spreads in the 2.75% between a quarter range with CLO leverage being coming in 75 basis points to where it was and those deals make more sense. So we'll be looking to really get more effective 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 Q1, which will be very effective in the way we leverage our balance sheet. Now we've got to manage all of this with where the interest rates are because as I mentioned in my prepared remarks, interest rates have a lot to do with our runoff and we'll manage our runoff and our liquidity on a moment to moment basis based on where rates are.

Speaker 1

We could see if rates come back down at 3.75 basis points, we could see an accelerated run off on our balance sheet which generates enormous cash. So we'll pay attention to all those factors and we'll tap the different avenues to increase our liquidity as needed, where appropriate based on how all those other features toggle. Yes. And Steve, to add to that, our whole approach on capital has been exactly what I've been laid out. I think we've proven over time as big insight on us, we've been tremendous stewards of capital.

Speaker 1

So we're sitting on a nice amount of liquidity. We tapped the 3 year debt instrument we thought was appropriate and accretive. As Ivan said, we managed based on interest rates. If we're going to see a lot of runoff, we're going to generate capital. If we see tremendous opportunities on the bridge side, the construction, the SFR, we'll look to access liquidity in the ways we always have, which is a barbell approach between equity and debt.

Speaker 1

And right now, we're pretty low in leverage. So we like our spot. A lot depends on interest rates, but we'll continue to approach the capital markets like we always have and really focus on not being diluted. Yes, and just to jump back into one other item, not only are the NPLs important for us to manage through from an interest standpoint, if you have $1,000,000,000 of non interest earning assets value, you can do the math as we return that back into capital. But the leverage on those assets is much lower.

Speaker 1

So we'll generate a lot of cash as we resolve that as well. So we'll keep our eye on the path to resolutions.

Speaker 4

Thank you for the color on that. And it really leads to my follow-up question. Paul, I know in your prepared remarks, you mentioned kind of a low crossing on the earnings here in this quarter, next quarter, kind of near term. As we look back half of next year, is it fair to assume we're going to get a decent amount of earnings lift between the NPL resolutions, recycling capital and then resolutions on those the SAESARIO assets as well. Is that the right way to think about earnings kind of ramping next year?

Speaker 1

I think that's correct, but let's go over it in pieces. I think you got to look at things a little bit longer term than 1 or 2 quarters, right? That's what we talked about. So we're at the bottom. I've guided to a low order mark on interest income because as Ivan said in his prepared remarks, we're doing a great job of resolving our delinquencies, but we do expect new ones to pop up.

Speaker 1

Our goal is that our resolutions will exceed the new delinquencies and we'll continue to have our total delinquencies come down, hopefully in a similar fashion as they did in this quarter. Obviously, sulfur, where sulfur goes obviously affects the model as well as you know. But I think over a longer period of time, a longer outlook, that's correct that as rates move in favor and we were able to resolve our NPLs and our agency business originations go up, all those things move in our favor, right. There's some things that move against you short term when rates come down and there's things that move with you as the cycle progresses. So I think I look at it and Ivan looks at it as a more long term view and in a more long term view, we think over the next 10 to 12 months, we start to really see a lift from those non performing loans getting resolved as long as we don't have significant additional delinquencies.

Speaker 1

We see a lift from rates being more cooperative and launching our origination business, our SFR business, our Bridge business, but it's over a longer period of time, Steve.

Speaker 4

Great. Well, I appreciate the comments this morning and you guys have

Speaker 1

done a great job kind

Speaker 4

of managing through a pretty difficult environment the last year

Speaker 1

and we'll show

Speaker 4

the successes you've had managing through that. So appreciate the comments and good to hear.

Speaker 1

Thanks, Steve. I appreciate it, Steve.

Operator

Next we'll hear from the line of Rick Shane with JPMorgan. Please go ahead.

Speaker 5

Thanks everybody for taking my questions. Good morning. Just a couple of things. Ivan, you talked a little bit about the backlog associated with the agency business. And given the run rate through July, which I think last quarter you guys had said was about 360,000,000 dollars We were surprised not to see an acceleration there.

