Arbor Realty Trust Inc (ABR) 2023 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and full-year 2023 Arbor Realty Trust earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn your call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Savannah. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 2023. 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.

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 outstanding quarter and closed out an exceptional 2023.

In fact, 2023 was one of our best years as a public company despite an extremely challenging environment, we managed to increase our dividend twice while maintaining one of the lowest payout dividend ratios in the industry and generated a total shareholder return of 28%, outperforming our peers. Additionally and very significantly, we're able to maintain our book value, where we recorded reserves for potential future losses, which clearly differentiates us from everyone in this space.

In fact, as Paul will discuss in more detail later, we generated GAAP earnings in excess of our dividend in 2023 despite recording approximately $90 million in reserves. And our distributable earnings were also well in excess of our dividend, providing one of the best dividend and coverage ratios in the industry. We're also very effective in refinancing loans off our balance sheet for our capital-light agency business.

We generated $3 billion of multifamily runoff in 2023, and we captured 56% or $1.7 billion of those loans into agency product. Our agency platform gives us tremendous strategic advantage, allowing us to continue to delever our balance sheet and generate significant long dated income streams, which is a key part of our business strategy.

We have been a significant player in the agency business for almost 20 years and now have been a top 10 Fannie Mae DUS lender for 17 years in a row, coming in at number six for 2023. It is extremely important to emphasize that our agency business generates over 40% of our net revenues, the vast majority of which occur before we open our doors every day. This is completely unique to our platform, and it's something we feel is now fully reflected in our valuation.

On our last call, we gave guidance that fourth quarter of last year and the first quarter and second quarters of this year would be the most challenging part of the cycle. We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter.

As a result of this environment, we are experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrwers are taken to position that they will default first and negotiate second, which is not a strategy that works well with us. Second, borrowers need to bring capital to that table to rightsize their deals, and raising capital is a lengthy process at today's climate. Therefore, you will see defaults rise initially until are able to raise additional capital, and then deals will often be recapped.

We feel we have done a very good job to date in collecting payments and have been highly effective in refinancing deals for our agency business as well as getting borrowers to recapitalize the deals and purchase interest rate caps where appropriate. In fact, we had $2.5 billion of loans with interest rate caps that were expiring over the last four months, of which $1.7 billion executed new rate caps or put cash up in lieu of caps. And we continue to work on getting new caps executed every day.

We also have long-standing relationships with many quality sponsors that we've been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions. As we are constantly receiving reverse inquiries from the market to purchase our assets as well, our goal is to maximize shareholder value. And very often, it's not just the value of the collateral but the recourse provisions that we evaluate in determining how to approach each individual circumstance.

The short-term nature of having a delinquent loan will not impact our decision-making process to achieve a correct economic result on a transaction. With that said, we have received a lot of public criticism in what we consider to be an extremely successful transition of assets to new ownership through the legal process or even two cases consensually. This is a very difficult and complicated work. As I said earlier, we expect to be extremely busy in the first two quarters of this year, managing through the most challenging part of this dislocation.

Additionally, we continue to focus heavily on maintaining a very strong liquidity position. We currently have over $1.1 billion of cash between $1 billion in corporate cash and $600 million of cash and our CLOs that results in an additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment as it provides us the flexibility needed to manage through the rest of the downturn and take advantage of opportunities that will exist in the market to generate superior returns on our capital.

We've also done an excellent job in reducing our exposure to short-term bank debt and have no significant pending maturity to deal with on any of our warehouses and facilities. We are down to approximately $2.8 billion in outstandings with our commercial banks from a peak of nearly $4.2 billion, and we have over 70% of our secured indebtedness and non-mark-to-market, non-recourse, low-cost CLO vehicles.

As previously discussed, these vehicles provide a tremendous strategic advantage at times of distress and dislocation like the environment we are in today due to the nature of their non-mark-to-market non-recourse elements. In addition, they contribute significantly to providing a low cost alternative to warehouse banks, which in times like this have fluctuating pricing and [leveraged point] parameters.

Turning now to the fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.54 per share, excluding a one-time realized gain on an office property that we had previously reserved for. The results were well in excess of our current dividend, representing a payout ratio of around 80%.

We are very pleased with substantial cushion we have created between our earnings and dividends, which will serve us well through the balance of this dislocation. We believe our diverse business model uniquely positions us as one of the only companies in this space with the ability to continue to provide a sustainable dividend. And just as importantly, at a time of tremendous stress, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from our peers.

In our balance sheet lending business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency product, allowing us to recapture a substantial amount of our invested capital to produce significant long dated income streams.

In the fourth quarter, we were able to again be highly effective with this strategy, producing another $800 million of balance sheet run off, $465 million or 58% of which was recaptured with the agency loan originations. As a result, we recouped over $100 million of capital and continue to build up our cash position, which again currently sits at around $1.1 billion. With today's current interest rates, we'll continue to chip away at converting the loans to the agencies. But if the 10-year goes below 4% again, it will become more meaningful. And every quarter of a point, drop-in rates from here will be even more impactful.

As we touched upon last quarter, we also believe we are well positioned to step back into the lending market and garner accretive opportunities, continuing to grow our platform. We feel now is the appropriate time to originate some of the highest quality loans that attractive returns, allowing us to grow our balance sheet and build our pipeline of future agency deals.

In our GSE agency business, we had another great quarter, an exceptional 2023 despite elevated interest rates. We originated $1.3 billion in the fourth quarter and $4.8 billion for the full year, representing a 7% increase over our 2022 numbers. This is a tremendous accomplishment in light of the fact that the agencies were down 25% to 30% in production year over year.

