Arbor Realty Trust Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2025

There are 7 speakers on the call.

Operator

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

Speaker 1

Thank you, David, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended 03/31/2025. 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.

Speaker 1

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 2

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 an active and productive quarter with many notable accomplishments, including substantial improvements to the right side of our balance sheet and significant progress from working through our delinquencies and REO assets despite the challenging environment. We have been heavily focused on creating efficiencies in our financing facilities to continue to drive higher returns on our capital. In fact, in March, we announced a transformational deal in which we entered into a $1,100,000,000 repurchase facility to finance assets in two of our existing CLO vehicles with JPMorgan. This allowed us to redeem at par in full all invested capital in these vehicles while creating tremendous efficiencies through significantly reduced price, enhanced leverage and guaranteed and generated approximately $80,000,000 of additional liquidity.

Speaker 2

Additionally, and very significantly, the facility is 88% nonrecourse and provides us with a two year replenishment period to substitute collateral when loans run off. This is essentially like issuing a new CLO with significantly improved terms. And since every loan finance in this facility has been recently appraised, this transaction also very importantly reinforces the quality of our loan book. We're extremely pleased with this innovative transaction and we believe demonstrates the quality of our brand and the depth of our banking relationships and again will drive higher earnings in the future. We also saw very strong demand in our first quarter in the CLO securitization market.

Speaker 2

We've been a leader in this space for over twenty years and have been extremely active in accessing this market. These vehicles are very attractive to us as they allow us to fund our loans with nonrecourse, non mark to market debt with replenishment rights and generates outsized returns on our capital. And while this market has cooled off a little in the last few weeks, there is a significant amount of liquidity in this space that we expect will drive a very robust CLO market going forward. We will continue to be an active player in this space, which again is a big part of our strategy and will help drive increased future earnings through these low cost, long dated funding sources. On our last call, we discussed how the significant backup in long term rates was creating substantial headwinds for everybody in this space.

Speaker 2

We talked about how this environment was creating a very challenging originations climate as it relates to our agency business and how it was also going to result in a curtailed ability for borrowers to transition to fixed rate loans and recap their deals. Since the announcement of the Trump tariffs and the trade wars that have ensued, we've seen a tremendous amount of uncertainty and rate volatility that has resulted in large swings in the five and ten year indexes and what feels like feels at times is a constantly changing economic forecast. It will be very hard to predict where all is settled out for the balance of the year and where interest rates will go as a result. We expect at least in the short term for there to be a tremendous amount of volatility and uncertainty. We will continue to monitor the market environment and determine the effect it will have on our business for the balance of 2025.

Speaker 2

We were very prudent with the guidance we gave on last quarter's call for 2025, which is based on a similar market conditions to what we are experiencing. Very recently, we have seen a reduction in the five and ten year interest rates, which if this trend continues, will be a positive catalyst for our business by driving increased agency volumes and allowing us to move more loans off of our balance sheet, which will increase our earnings run rate and position us well for 2026. We continue to do a very effective job despite the elevated rates of working through our loan portfolio by getting borrowers to recap their deals and purchase interest rate caps as well as bringing new sponsors to take over assets either contentially or through foreclosure. These are very important strategies that have resulted in our ability to reposition as the performance of these assets is greatly affected by poor management and from being undercapitalized, which resulted in very low occupancy I'm sorry, excuse me one second. These are very important strategies that resulted in a large portion of our loan book being successfully repositioned at performing assets with enhanced collateral values and experienced sponsors and have created a more predictable future income stream.

Speaker 2

We also continue to make progress in on the $819,000,000 of loans that were past due as of December 31 in accordance with our previous guidance. In the first quarter, we successfully modified $38,000,000 of these loans at $39,000,000 of loans become fully performing again and took back approximately $197,000,000 of REO assets, dollars 31,000,000 of which we are in the process of bringing new sponsors to operate and assume our debt. As expected, we did experience additional delinquencies during the quarter of approximately 109,000,000 delinquencies as of March 31 to approximately $654,000,000 And our plans for resolving our remaining delinquencies are to take back as REO included bringing new sponsorship approximately 30% of this pool with the other roughly 65% either paying off or being modified in the future. This would put our REO assets on balance sheet in a range of 400,000,000 to $500,000,000 with another roughly $200,000,000 that we will have brought in new sponsorship to operate. As we discussed on last quarter's call, these REO assets will be heavy lifting position of our loan book and we estimate will take approximately twelve to twenty four months to reposition as the performance of these assets have been greatly affected by poor management and from being undercapitalized, which has resulted in very low occupancies and NOIs.