Speaker 5

I'm curious how this actually works from a pipeline perspective. Do your borrowers lock rates? So is this just a deferral? Or if they didn't hit that window where rates were below 4% for 2 months, which you've sort of signaled as the big number, is that basically lost opportunity until the next time

Speaker 6

we see rates tick lower?

Speaker 1

Okay. I think it's a great question. And I'm intimately involved in it because it's a little bit of a new quirk that the agencies would be so backlogged and normally things would move much quicker. When agencies don't turn around your loans, you can't rate lock them, right? So there was a period of time where you were eager to rate lock these loans.

Speaker 1

They work well, but you couldn't get in position. That cost to us roughly, in my estimation, dollars 200,000,000 to $300,000,000 worth of loans that if we rate lock, they would have closed. Now unfortunately, rates moved against us, so loans that would have worked at 4% or 375, don't work today. Okay. So the question is, are they lost or are they not lost?

Speaker 1

We have $1,800,000,000 pipeline roughly and we have normal fallout. We gave a range based on where interest rates are and where they could be and our range is $1,250,000,000 to $1,500,000,000 So that number of $250,000,000 to $300,000,000 what I mentioned earlier, which is interest rate sensitive is the toggle feature of loans that are in the pipeline that if rates come down will close. So we think if rates stay $425,000,000 $420,000,000 that will hit $1,200,000,000 for the quarter $1,250,000,000 if rates migrate down to $4,390,000,000 $380,000,000 that 300,000,000 which was previously on the drawing board with those rates, which don't make sense because borrowers have to put cash back in, those will only happen if rates come down. So that's how we look at it.

Speaker 5

Great. It's very helpful context. I appreciate that. Just pivoting quickly to distributable income. Paul, when we look at that number and think about the mods and the loans that are picking, I am assuming with the way you report numbers that pick income is included in distributable.

Speaker 5

And I apologize, I'm bouncing around a lot this morning. If you mentioned this, how much PIK income was there that was reported that is non cash in the Q3?

Speaker 1

Sure. Good question, Rick, and you're right. We are including the PIK interest on the mods in distributable earnings because I think there's a high probability of collecting and it's timing. To answer your question, for the Q3, there was $15,000,000 of PIK interest in our numbers, but I want to break that number out for you to give you a little context. So of the $15,000,000 that was PIK interest for the quarter, dollars 3,000,000 was related to a group of assets we modified in a prior year that we have substantial guarantees from the equity behind that we feel very, very strong we're going to collect.

Speaker 1

Another on top of that, another couple of $1,000,000 of that was mezzan PE, which part of our mezzan PE product, whenever we're doing mezzan PE and we're doing it behind agency, that always has a pick feature to it, that's just normal cost. So you have to pay and you have to call. The rest of it, which is about 10,000,000 was related to mods that happened in the 1st and second and third quarter of this year, with 4,000,000 coming from our 3rd quarter mods and 2,000,000 coming from our 2nd quarter mods and 4,000,000 coming from our 1st quarter mods. That's the breakout of the numbers for the 3rd quarter, if that's helpful to you.

Speaker 5

It's very helpful. And I'm scanning the 2nd quarter transcript as you were speaking, that $15,000,000 I can't find the number in the transcript at the moment. Is that comparable to I think you said $9,000,000 last quarter?

Speaker 1

I think it was about $10,000,000 last quarter. That's right. So it's just up a little bit because it's up a little bit because the Q1 mods I'm sorry, the 2nd quarter mods are fully in the Q3 now because some of them were modded mid quarter and then you've got your Q3 mods and then those Q3 mods will have a bigger impact in the Q4 if they were modified late in Q3. So you're correct, it's about $10,000,000 now it's $15,000,000 and then we'll see where it goes going forward.

Speaker 6

Great. Thank you guys for taking my questions.

Speaker 1

In addition to that though, I just want to point out Rick that there is there are certain amount of loans that we have modded with a paying accrual that we've chosen not to book the accrual and not track the accrual. And that's a couple of $1,000,000 that's owed to us, that's not in these numbers as kind of an offset if we get it.