We have done an excellent job in gaining market share and converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. We also originated $300 million of five- to 10-year fixed-rate GSE agency alternative products for our private label business, bringing our total agency volume to $5.1 billion for 2023.

Traditionally, January is a much slower month for the agencies, which resulted in us originating $250 million of loans. February numbers are looking much stronger, and we have a large pipeline setting us up for what we believe will be another very solid year to agency originations for 2024.

And again, this agency business offers a premium value as it requires limited capital and generates a significant long-dated predictable income stream and produces significant annual cash flow. To this point, our $31 billion fee-based servicing loan portfolio, which grew another 4% in the fourth quarter and 11% year over year generates approximately $121 million a year in reoccurring cash flow.

We also generate significant earnings on our strong cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning 5% of around $3 billion in balances, roughly $150 million annually, which combined with our servicing income annuity totals approximately $270 million of annual gross earnings or $1.30 a share. This is in addition to the strong gain-on-sale margins we generate from our originations platform, providing us a strategic advantage over our peers.

In our single-family rental business, we had a very strong fourth quarter and a full-year 2023 as we continue to dominate the space and have become a lender of choice in the premium markets we traffic in. We had $200 million of fundings and another $470 million of commitments signed up in the fourth quarter and closed out 2023 with $1.2 billion of new commitments.

We also have a large pipeline remain committed to this business as one of the returns on that capital for construction bridge and permanent lending opportunities and generate strong levered returns in the short term, while providing significant long-term benefits by further diversifying our income streams. We're also very excited about the opportunities we think we can garner from our newly added construction lending business as we believe we can generate 10% to 12% unlevered returns on capital and eventually leverage this business and produce mid- to high-teens returns.

We continue to build a pipeline of potential deals and now have roughly $44 million under application, another $400 million in annualized and a significant number of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us returns on our capital through construction bridge and permanent agency lending opportunities.

Lastly, I would like to spend some time talking about the short reports that have been written on our company. I want our loyal investor base to understand that these reports are written in a way that was purposely designed to drive down the company's stock price to achieve the desired goal of profit from a short position.

As such, the facts, assumptions, predicated future events and market conditions, as well as the conclusions of these reports are exaggerated, laced with incomplete or inaccurate data, and slanted only to provide a negative view on Arbor, and again, truly for personal gain.

And while we will not get into a back-and-forth on the information in these reports, we'll have detailed discussions at any specific loans, where we will point out that the short reports state that our CLO delinquencies were 16.5% in December and 26.6% in January. When in reality, the ratio is 1.3% for December and 5.6% for January as of today.

More importantly, there's 30-day delinquency numbers or 0.9% for December and 1.2% for January as of today, which are the numbers the industry focuses on. This is a perfect example of using short select data, as of a point in time, does not contain the full picture or represent the industry's focus, only to inject fear into the market for personal gain.

We urge our long-term shareholders to know these one-sided self-motivated reports and focused only on our results and public disclosures and the fact that we've consistently outperformed our peers. It is also very important to emphasize that a significant portion of Arbor's lending is multifamily focused, specifically in the workforce housing part of the market.

As we all know, Fannie Mae and Freddie Mac have had a specific mandate to address the workforce slash affordable housing needs, which is a major issue in the United States, making Arbor a great partner. This product requires a high level of management, tremendous expertise, which we have been very effective at for decades because this prospect may not have the same curb appeal of the multifamily product types.

We have been criticized for a core part of our business that we have been extremely effective at, and we'll continue to fulfill a very important mandate for the federal agencies as well as the social needs for society. Again, we thank you for your continued support.

And now, I will turn the call over to Paul to take you through our financial results.

Okay. Thank you, Ivan. As Ivan mentioned, we had another very strong quarter, producing distributable earnings of $104 million or $0.51 per share and $0.64 per share, excluding a $7 million one-time realized loss and an office property that we had previously reserved for. These results trended and translated into industry high ROEs, again, of approximately 17% for the fourth quarter and 18% for the full year of 2023.

Equally as important, we closed out 2023 with GAAP EPS of $1.75 a share, which was in excess of our dividend, despite booking approximately $90 million of reserves for potential future losses. And then of course, with distributable earnings of $2.25 a share, that easily beat our dividend run rate. We provided a very strong dividends to earnings coverage ratio for our investors.

Our fourth-quarter results were positively affected by a $5 million distribution from our Lexford investment, which was recorded in income from equity affiliates. We also had higher gain on sale income as our agency bonds are typically stronger in the fourth quarter, and we continue to benefit from strong earnings on our escrow and cash balances from elevated interest rates.

As Ivan mentioned, we do expect to continue to experience stress as we manage through the most challenging part of the cycle. As a result, we continued to build our reserves, recording an additional $23 million in CECL reserves on our balance sheet loan book during the quarter, which was slightly offset by a $3 million recovery we had from a payoff of a non-performing loan that we had fully reserved for previously.

As we expected in this market, we also experienced a net increase in our delinquencies in the fourth quarter of approximately $115 million. And as discussed earlier, we are expecting that we will experience additional delinquencies over the next few quarters.

Very important to emphasize that despite booking approximately $90 million CECL reserves across our platform in 2023, $74 million of which was in our balance sheet business, we still grew our book value 2% to $12.80 a share from $12.50 a share last year. And we are one of the only companies in our space that has significant book value appreciation over the last three years with roughly 30% growth from around $10 a share to nearly $13 a share.