Speaker 2

As a result, these REO assets will temporarily create the greatest drag on our earnings, which is a significant component of our revised guidance for 2025. We do believe there is a great economic opportunity for us to step in and reposition these assets and significantly grow the occupancy and NOIs over the next twelve to twenty four months, which will increase our future earnings substantially. We are working exceptionally hard at resolving our delinquencies, which have been significantly affected by the higher interest rate environment and again was factored into our 2024 guidance. As I have said before, if rates come down sooner than we expect, we will have a positive impact on our ability to convert non interest earning assets into income producing investments, which will be accretive to our future earnings. Turning now to our first quarter performance, as Paul will discuss in more detail, Our quarterly results were in line with our previous guidance with us producing distributable earnings of $0.31 per share in the first quarter.

Speaker 2

Based on these results and the environment we are currently operating, our Board has decided to reset the quarterly dividend at $0.30 a share, which again is in line with our guidance. We anticipate that the next nine months will continue to be very challenging due to the significant drag on earnings from our REO assets and delinquencies and from the effect the higher interest rate environment is having on our originations business, all of which will make 2025 a transitional year, which is reflected in our revised dividend. As we successfully resolve these assets and if we continue to see rate relief, we believe we will be well positioned to grow our earnings and dividends again in 2026. In our balance sheet lending platform, we had an active first quarter originating $370,000,000 of new bridge loans. Last quarter, we guided to approximately $1,500,000,000 to $2,000,000,000 of bridge loan production for 2025, which we feel we are very on pace to accomplish.

Speaker 2

Whether we come in at the low end or the high end of the range is highly dependent upon market conditions and the interest rate environment, which again has been extremely volatile and unpredictable lately. This is a very attractive business as it generates a strong levered returns on our capital in the short term, while continuing to build up significant pipeline of future agency deals, which is a critical part of our strategy. As we continue to take advantage of efficiencies in the securitization market with our commercial banks, we can drive higher levered returns and increase returns on our capital substantially. As we talked about on our last call, we guided to $3.5 to $4,000,000,000 of agency volume in 2025, which is a much slower start with a much slower start in Q1 given the backup of rates that occurred last quarter. The first quarter did come in around what we expected or approximately $600,000,000 of origination volume from the significant increase in the tenure, which has created a very challenging origination plan.

Speaker 2

Again, there has been a very significant amount of volatility in the rate environment lately with some dips in the five and ten year rates that we were able to capitalize on growing our forward pipeline. In fact, our pipeline is approximately $2,000,000,000 today, which is up significantly from approximately $1,200,000,000 in late February where we started our last call. And this robust pipeline gives us confidence in our ability to deliver the range of guidance we gave in 2025 despite the slower first quarter. We continue to do an excellent job growing our single family rental business. We had a solid first quarter with approximately 200,000,000 in new business and our pipeline remains strong.

Speaker 2

This is a great business as it offers us returns on our capital through construction, bridge and permanent lending opportunities and generate strong leverage returns in the short term while providing significant long term benefits by further diversifying our income streams. In fact, the business plan is working well as we are starting to see more of our construction loans transition to new bridge loans as well as being able to capture new bridge loan business off of other lenders' SFR books because of how vertically integrated we are. In the first quarter, we closed $131,000,000 of new bridge loans on top of the $270,000,000 that we closed in 2024. And with the enhanced efficiencies we're seeing in the financing side of the business, we are generating mid to high returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up this business. We also continue to make steady progress in our construction lending business.

Speaker 2

We believe this product is very appropriate for our platform as it also offers us three turns on our capital through construction, bridge and permanent agency lending opportunities and generates mid to high teens returns on our capital. We closed $92,000,000 of deals in the first quarter and another $58,000,000 in April. We also have a growing pipeline with roughly 300,000,000 under application and another $500,000,000 of additional deals we are currently screening, which gives us confidence that we will easily make and likely beat the guidance we gave of $250,000,000 to $500,000,000 of production in 2025. In summary, we had an active and productive first quarter with many notable accomplishments. We continue to execute our business plan very effectively and in line with our objectives and guidance.