Speaker 5

Okay, great. And actually, Paul, you're going to regret keeping talking because I will ask one last question that occurred to me. Please remind me your policy on REO. Do you when you and we noticed this differs company to company, do you realize any loss when you take property REO?

Speaker 1

So it depends on what the value is. So the way REO works in the accounting world is you take back an asset, the time you take back the asset, you have to do an appraisal and you have to allocate the value between land and building. And 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. But for us, that gain or loss is not a realized loss until you dispose of the REO asset or gain.

Speaker 6

Okay, got it. Thank you.

Speaker 1

You're welcome.

Operator

And we'll turn now to the line of Jade Rahmani with KBW. Please go ahead.

Speaker 3

Thank you very much and really great to get all those answers to pick, Very helpful. I know investors have a lot of questions about that. Wanted to ask on cash flow performance. It dipped in the Q3. If we exclude timing of agency originations and loan sales, operating cash flow was $68,000,000 down from $94,000,000 last quarter.

Speaker 3

I know there's some seasonality. Again, this excludes timing related

Speaker 1

to the agency business, but it

Speaker 3

is below the dividend. Typically, you do have a pickup in the Q4. So can you just talk to the cash flow operations outlook and if the dividend you expect to be sustained?

Speaker 1

Sure. Let's talk about the cash flow. I don't have the numbers you have in front of you, Jade. I think you're doing it on a quarterly basis. The Q, which was filed this morning, has a 9 month cash flow of $415,000,000 cash from operations.

Speaker 1

If you adjust for the timing of the health of sale loans and adjust for the timing of the changes in other assets and other liabilities, it's at $328,000,000 the dividend for the 9 months would have been $265,000,000 so we cover. There are dips and there are increases, obviously depends on cash collection. There are certain loans that pay historically late and you get those cash in the subsequent quarter. But we do feel like we have adequate cash flow from many, many sources to cover the dividend.

Speaker 3

Great to hear. Regarding liquidity, how much liquidity do you expect to use of the $600,000,000 to take back the $250,000,000 REO that you mentioned you expected and also I assume there'll be further modifications?

Speaker 1

Yes, I think that we're in the thick of it now and as I mentioned that a lot of these NPLs are very low levered relative to the rest of the business we've done, which has impacted our cash, but it's going to be a turning event. There are many loans that we have REO, we have slated borrowers for and once you have a slated bar, you can re lever those ones up. There are a lot of loans we're seeing dispositions on and that's pure cash. So at the moment, I think that it will be somewhat consistent with what we've done. And I think where we are is a pretty good outlook based on being in the bottom of the cycle.

Speaker 3

Thank you very much. I also wanted to ask about loan putbacks from the GSEs. I think one of your competitors has had putbacks and another made some disclosure. But I don't believe there's been any disclosure from Harvard. Have you experienced any of that?

Speaker 1

No. No, we have not.

Speaker 3

Thank you very much. And lastly, just because investors ask about it, is there any comment or update you could provide regarding the DOJ inquiry that was reported?

Speaker 1

No, we've covered everything in our prepared remarks before. As we've said, we don't comment on

Speaker 6

that. Thank you.

Speaker 1

Thanks, Jade.

Operator

Next, we'll go to Crispin Love with Piper Sandler. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. Ivan, you mentioned in

Speaker 6

the prepared remarks that now could be the time to start ramping up the bridge lending program. So just looking at this quarter, originations are down to around $15,000,000 or so, which has come down in this environment, which completely makes sense. But they were $100,000,000 in early 2023 and significantly higher than that previously. So curious on what you're seeing right now, how the demand is from borrowers right now, just how some of those conversations are going and how you might expect originations to trend down the bridge side? Thank you.