In our agency business, we had a very strong fourth quarter with $1.4 billion in originations and $1.3 billion in loan sales. The margin on these loan sales came in at 1.32% this quarter compared to 1.46% last quarter, mainly due to some larger deals in the fourth quarter. We were very incredibly pleased with the margins we generated in 2023 of 1.48%, which exceeded 2022's pace of 1.34% by 10%.

We also recorded $21.1 million of mortgage servicing rights income related to 1.4 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.55% compared to 1.16% last quarter, mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter, which contain higher servicing fees.

Our fee-based servicing portfolio also grew another 3.5% in the fourth quarter and 11% year over year to approximately $31 billion at December 31, with a weighted average servicing fee of 39 basis points and estimated remaining life of eight years. This portfolio will continue to generate a predictable annuity of income going forward of around $121 million gross annually. And this income stream, combined with our earnings on our escrows and gain-on-sale margins, represented over 40% of our 2023 net revenues.

In our balance sheet lending operation, our $12.6 billion investment portfolio had an all-in yield of 8.98% at December 31 compared to 9.12% at September 30, due to a combination of an increase in non-performing loans and loans that had not made their full payments as of December 31 that we did not fully accrue for.

the average balance in our core investments was $13 billion this quarter compared to $13.4 billion last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield on these assets increased slightly to 9.31% from 9.28% last quarter due to a slight increase in SOFR, which was offset by an increase in non-performing loans in the fourth quarter.

Total debt on our core assets decreased again to approximately $11.6 billion at December 31 from $11.9 billion at September 30. The all-in cost of debt was relatively flat at 7.45% at 12/31 versus 7.41% at 9/30. The average balance on our debt facilities was approximately $11.8 billion for the fourth quarter compared to $12 billion last quarter. And the average cost of funds in our debt facilities was 7.48% for the fourth quarter compared to 7.37% for the third quarter, primarily due to increases in the benchmark index rates.

Our overall net interest spreads on our core assets decreased to 1.83% this quarter compared to 1.91% last quarter. And our overall spot net interest spreads were down to 1.53% at December 31 from 1.71% at September 30, again due to an increase in delinquencies and non-accrual loans during the quarter. As and as I mentioned earlier, we are expecting to experience additional delinquencies over the next few quarters, which could further reduce these margins.

Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 18% in 2023 to a leverage ratio of 3.3 to 1 from around 4.0 to one last year. Equally as important, our leverage consist of over 70% non-recourse non-mark-to-market CLO debt with average pricing of 170 over, which is well below the current market, providing strong levered returns on our capital.

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. Operator?

(Operator Instructions) Steve Delaney, Citizens JMP.

Thank you. Good morning, Ivan and Paul. I'll start off, if I may, with a quick question for Paul. Thanks for the details on the NPLs up to 16 assets from 12. Foreclosures is something we haven't -- it's certainly part of your toolkit, but not something we've seen a lot.

Should we expect over the next several quarters as you attempt to maximize your outcome that we will see more actual -- you've actually taken over properties? And do you have -- are you confident you have the internal ability to operate those projects and resolve them without the current borrower? Thanks, Paul.

So let me take that first, Steve. We have options to either go through and all the legal process of foreclosure to do them consensually. It's always better to do things consensually if you can. But sometimes, the process is an alternative and certainly, in certain jurisdictions, it's very easy to do so.

With respect to us taking over the management of the assets, we do have the capability, but that's not what's taken place. In fact, the demand from our borrowers to step into some of these assets is so strong that we've had to set up an internal process to limit the number of actual borrowers that we have because we're getting inundated with requests.

We set up an internal process that when we do have a stressed asset or stressed borrower or a borrower we don't think is going to be able to bring the asset to the finish line to bring in a new borrower and whether it be through a consensual process or through the legal process, we have somebody lined up, willing to step in, and that's how we've done it.

So maybe six or nine months ago when there was a lot of fear in the market of where our value is going to go and a lack of liquidity, it was much harder to get somebody to the table. Clearly, to get people to the table is very easy. And as you can see, people are raising distressed funds and there's plenty of capital, plenty of liquidity to step in. So we have that capability and we set up the process.

Excellent. Paul, anything you want to add there?

No, I think Ivan took you through everything that we worked through internally.

So yeah, it just sounds like the opportunistic private capital and your relationships in the industry that you're going to have opportunities to resolve, either working with the existing borrower or bringing in a new player that we probably won't see a lot of dead foreclosured REO properties on your balance sheet where you try and figure out a plan. It sounds like you've got the plans in place very accurately.

I mean, generally not. Generally, by the time we foreclose, that thing has been of pre-baked and pre-done in that sense. You really get to see assets that haven't had the right management. And that's why it's so important to us when an asset isn't performing to not just kick the can down the road because the asset will deteriorate but to really accelerate either a change management or a change in ownership.

Steve, yeah. As Ivan said, we don't have a lot of REO in our book, as you know. We did this quarter, and we didn't put it in our commentary. We did have an office asset that we had written [down the loan].

We took back that asset this quarter. It is an REO, and we brought in a very sophisticated partner who has a lot of experience in converting that building to condo. And so we're working through that process over the next couple of years. So that's an exception where we will take an asset back in REO. It's just not a big part of our business, as Ivan said, but you will see that in our filings when we file our K.

Okay, thanks. So Ivan, on your point, this is kind of strategic, and I am speaking directly to some of the short reports. I think, early on, maybe there was a Houston asset. Someone used the term slumlord to describe your portfolio.

Your three bites out of the apple strategy that you've used forever, do you have any concern that the overall quality of your loans or borrowers, and I don't mean a large percentage, but do you think you have some assets, loans in your portfolio that are not of sufficient quality to be refinanced with permanent financing into Freddie Mac and Fannie Mae? That’s it for me. Thanks.