Speaker 2

Clearly, there's been a tremendous amount of in this space, especially as it relates to the outlook of short term and long term rates. If the rate environment improves, it will have a positive impact on our business and our outlook going forward. Additionally, we continue to see efficiencies in the securitization market and our bank mindset will continue to be a positive catalyst. As mentioned earlier, we view twenty twenty five as a transitional year in which we will work extremely hard to successfully resolve our REO assets and delinquencies, providing strong earnings foundations, which we can build upon in 2026. I will now turn the call over to Paul to take you through our financial results.

Speaker 2

Paul?

Speaker 1

Thank you, Ivan. In the first quarter, we produced distributable earnings of $57,300,000 or $0.28 per share and $0.31 a share, excluding $7,000,000 of onetime realized losses from the sale of two REO assets that we previously reserved for, 6,000,000 of which we guided to on last quarter's call. These results translated into ROEs of approximately 10% for the first quarter. As Ivan mentioned, we reflected the current environment in our 2025 distributable earnings guidance of $0.30 to $0.35 per quarter. Additionally, as I mentioned on last quarter's call, we were expecting at least the first two quarters of this year to come in at the low end of that guidance due to the challenging climate we're experiencing from elevated rates.

Speaker 1

Clearly, rates are playing a big factor in our earnings outlook, and future changes in the interest rate environment will most certainly dictate whether we stay at the low end of the range for the balance of the year or are able to grow our earnings quicker. In the first quarter, we modified another 21 loans totaling $950,000,000 On approximately $850,000,000 of these loans, we required borrowers to invest additional capital to recap their deals with us providing some temporary relief through a paying accrual feature. The pay rates were modified on average to approximately 5.18 with 2.56% of the residual interest due being deferred until maturity. Dollars 55,000,000 of these loans were delinquent last quarter and are now current in accordance with their modified terms. In the first quarter, we accrued $15,300,000 of interest related to all modifications with pay and accrual features, dollars 2,300,000.0 of which is on mezz and PE loans behind agency loans that have a pay and accrual feature as part of their normal structure.

Speaker 1

This leaves $13,000,000 worth of accrued interest in the first quarter related to the modifications of bridge loans, dollars 3,800,000.0 of which is related to our first quarter modifications. Our total delinquencies are down 20% to $654,000,000 at March 31 compared to $819,000,000 at December 31. 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 that we're not recording interest income on unless we believe the cash will be received. The sixty plus day delinquent loans or NPLs were approximately $511,000,000 this quarter compared to $652,000,000 last quarter due to approximately $197,000,000 of loans that we took back as OREO and $38,000,000 of modifications during the quarter, which was partially offset by $82,000,000 of loans progressing from less than sixty days delinquent to greater than sixty days past due and $13,000,000 of additional defaults during the quarter. The second bucket consisting of loans that are less than sixty days past due came down to $143,000,000 this quarter from $167,000,000 last quarter due to $38,000,000 of modifications and $82,000,000 of loans progressing to greater than sixty days past due, which was partially offset by approximately $96,000,000 of new delinquencies during the quarter.

Speaker 1

And while we were making very good progress in resolving these delinquencies, at the same time, we do anticipate that we will continue to experience some new delinquencies, especially if this current rate environment persists. In accordance with our plan of resolving certain delinquent loans, we have continued to take back assets as REO and we expect to take back more over the next few quarters, as Ivan mentioned earlier. 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 first quarter, we took back $197,000,000 of OREO assets. We've been highly successful at bringing in new sponsors on certain assets to take over the real estate and assume our debt.

Speaker 1

This strategy is a very effective tool at turning debt capital in a non performing loan into an interest earning asset, which will increase our future earnings. As Ivan mentioned, we're in the process of bringing in new sponsors on two of the REO assets we took back in the first quarter, which we hope to close by the end of the third quarter. We have no loan loss reserves against these assets as we expect to sell these assets at or above our current debt levels. As a result of this environment, we record an additional $16,000,000 in specific reserves in our balance sheet loan book in the first quarter. 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 transactions we've been able to effectuate to date at or around our carrying values net of reserves.

Speaker 1

In our Agency business, we had a slow first quarter as expected due to the significant headwinds from higher rates. We produced $6.00 $6,000,000 in originations and $731,000,000 in loan sales with very strong margins of 1.75% for the first quarter, which was equal to our margins from last quarter. We also recorded $8,100,000 of mortgage servicing rights income related to $645,000,000 of committed loans in the first quarter, representing an average MSR rate of around 1.26%, which is up from 1% last quarter due to a higher mix of Fannie Mae loans in the first quarter, which contain higher servicing fees. Our fee based servicing portfolio is at approximately $33,500,000,000 at March 31, with a weighted average servicing fee of 37.5 basis points and an estimated remaining life of around seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $126,000,000 gross annually.