Speaker 1

So I think what we're looking at to some degree is a lot of the loans with construction loans, which are getting CMOs and lease up. We kind of like that business and that's where we're putting a lot of our attention. I mean the math didn't work for me before when spreads were 400 over a 4.50 and sulfur was a 5.25 and people had to buy caps and their costs were enormous spreads and we just did a bunch of loans at 2.75 over and SOFA was lower and cap cost was substantially lower. So I think we closed about $80,000,000 and we have another couple 100 in the pipeline. So I would say that I'd like to see about $300,000,000 to $400,000,000 closed on the bridge lending side between now year end and then ramp up that pipeline.

Speaker 1

We're also going to continue to do the build to rent in the construction lending. So you have to look at it in its totality. In addition, we are putting a lot of money out on the prep and mezz and that's been a 14% business and that's been a very attractive business. So we have a lot of flexibility here in terms of where we want to put our capital. But with the securitization market returning and with rates on the short end going down, we think that will be more live.

Speaker 1

I just want to make sure

Speaker 6

I got that. Did you say that you'd expect $300,000,000 to $400,000,000 of bridge originations between now and year end?

Speaker 1

About $300,000,000 is what we're expecting. Yes, we did $84,000,000 in October as Ivan referenced And then we had $240,000,000 of fundings in the Q3 from our SFR business, which as we had in our prepared remarks, our committed volume is very, very high. So we got $1,800,000,000 outstanding on our balance sheet net business and that continues to fund up. So we do expect that to ramp up and plus we did $84,000,000 already and hopefully we'll do a couple of $100,000,000 more by the end of the year. That's kind of the way we're looking at it in the different product lines.

Speaker 1

On top of that, as Ivan said, we're active in the construction lending side. We did our first deal of $47,000,000 this quarter. Again, that funds over time, so it'll take time to fund, but we could have a few more committed volumes closed by the end of the year on that. Yes, I think it will be impacted if you see short term rates come down 50 basis points. I think that business will see a lot of growth in the Q1, could be very substantial if that moves in the right direction.

Speaker 6

Great. Thank you. Appreciate all that color. And then just one last question for me. Just curious on your confidence in the current dividend level.

Speaker 6

You've been covering it with DE. DE has softened a little bit. So it seems like there could be some near term pressure there, but kind of more confidence as you look out from 10 to 12 months as you said. So just curious on how you and the Board are feeling about the current $0.43 dividend in the environment right now? Thank you.

Speaker 1

So we have a pretty diversified business and very resilient business and there are a lot of things that go up and down in our business. Clearly, if rates come down a little bit on the 10 year side, you'll see a dramatic growth in the agency business, which produces substantial amount of revenue. On the other side, we'll see a little bit of decline on our escrow balances. So they kind of offset each other. If rates do come down, I think you'll see the NPLs resolutions really decline and that will be a great contributor to the way our future income comes.

Speaker 1

So those are the kind of factors that we'll look at very strong. So there's some offsets, some benefits and some negatives. So I think we're in a pretty good position based on where rates are today. But if rates continue to decline, I think you can see a little bit more optimism on those numbers even though there'll be a decline on interest earning escrows. Now also keep in mind, the securitization market has come roaring back and there'll be a lot of efficiencies on our borrowing costs.

Speaker 1

If we do decide to issue in the beginning of next year, I mean, we're paying on our warehousing lines probably $2.50 over to $2.75 over. I think the securitization market, we could see 50 to 75 basis points of improvement on our borrowing cost and better leverage. So those are the kind of things that we're evaluating and looking at. And Chris, it's Paul. Ivan laid out all the macro different scenarios of what goes up and what goes down.

Speaker 1

And you and I talked about this in the past. Timing is never perfect, right? Some things may go down earlier, some stuff goes up. But the way we look at it, the way the company and the Board looks at the dividend is you look at it more of a long term, you don't look at 1 or 2 quarters at the bottom of the cycle. So we're confident we have things that will offset.

Speaker 1

It could be over a period of time. Real confident where we are today that over a longer period of time that's sustainable.

Speaker 6

Great. Thank you. I appreciate you both taking my questions.

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.

Speaker 1

I just want to thank everybody for their participation. It's definitely been very challenging time for us and those 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

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.

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