Well, clearly, our agenda is when we do a bridge loan, it's for the sole purpose of creating an agency loan. You have to have a quality sponsor and you have to have a quality asset. So our idea, of course, is that every sponsor that we take on is going to perform correctly.

Not all sponsors do that, and a lot of -- sometimes, there will be a sponsor who couldn't hit his business plan or who had other problems or isn't what we thought, and they don't qualify. And that's just the way it goes. Nobody is perfect. We're not perfect.

With respect to the assets, if you're improving an asset, you've got to improve that asset and you got to get it up to industry standards and agency standards. If it doesn't, it won't meet the agency eligible. So if we have a $16 billion portfolio, not all $16 billion is going to make that mark. I mean, I think it's 75%, 80% of them get agency status and convert. That's pretty good.

In other cases, when they don't do that, the assets will be sold or put into new ownership who will get that asset up to spec. So that's kind of the way we look at the world. It's not a perfect situation where every asset that we take in ends up meeting our execution.

But you have other options to resolve it, it sounds like.

We have other options. And bringing in new ownership, very often, they can get the assets up to speed and get them repaired and get them fixed. And if we've had many assets where on the one form of ownership that couldn't get there, you bring another form of ownership that gets there very, very quickly.

In fact, one of the assets that we transitioned in Atlanta, we had it for ownership. And I think within nine months, the asset is almost ready to go agency; whereas with all the other ownership, we had no chance between the owner and the way it was operating. It only took nine months to turn the asset around.

Well, thank you both for your comments this morning.

Thanks, Steve.

Jay McCanless, Wedbush.

Hey, good morning. Thank you for taking my questions. So provisioning was a little less than what we're expecting this quarter, but it sounds like things may get a little rockier heading into the beginning of '24. Could you maybe talk a little bit more about why some borrowers feel better to default than negotiate first? That seems to be a little backwards given the environment that we're in right now.

Well, I can speak from experience as I deal with a lot. I'm pretty involved in the asset management side with the asset management group. I think they're being counseled that if you default, the lender will be more easy to work with. They don't want defaults on their books. That's number one. And that may work with other lenders. It doesn't work with us. We're not afraid of defaults. Defaults don't intimidate us. It may intimidate other lenders. That's number one.

Number two, for whatever reason, and I'm not sure why, initially, people don't think that the recourse provisions on their loan applicable. And when they get notification of what they're triggering, they really wake up very, very quickly.

I don't believe other lenders in the prior years had the structural enhancements that we had all but do have on our loans. They do now. They've learned. But we've always had the structural enhancements on our loans, which include, in many cases, interest reserve replenishment, recourse obligations on rebalance and caps, and very, very significantly, majority of our default interest on loans are 24%.

So I think it puts us in a different light, maybe when they have loans with other lenders, lenders act differently than we do. But this is our course of conduct. If a borrower has a problem, we advise them. Let us know what your issue is. We're happy to figure out how to try and come up with a solution in a proper way. And that's always the best act, and then we'll give you time to figure out how to recap and work with you.

But we did definitely see a spike of a mentality of default. And then here are the keys and it's your problem. And immediately, we let them know of their obligations and we're able to bring that mentality and correct that mentality.

Great. Thank you, Ivan. The other question that I had, when we look at multifamily rents, especially in Texas and Florida, we started to see -- some of the cities are holding up, but some of the cities you're starting to see year-over-year rent declines. I guess, could you maybe talk about what type of geographic risk we should be monitoring right now and how you're feeling about that part of the country in terms of potential delinquencies and workouts you're going to have to address there?

I think we're through the worst of it. And I think in my prior calls, I talked a little bit about the economic vacancy that exists specifically in certain areas. And I think there's a large economic vacancy, which has been created from COVID backlog and the cost mentality with some of the renters that they can be in an apartment, not pay rent, and not get evicted.

I also think that there was a period of time from COVID that people got rent subsidies and those rent subsidies ran out. And that also accelerated a lot of the delinquencies. The courts are starting to be a little easier to work with. Tenants are being evicted at a much more rapid pace. And I think that you'll see the economic vacancy start to diminish without a doubt.

I do want to differentiate between the product type that we have, which is a lot of workforce housing, which I think is a huge shortage versus the Class A market, which I think is suffering from different headwinds. I think if you look at the deliveries in 2023 of new construction and then the deliveries in 2024, I think you'll see continued headwinds for Class A.

I think for the workforce housing, there is a shortage. We all know there's a shortage. I think when the court system starts being more efficient, I think that the economic numbers will look a little better.

I also think there's another shadow issue, which we've talked about internally. I mean, basically, you have 8 million or 9 million people who have come across the border who are living in hotels. These people have to go live somewhere. They can't live in hotels forever. We think they -- once they start to begin to get their work permits and start to work, I think that will have a positive impact on the vacancy factors in workforce housing.

Yeah, that’s great. Thank you, Ivan. Appreciate it.

Thanks, Jay.

Jade Rahmani, KBW.

Thank you very much. The delinquency statistics you gave are much lower than the info available from the CLOs. And I wanted to ask what the main discrepancy is there that you see. Just so we're clear, the numbers you gave, are those the 30-day plus delinquency rates? Is that what you want us to focus on, if you could just clarify that?

Sure, Jade. It's Paul. So yes, so the delinquency numbers that are reported with the CLOs, as we said in our commentary, were 16.5% in total delinquencies after December and 26.6% in total delinquencies for January. Those numbers, total delinquency numbers, are down to 1.3%, as we said in our commentary today. So we've resolved a lot of those loans, okay? And they're down to -- for the January numbers, I have them right here. They're down to 5.6%.