Speaker 1

In our balance sheet lending operation, our investment portfolio grew to 11,500,000,000 at March 31 from originations outpacing runoff in the first quarter. Our all in yield on this portfolio was 7.85% at March 31 compared to 7.8% at December 31, mainly due to taking back nonperforming assets as REO, which are separately stated on our balance sheet, partially offset by some new delinquencies in the first quarter. The average balance in our core investments was $11,400,000,000 this quarter compared to $11,500,000,000 last quarter. The average yield on these assets decreased to 8.15% from 8.52% last quarter, mainly due to a reduction in the average SOFR rate and less back interest collected this quarter on loan modifications and delinquencies versus last quarter. Total debt on our core assets was approximately $9,500,000,000 at March 31 and December 31.

Speaker 1

The all in cost of debt was down to approximately 6.82% at threethirty one versus 6.88% at twelvethirty one, mainly due to a 40 basis point reduction in rate on the new JPMorgan facility as compared to the rates we were paying on the CLOs at the time they were redeemed. The average balance on our debt facilities was down to approximately $9,400,000,000 for the first quarter compared to $9,700,000,000 in the fourth quarter, mainly due to pay downs in our CLO vehicles from runoff in the fourth and first quarters. The average cost of funds in our debt facilities was 6.89% in the first quarter compared to 7.08% for the fourth quarter, excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet and therefore not included in our total debt on core assets. This reduction in the average cost of funds was from a decline in SOFR, which was partially offset by the lower rate tranche lower debt tranches being paid down from CLO runoff in the first quarter. Our overall net interest spreads in our core assets was down to 1.26% this quarter from 1.44% last quarter, largely due to more back interest being collected last quarter on delinquent loans combined with a decline in SOFR.

Speaker 1

And our overall spot net interest spread was up to 1.03% at March 31 compared to 0.92% at December 31 from the removal of some loans that went REO and from better pricing on the new JPMorgan line that we closed in March. And lastly and very significantly, we've managed to delever our business 30% during this very lengthy dislocation to a leverage ratio of 2.8:one from a peak of around 4.0:one over two years ago. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have at this time. David?

Operator

Thank you. We'll take our first question from Steve Delaney with Citizens JMP Securities. Please go ahead. Your line is open.

Speaker 3

Thank you. Good morning, Ivan and Paul. Good to be on with you today. It sounds like, I mean, gosh, you covered a lot there in three or four different business lines. But the thing that caught my ear, it sounds like the CLO market is very attractive right now in terms of both structure and pricing.

Speaker 3

And a lot of folks have pulled back from Bridge loans because of the credit problems that occurred on the earlier vintages. I'm just wondering when you look at the Bridge portfolio, 11,500,000,000.0, Do you expect net growth there in 2025? And do you have a target level for where that portfolio might grow by the end of this year? Thank you.

Speaker 2

Let me give a little bit of an overview of our business and what our outlook is. And I think it's a combination of three factors. Number one, how much new Bridge business And in my comments, it will be about 1,500,000,000.0 to $2,000,000,000 Runoff, I think we did runoff of $400,000,000 in the first quarter, '2 hundred million in April. We expect runoff to be anywhere between 1,500,000,000 to $3,000,000,000 depending on where interest rates are.

Speaker 2

And then we're going to fund up our construction business and we're going to fund up our SFR business. So you're going to see a good net growth number. And then you're going to see the composition of our balance sheet hopefully by the end of the year or maybe the first quarter where the majority of what's on our book will be new production as opposed to legacy. And that's transformational when the legacy book gets shrunk to a minority of our book. And that's our goal.

Speaker 2

That's where we're going. A lot of this will be fueled by a very robust securitization market. There's been some pullback, as I mentioned in my comments, that with what happened with the tariffs, what was one of the most aggressive securitization markets has been pulled back. But pay very close attention. There are a couple of deals in the market now, but we think they're going to be extraordinarily well received.

Speaker 2

The net inflows and outflows on the securitization market is very clear that there's a lot of liquidity, a lot of demand, and we expect as a firm to be able to really benefit off, A, the leverage from that business as well as the cost of funds in that business, and we think it will be very accretive to earnings. And that's why a lot of what we spoke about was 2025 being a transition year and setting us up very, very strongly for 2026.

Speaker 3

Simon, just a quick follow-up. When you look at the loans that you're making today on the bridge loan side of the business, and clearly, you just said that you expect some growth and and you you really find that attractive. Why did so many people, just in a very simple term, what was the number one or number two, the primary weaknesses on why that, 2022, '20 '20 '3 vintages have performed so poorly? And you're going to obviously planning to correct that with your 2025 loans.

Speaker 2

So I think that's a great question. And I think we all have to understand that on the multifamily side of the business, you had a run from 2010 all the way up till now with very few corrections. And every market has a lot of corrections. I think we're going back two or three years from now, two or three years, everybody would say as they do in every upmarket that things can only get better, right? Rates will never go up and rates will only grow and rents will always rise.

Speaker 2

I think the biggest mistakes we're always made at the top of the market, those are the facts. We see it in every curve and everybody says, hey, if I only knew what I know now, I wouldn't have been where I was. It doesn't always work that way. We as a firm pull back a little quicker than everybody else. Now the one thing that we've done a great job with is certainly, as you know, the structure on our loans and the recourse on our loans has been very effective in mitigating some of the deterioration in the real estate fundamentals.

Speaker 2

And there has been a deterioration in fundamentals, but they're starting to strengthen up again. I think after COVID, which nobody could have ever have expected, you had a lot of delinquencies, a lot of rent issues, tremendous number of economic vacancy issues due to people not being able to move out the slow core system. You saw other factors which weren't anticipated, an increase in insurance rates and increase in tax rates. The insurance was a big factor. What nobody also anticipated was a number of new entrants into the business and the fact that they didn't have a level of experience in management.

Speaker 2

And when the trend is only positive, you kind of lose sight of some of the negative factors. So every cycle you get better. We've been through a lot of cycles. But I do want to comment on one thing. In our career, this being the fifth cycle we've been through, this is the longest peak to trough.

Speaker 2

Most of the time the cycles go for eighteen months, twenty months, sixteen months and you recover. This has been over thirty six months and still going. There have been bits of recovery, bits of setback. So this is a lot longer of a cycle than most people are accustomed to. But we're starting to see some elements of recovery.

Speaker 2

We're starting to see better occupancies and better growth. And there's a lot to learn from every cycle and every firm gets better. So that's my commentary on what happened then and hopefully how we're better positioned now.

Speaker 3

Thanks very much. Appreciate it.

Speaker 1

Thanks, Steve.

Operator

We'll take our next question from Jade Rahmani with KBW. Please go ahead. Your line is open.

Speaker 4

Thank you very much. Wanted to start with a liquidity update. What are you expecting cash and liquidity to do just looking ahead at earnings, the reset dividend, your expectations regarding NPLs and REO?

Speaker 1

Jade, it's Paul. So we're sitting right now, as you could see, with like $325,000,000 of cash and liquidity. I think one of the things that was in my commentary that's very important to note is that during this lengthy dislocation, we made a strategic decision to delever the business due to the uncertainty. And we delevered that business 30%. In the peak of the market prior to the dislocation occurring, we were four point zero to one levered and humming along.

Speaker 1

We're now 2.8 levered and we've at that level for a few quarters now. As with Ivan's commentary, what we're seeing in the securitization market and with the banks being so engaged and so constructive lately, evident by the JPMorgan line we just put in place, which was obviously an extremely good deal for us, we're seeing the opportunity now where leverage we can enhance our leverage and grow our liquidity. So we expect to be able to over the next six to nine, twelve months to totally fully take advantage of one, the securitization market and two, the constructiveness of the banks and the liquidity that's out there in the banking system to increase our leverage and grow our liquidity. Secondly, as Ivan mentioned, runoff is a big part of where our liquidity will go. And it's toggle it based on our origination objectives and what our runoff does.

Speaker 1

We did have $400,000,000 of runoff in Q1. It was a little light given where interest rates were for the last three or four months. Interest rates have backed off a little bit recently as we said, and we did get about $200,000,000 of runoff in April. So could runoff could go anywhere from $1,500,000,000 to $3,000,000,000 depending on where interest rates go, and that's also a source of liquidity. And then the last piece that I want to mention is the debt markets are very, very open and active.