However, those are total delinquency numbers. The industry normally looks at anything 30 plus and really, more importantly, 60 plus. So what we're telling you is those total delinquency numbers that were reported on those days are down significantly from when those numbers were reported.

And even more importantly, the 30-plus day delinquent numbers, okay, were 6.3% on December. So of that, 16.5% of total delinquency, 6.3% was 30 days plus, and that number is down to 0.9% today, okay? So that's what we're telling you. And 60-day delinquencies are down to 0.8%, so very, very nominal.

On January, same type of thesis. The 26.6% in total delinquencies is down to 5.6% today as people have made their payments. The 30-day delinquencies on that day, 30-plus day delinquencies were 9.1%, and that's down to 1.2% today. And a 60-day delinquency is 0.8%.

So the way the industry looks, CMBS and all the other industries look at delinquencies, they look at 30 plus and 60 plus. All we're telling you is the numbers that you're seeing in those reports are total delinquencies, most of which you can gather by the numbers we're giving you are less than 30 days and are subsequently cured. That's what we're trying to give you the information on.

And what was the 60 day as of 12/31?

As of 12/31, the 60-day delinquent number was 0.8%, and it's still at 0.8% because those are some of our non-performing loans.

And the 30 day is now 1.2%, down from 9.1%?

The 30-plus day or 1.2% for January, down from 9.1%.

So in terms of moving it down, by that, I mean, this looks dramatic that there was that level of delinquency. First of all, I mean, that level of delinquency is surprising to me, understanding that some borrowers may just pay late because different loans pay in the 15th versus at the end of the month. But that's a high delinquency rate, but it's down sharply. What is the main means of getting it down sharply?

Ivan, do you want to talk to that?

On a lot of loans, there's no grace period. People pay late. They collect rents late. It's not a number that we give a lot of credibility to. What we give credibility is 30-plus days. Borrowers are struggling. These are more difficult times, and if there's a shortfall between the rents that come in and where the capital is, they've got to raise the capital. They've got to put it in.

But keep in mind, there's really no grace period on these loans, so they do it at a certain point in time. If they're late on their payments, they're late on their payments. What we focus on, as Paul reiterated, is really the 30-plus days. So I would say it's definitely more challenging times. But our focus is on the 30-plus days, and we work hard to make sure that the borrowers stay within that 30 days.

The other thing I'll point out, Jade, just quickly, it's just a little bit more granular. We're not looking to change the way things are reported with the CLOs. But we are one of the only lenders left in the space that have replenishment vehicles with cash in those vehicles.

So as we said in our commentary, we have $600 million of cash still ready to be deployed in those vehicles. The way these numbers are calculated for those reports is based on the delinquencies over your total investable assets. But we can make the argument that that $600 million of cash is a performing asset and will be invested into a qualified performing asset.

So if you up the denominator by using the cash as well, just not the loans, the numbers drop by 1.5 points. I'm just telling you that there are ways these things are reported, ways we look at it. But more importantly, the 30-plus delinquencies are where we focus and the industry focuses, and those numbers are significantly lower than those total delinquencies.

You mentioned peak stress is in the next two quarters. A couple of things, that 30-day number, that's what you want us to focus on. It's 1.2%. Where do you expect that to peak?

We don't -- we're not going to project on that. But what we will say is that we expect this quarter and next quarter to have continued stress. I want to add one more commentary. It's that if rates stay at these levels a little bit longer, we could have stress drip into the third quarter as well. There was a little bit of an outlook that rates would begin to decline at a certain level, which would de-stress the environment. We think if rates continue to rise a little bit as they are in this area, we may have continued stress drip into the third quarter.

Okay, I appreciate that. I was actually going to ask that. And then finally, just to clear some other notions, rent-regulated New York multifamily is its own troubled asset class. First of all, can you give your views on that? Are there any opportunities you see emerging there, and if you could quantify any Arbor exposure, which I believe is minimal?

Yeah, I'm glad you brought that up because clearly, Signature New York Community Bank are loaded up with all these rent control and rent stabilized. And the impact on valuation on those banks have been dramatic. I think everybody's followed the sale of the Signature portfolio and the haircut that the rent control or rent stabilized -- I think it was somewhere in the 58% level.

That's really had a dramatic impact on that asset class. We, as a lender, we're not a very active participant in that space. We were not active because they were being acquired at a very low cap rate with the concept that they would be able to kick out these tenants and bring them to market and rehab them.

The numbers going in didn't make sense nor did we really like the concept of kicking out rent control to rent-stabilized tenants. We thought that was inappropriate. And therefore, we had very, very little exposure to that asset class.

We think that in the long run, a lot of that housing will be respite out of discounts and come back to the market. But we do not, as a firm, have any significant exposure to the rent control or rent stabilized on the one hand.

On the other hand, there will be opportunities on the lending side at the right valuations with the right operators in that asset class, and that will return in our view. And it will return once the assets could be split out to the market at the right valuations with good operators. We do have some really good operators internally that we do business with. We'll be very effective in those asset classes at the right basis and the right lending parameters.

Thank you very much.

Thank you, Jade.

Lee Cooperman, Omega Family Office.

Thank you. Let me just say this, nobody has given you a shout out. I've been an investor in the company for well over a decade, and I speak with you periodically. And I got to tell you, a year ago, you told me you were very pessimistic about the outlook and you were getting very defensively postured, which was a brilliant call.

And then three years ago, you started moving the company into multifamily. And everybody is now looking at multifamily like they're looking at office. It makes no sense to me. You get all these immigrants coming over the border. They have to live somewhere, and they're employed, and it seems to me that you're in a good sector. So that's an observation. I'm just going to give you a shout out.