Speaker 1

As you know, we've been a serial issuer of debt through the unsecured debt market, through the preferreds and all those types of instruments to the converts. Term Loan B, high yield debt, convert market, it's all pretty open right now. So we will continue to do what we do, be good stewards of capital. And if we see good growth opportunities and we think there's good origination opportunities and the runoff is slowing, we will continue to access those markets as well. So that's kind of the three pegs of the stool that drive our liquidity and why we feel comfortable we'll have adequate liquidity.

Speaker 4

Thanks. You didn't mention NPLs and REO. Could you talk about where you expect each to go? And also proceeds, do you expect proceeds from either category?

Speaker 2

Let me comment on the REO because I commented on my comments. We expect the REO to go up to between 400 and $500,000,000 and we're going to be extraordinarily aggressive where there's bad management and where there's asset deterioration to pursue that REO, reposition them. A lot of them are heavy lift. We started a process. And to the extent that we can reposition those assets, they are tying up liquidity, and we will look to liquidate them once we get to a certain level and generate liquidity there.

Speaker 2

Paul, you can give a little overview on the NPLs and how that's moving along.

Speaker 1

Sure. So as we said in the commentary, we're sitting with $511,000,000 of NPLs, about 140,000,000 less than sixty days, and they go through a natural progression, Jade. And as we laid out, as Ivan laid out in his commentary, we think about 35% of that pool, $654,000,000 will take back its REO. We're sitting with $300,000,000 of REO right now on our balance sheet, but $37,000,000 of that, as we mentioned, is going to get sold in the next couple of quarters. And then there's some legacy stuff on there that's been on before the crisis.

Speaker 1

So we're sitting at about, call it, $210,000,000, 2 20 million of REO after we sell those two from this cycle, and we're expecting to take back about 35 percent of that $654,000,000 So that will grow it to the 400 to $500,000,000 as Ivan mentioned. And we know the NOIs and the occupancy are low, and we're going to work through those assets, put a little money into them, rehab them, get them to a level where they're now contributing to our earnings and then we'll make a decision whether we want to liquidate them or keep owning and operating them at what level. That's kind of the way we're looking at it. But as we mentioned, it's a big drag on our 2025 earnings and that's why we believe it's a transitional year and that's why we gave the guidance we gave last quarter.

Speaker 4

Thanks. I could ask one more, it's just about the overall economic sensitivity of the portfolio. You mentioned the thirty six month cycle, but that's really an interest rate cycle. We haven't even gone through an economic cycle in terms of unemployment spiking or a recession. So could you touch on your views there?

Speaker 2

We're actually seeing the occupancy firm up in a lot of our assets, and we're seeing better performance. And I think in many of the markets we've hit bottom that we're seeing. A lot of it was a product of what was, I would say, COVID and post COVID and the difficulty of getting tenants out and that has firmed up. So in many ways, we feel we've really bottomed out in a lot of these markets. With respect to REOs, which we experienced, it was really poor management and what we've seen now with bringing in the right management, we've been able to really take underperforming assets and bring them up to market.

Speaker 2

A lot of what we have is workforce housing, and we're seeing good data on that in general. So I think we've seen from the on the economic side of the coin, the worst side of it, and we've been to a very tough side of it.

Speaker 4

Thank you very much.

Speaker 1

Thanks, Jade.

Operator

We'll take our next question from Rick Shane with JPMorgan. Please go ahead. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my questions this morning. Look, the interaction feedback we're getting is a lot of focus on liquidity, dividend sustainability and non cash income. Cash is down 65% year over year, 38% quarter over quarter and that I'm not including the restricted cash because of the paydown of the CLO. Repayments were at their lowest level back to the pandemic at $421,000,000 I think.

Speaker 5

Originations in the quarter were $747,000,000 So you consumed about $300,000,000 on originations. I'm curious how much of those originations really were on new projects as opposed to reinvesting in existing?

Speaker 1

Sure. So I can give you some of those numbers, Rick. So the $747,000,000 that we did in originations, $367,000,000 were brand new bridge loans, not on existing projects, brand new bridge loans in the market we're in today. 131,000,000 were bridge loans that came off our SFR business with that business working nicely. So construction got to lease up and then those loans turned into bridge loans.

Speaker 1

And then in addition to that, we had about $223,000,000 of fundings on our unfunded SFR business. As you know, we have commitments outstanding and then we fund that business over time. And then about $19,000,000 was funding on construction loans in our newly created construction business and $4,500,000 was mezz. So pretty much all of that product that I mentioned is new product to us. It's not on existing.