My question is as follows. I have a lot of money with the guy that's done a sensational job for me in doing real estate lending. And I've noticed many times when he has a foreclosure, he makes a profit. So I assume if the assets are well underwritten, you may even be a beneficiary of foreclosures. What is -- do you feel comfortable that the book value of [$1,280] or [$1,250], whatever it is, is accurate?

And how do you feel about the quality of your underwriting, given the environment? I congratulate you on being very correct in your assessment of the environment. Thank you.

Thanks, Lee. First of all, the multifamily market is still a great asset class, a phenomenal asset class. And in 2009 and 2010, when we were 35% multi and we did all the other asset classes, we came to a quick conclusion that even though there were defaults and even though there were losses, all the significant losses came on the other asset classes. And eventually, multifamily with the right management returns, and every high is generally followed by another high, just as long as you have good management.

And we made a decision as a firm that we wanted to be predominantly multifamily, and we're glad we did. I'm not sure how and why they're comparing a multifamily office -- the losses on office could be extraordinarily significant. I'm sure there are [parts] of that of office and [facilities] that are strong, but they're not the dominant part of the market. And when you lose on an office, you lose big. Multi, your losses are not that dramatic on a relative basis.

With respect to the foreclosure process, do we win, do we lose? Do we lose, do we win? The fact is we went on some, we lose on a little. When we think we're going to lose, we put up reserves. Our reserves have been pretty accurate in the history of the firm. We're very comfortable with the reserves. We're very comfortable with our book value, and we'll continue to put up reserves as we feel it's appropriate.

So there are many times that we'll head towards the foreclosure and say, okay, there's a gain here. There are many times we'll head towards a foreclosure, and we'd have a reserve and we're properly reserved. So far, we've done a great job.

There are a lot of borrowers, and it's funny, somebody asked me, why do borrowers default first? I mean, we've had a few defaults recently where the borrowers defaulted, and the assets are worth significantly more than the debt. And we're like, we're not even going to talk to you guys, right? You're going to pay us 24% or we're going to foreclose. And by the way, we're going to get a default judgment against you too. Don't forget about that.

We've got four, five, six borrowers with guarantees on the loan. And if I'm short, we're going after those borrowers. And I promise you, we're hiring staff just to pursue the judgments, and we're going to collect all our money. So nothing is perfect. We feel really comfortable with our book value. We feel really comfortable with our process.

Make no mistake about it. This is not easy work. It's hard work. And it takes a lot of management and a lot of discipline, but we will achieve the best economic result, and we're doing a pretty good job, and I can deploy my asset management staff and the company as a whole for the amount of work they're putting in and the results they're getting.

I'm just curious if you can comment on this. I just got an email from a Peter Boockvar, and the headline on the email is Multifamily Construction is Collapsing. I've been a great believer that excess returns brings within new competition, and inadequate returns drives our competition. So are we heading -- is this headline reasonable from what you're seeing? Is multifamily construction turning down quite a bit in action -- in response to the increased supply?

Took too many deliveries, too many deliveries. I think there's 670,000 units being delivered in 2024 to 370,000. You have way too many deliveries. The costs were high due to COVID, so of course, we're way out of line.

If you listen to the economic reports, these units should be being filled up, hand over fist. I don't believe that the employment is where people say they are. Otherwise, we wouldn't be having this absorption issue. But there is an absorption issue, without a question, from what we see.

We're not very active in that side of the market. As we say, we're workforce housing, and there's a shortage of workforce housing. You can't produce the housing at the cost basis in which we're landing. And I believe the workforce housing, even as it goes through this period of difficulty, will emerge in a very strong manner.

Well, I congratulate you again on your very intelligent call about a year ago and the way you've positioned the company. Thank you. I appreciate it.

Thanks, Lee.

Rick Shane, JPMorgan.

Thanks for taking my questions this morning guys. Ivan, you talked, and Paul, you referenced the delinquency data. I believe that's related to the CLO, which I estimate represents about two-thirds of the assets. If we look at -- if that's the correct description, if we look at the overall portfolio, can you provide the delinquency statistics for the total portfolio, not just the CLO?

Okay, so Rick, you're correct. What I was referring to was on the CLOs because I thought that was the question that people were asking from the short report. What we do have now, we don't have it out yet. And when we file our K, it will be there as we have the 60-day plus delinquencies, which is my non-performing loans.

But there are some loans that I mentioned in my commentary that were 30 or inside of 30 days delinquent that we conservatively just chose not to accrue at year end. I don't have that number with me now, but that number will be in our filings. So you can take those numbers and extrapolate it to the overall portfolio to get the delinquency rate if that's what you're looking to do.

Got it. So is there a difference between the 60-day delinquencies in the CLO that you cited and the 60-day delinquencies, I'm going to call it, the managed portfolio? Is that how we would think about it? Is there a difference there?

Yes. so the nonperforming loans that are disclosed in our filing today of $262 million are all our loans, whether they're in the CLO or not, that are over 60 days delinquent. So there's a crossover. What we gave you today was numbers on what 30-plus-day delinquency in our CLOs -- but what you don't have is the 30-plus delinquent in the total portfolio, although it's not substantially different because as you said, most of the loans are in the vehicles.

Got it, and can you talk about buyouts from the CLOs, both in the fourth quarter and quarter to date? Because I suspect there'll be some questions about whether or not the CLO, the decline in delinquencies in the CLOs related to buyouts.

You have those numbers. So I can give some color.

Sure. I'll give the numbers, and then Ivan will give the color. So for the quarter, it was fairly light. We only bought out one loan for $38 million out of the CLOs in the fourth quarter. We did buy $90 million of loans out of the vehicles in February.

But for the year, just to give you some color, Rick, we bought out $453 million of loans out of our vehicles for all of 2023. $95 million of those loans subsequently paid off before the end of the year. $290 million of those loans will be modified and restructured and got re-levered on. And another $69 million, we're holding on our balance sheet without leverage. But on a bulk of those loans, we're very close to a satisfactory resolution for a sale on the market.

So that's kind of the data points of how -- what the numbers are. And on the $90 million that we bought out in February, we're very, very close to finishing a mod on two of those loans and actually re-levering those loans again. So that's the data. And then I'll let Ivan talk about the strategy and how do we look at things.

Yeah, I mean, it's an active part of our business, not a -- it's active in terms of how we manage our assets. The amount that Paul mentioned is not a tremendous amount, and it's kind of transitional. You can either take a loan out, foreclose on them. People can sell them. They can bring a new ownership. It's a whole myriad of different circumstances.

And generally, the process goes anywhere from 30 to 90 days. We generally get leverage on those assets when we do them. And then there are just some that need to be sold and go to the market to be sold. So it's a constant process.

Got it. And when we think about that $90 million that was repurchased in February, and you can hear me typing in the background trying to figure this out, how impactful is that on the delta in that DT rate?

Those loans, I believe, were already in my non-performing bucket at year end. So in the $262 million we disclosed, those are two loans that were already nonperforming that we bought out of the CLO if that's what you're asking.

No, I'm trying to figure out -- you cited a decline in the delinquency rate. But if you bought out $90 million that were presumably delinquent and you're discussing the CLO, not the managed portfolio, that comes out of the numerator in terms of that delinquency rate. That's what I'm trying to understand. (Multiple speakers)

It will be in the overall number, which will be --

It will. But it will be in February, not in the January numbers we gave you.

It doesn't disappear, Rick. It's not like it falls off the chart. It's part of the total number.

Okay, got it. And then just last question from me, so when we look at the reserves2 and we look at the specific reserve, there's a $70 million reserve related to a very old loan, 2008, I believe. The specific reserves are, I believe, in the $120 million range. I might get this a little bit wrong, but I think the general reserve is now about 57 or 58 basis points. Should we expect that to increase given your outlook over the next two to three quarters?

So here's how it works. You're exactly right. We have $120 million of specific reserves. $78 million of that is actually on a very old legacy land development deal out in California we've talked about in the past. And haven't put a reserve on additional reserve on that deal in a while. The rest of the reserves throughout the asset class is mostly multifamily.

We do have $75 million in general reserves on our book, $73 million of those is multifamily. As far as outlook, it's really hard to talk about the reserves because CECL requires you, obviously, to build the reserve when you think you having stress, which we do.

However, having said that, we do think the next couple of quarters will be increasingly challenging. And as Ivan said, if rates stay elevated for longer, that could leak into the third quarter. And we will continue to look as we work through our deals and determine whether we need additional reserves. While I can't predict what the model is going to show, my -- intuitively, I believe reserves will stay elevated for the next couple of quarters. That's what I think.

Okay, guys. Thank you for taking my questions this morning.

You're welcome.

Stephen Laws, Raymond James.

Thanks. Good morning and very nice quarter in a very difficult environment. I know you're working through a lot, like all multifamily lenders are here. I really wanted to circle back to a couple of your comments I think one of the big misconceptions that I think -- that I hear from people is the assumption that all delinquencies lead to a loss.

Now can you talk a little more about your process, how the modifications and extensions were? Your gives and takes? Are you providing [mezz]? How much mezz do you guys provide? Are they finding that elsewhere?

And again, about the new equity sponsor stepping in, you kind of mentioned that there's a lot of liquidity around multifamily. But can you maybe talk a little bit about the delinquencies? How do you think about collateral values? How do you think about which -- what loans are subject to potential losses and which ones were just going to go through a process where they worked out and come out as a performing loan with a new sponsor?

Well, I would say it's an art, not a science, and there's no specific one that is the same. You have different sponsors with different capabilities, different assets, different basis, different ability to get capital. And you have assets that need more capital, less capital. And we approach each one independently. I mean I will tell you that one of our borrowers who didn't want to make this payment, and we're deep, deep in the money. And we have five sponsors who want to take over that asset.

We're going to collect penalty interest all the way through foreclosure, transition that asset with new ownership, get a reduction in the loan amount, get a nice performing loan, and then produce for agency loans in the next nine months when the asset gets restabilized. That's a great situation. We have some of those.

We have other ones where perhaps we have to give some concessions to attract more capital and be a good partner because we'll do other business with the client, and it's a fruitful relationship in the long run, and we're willing to work with them.

Then you have certain circumstances where we have an asset that's well in the money with a crappy borrower who's going to hold us up, and we're going to have to fight through it and make it a non-accrual loan, while he's stealing the rents from us for a six- to nine-month period of time. And then we'll just non-accrue the loan and fight the fight and get to where we want to go.

So there's no particular circumstance that's the same. And it's a detailed amount of work with a tremendous amount of focus. We have sponsors who have personal guarantees on loans with the assets underwater, but their guarantees are worth hundreds of millions of dollars, right? And we approach that one in a way where, okay, you got to either pay down a loan, feed the loan, fix the loan, bringing a new partner, recapitalize the loan.

You sign on the guarantees, we lend to you a little more than we would have based on your guarantees. So you better work with us. Otherwise, we're going to collect our money one way or the other. And by the way, when we collect our money, you're going to be paying a 24% interest rate, which you're not going to want.