Speaker 5

Great. That's I really appreciate the clarity there Paul. Second question is you guys reported $57,000,000 of distributable earnings, how much of the reported income was or interest was non cash?

Speaker 1

Yes. So that's what I put in my commentary. We booked 15,300,000.0 of PIK during the quarter, which is down from last quarter because we make adjustments as we go, some loans pay. And on the amount of loans that we've modified that we put a pay in accrual feature on, we're accruing about 78% of those loans and about 22% we've put on non accrual. But it was 15,300,000 for the quarter.

Speaker 1

And as I put in my commentary, a certain amount of that is mezz and PE, which is part of the normal structure, and the rest is on our bridge loans.

Speaker 5

Got it. And as we look through the year and look to your guidance both in terms of dividend outlook and expectations of an increase in PE in the back half of the year, Is that $15,000,000 run rate a good way to is that a good level of expectations?

Speaker 1

I think it is. It's a hard question because things change, right? So this quarter, if you look at our 10 Q, you'll see we reversed some prior pool interest on some loans that we modded that defaulted and then we had some new ones. So it's a constantly moving number and we sit down every quarter and we go through with asset management and we look through and say which ones do we think are going to pay, which ones we think are going to struggle. Once we think a struggle, we're going to be conservative.

Speaker 1

But I think that's a pretty good run rate right now. We may have some more mods in the second quarter, I'm not sure. And you'll have the first quarter mods full effect, but we'll see runoff. We're working on a couple of big deals now that if they get over the line given where interest rates are, we could see a chunk of that get paid. So it's all a moving number.

Speaker 1

So I would say that 15% is probably a good estimate going forward.

Speaker 5

Terrific. Thank you and thank you as always for taking my question.

Speaker 1

Sure. Thanks, Rick.

Operator

And we'll take our next question from Lee Cooperman with Omega Family Office. Please go ahead. Your line is open.

Speaker 6

Thank you. So far, everything I've heard is in line with what

Speaker 4

you previously have indicated. You and I have had this discussion in the past, and that is why do you

Speaker 6

think interest rates are too high? I mean, just the way I look at the macro economy, stock market is right near high. Speculation in the market is very rapid. I see no indication interest rates are too high. Why do you feel the interest rates are going go down?

Speaker 2

It's not that I feel whether they go down or up. It's how we think the business will be managed in a different rate environment. I mean, rates moved up as they did three or four months three months ago on our last quarter, we were very bearish and we gave a certain outlook and revised our earnings forecast going forward and our dividend going forward. Rates have improved a little bit and improvement in rate has a dramatic impact on our business. As I mentioned in my comments, our pipeline grew from $1,200,000,000 to $2,000,000,000 in a very short period of time with that rate down.

Speaker 2

I don't while I may feel rates may go down, I could just tell you how the different rate environment affects our business. We're at a point in time with this rate environment where it is today, we feel good about it. If rates move down even lower, we feel better. If rates move back up, we feel worse. So rates have moved from down about 50 basis points.

Speaker 2

It's had a dramatic impact on us already. If it moves lower, it will have even a better impact. So I comment more in terms of how our business will function in a different rate environment.

Speaker 6

Got you. Now second question for Paul. I got to this call very late. I apologize because I've got another call. What was the book value at the end of the quarter?

Speaker 1

Sure. The book value was $11.98 at the end of the quarter, Lee.

Speaker 6

Right. Okay. Dollars 11.98. And in the past, you've had an authorization to buy back stock. Is the current environment such that you would rather keep your liquidity and not buy stock back below book value?

Speaker 6

Think the short question is

Speaker 2

Leon, clearly, our liquidity is a very important item to us. We'll manage our liquidity. We'll manage our opportunities, and we'll keep an eye on everything. If we see the stock go down and we have an opportunity to gain liquidity in other areas and it's a good return on investment for how we raise our capital and something we would evaluate.

Speaker 6

Got you. All right. So you would not you're not committed to do a buyback, but you basically look at the various and the market environment?

Speaker 2

Correct.

Speaker 6

All right. Very good. Thank you.

Speaker 2

Thanks, Lee. And

Operator

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

Speaker 2

Okay. Thank you all for your participation today and your support. Look forward to next quarterly call. Everybody have a great day and a great weekend.

Operator

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

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Earnings Conference Call
Arbor Realty Trust Q1 2025
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