So every single one of these circumstances are different. We're very intimate with a lot of it. We have the best asset management team in the nation. They're motivated. They're working hard. We've integrated our own teams.

I want to add one more thing. Our originators who originated these loans, they're in it, working it through as well. It's not like they originate a loan, then walk away. They're part of the asset management process. So this is a fully integrated approach top to bottom to achieve the best economic result that we can on each and every loan.

I appreciate the color on that. And I wanted to touch base or follow up on that with regards to buying loans, this side of the CLOs and just overall liquidity. One thing I noticed is you guys did not use the ATM in the fourth quarter like you did in Q3. Maybe I'm overreading that, but you're in the mid-teens. You're comfortably above book. So that kind of gives a signal you feel pretty good about your liquidity and capital to not hit your ATM during the quarter.

Can you talk about how you see your liquidity managing through over the next six months? And then just generally, when you do buy out a loan from CLOs, say the $90 million in February, what is the impact to liquidity to move that to a bank line, which has a lower advance rate kind of CLO? How does that process impact liquidity?

I think that's a great question because moving -- buying loans out of CLOs for the benefit of being able to rework or create the best economic result, certainly very important to us. And when we do buy them out, we're able to typically re-leverage, and usually, it's a 10- to 20-point haircut difference. We got to come up with that kind of 10 to 20 points in equity. That's how that we look at it.

We have capacity with our banking relationships. And it's mostly transitional. It's not like they sit out there forever. They sit out there for maybe three months, six months, nine months, not much longer. And very often, when we buy them out, they restructure, recapitalize, and then they even re-lever back the original leverage rate or very close to it.

So we're fairly comfortable with our banking partners. It's deemed good business. They get good rates of returns at all a very low advance rate. And it's not as though we're buying them out, and they're going to be with us for 10 years. There's usually a timeline and solution.

But we forecast it in our cash projections, buying out a certain amount, the amount of additional leverage, and what the total outstanding will be at a certain time. So we're pretty comfortable forecasting ahead what our cash needs are for buying out.

But buying loans out of CLO are very important to maximize economic value. And we do that -- we do it within the rules of the CLO and we do it very effectively.

And Stephen, I'll just add on the liquidity side, excellent question and good point. I mean, one of the things we've been focused on, as Ivan said in our models, is maintaining a strong liquidity position as we can. And we have a lot of dexterity, as Ivan said, in buying loans out and having our warehouse lenders be able to re-lever those deals at a slight discount on a leverage.

But we've also been operating our business right now. When rates ticked down in the 10-year, we're being very opportunistic and brain loans over from the balance sheet. And as you've seen in the last few quarters, our roll-off has greatly exceeded our new originations. And in doing that, we're recouping a lot of the capital we had invested in if we can continue.

It does two things, right? When rates ticked down, we've got loans ready to be transitioned over to the agencies and we get our capital back. And then we end up generating a long-dated income stream, and compounded by the fact that when the rates are down, the agency business just generally picks up as it is. That all helps our cash flow.

So that's how we feel comfortable that our cash is the right position. And as you said, it's $1.1 billion, which is a really nice position to be in. And it's something we constantly monitor. And having that dexterity to move loans out of the vehicles and into our warehouse lines really helps us be able to maintain that cash position.

Yeah, I appreciate it. The runoff was certainly a positive number in the press and liquidity. I think it actually ticked up a little essentially. So one last small one on the mezz loans, do you guys do [pref] investments, people finding that capital elsewhere if it's something they're looking to add?

Yeah, we like the mezz and pref business not only on helping borrowers reposition some of their balance sheet loans into agency loans but originating new agency loans as well. So we're one of the few lenders who are very active with the agencies on doing that kind of lending.

We expect it to be a growing part of our business and budget accordingly. It's very stable returns. And it's a great risk-adjusted return. We like that business. We've always been active in that business, and we think there is a great opportunity going forward.

(Multiple speakers) We're locking in that fixed rate spread for 5 to 10 years too, which we really like.

Yeah, and then I think you mentioned that the sale of buyouts for Q4 in February. Were there any in January or was that February year to date?

I think that's Jan. and Feb., but I think both of those that I mentioned, the $90 million, actually happened in the beginning of Feb. But that's the total number to date. For the quarter, it's $90 million right now.

Thanks again. I know it's a lot of hard work, and I'll let you get back to it. Talk soon.

Thanks, Steve.

Crispin Love, Piper Sandler.

Thanks. Good morning. I appreciate you taking my questions. First on the servicing book, how much of the servicing book are in programs with GSE risk retention, such as the Fannie DUS program? And how have those loans been performing credit quality wise? Any delinquency stats or expected losses to share there?

Sure, so $21.3 billion of the $30.9 billion or $31 billion is in the Fannie Mae DUS world. So that's probably -- about 80% of the book is Fannie Mae DUS, which, as you said, has the risk share.

Delinquencies have been fairly stable. We did see a little bit of an uptick this quarter. We have $187 million of loans on the agency side that are delinquent. We have, I think, $12 million of specific reserves against those, and those are in the foreclosure process. We booked another $3 million of specific reserves this quarter as you may have seen from the press release on the agency business. Freddie Mac delinquencies were flat quarter over-quarter. We did not see any real increase. So a little bump up in agency on the Fannie Mae side.

But from a context standpoint, traditionally and through the history of the agencies, and we've been at this more than 20 years, loss levels on the agency business are very, very minuscule, as you know, compared to the rest of the world. So we're not expecting this number to be anything significant anytime soon. And it will be what it will be, but it will never be real material.

Okay. Thanks, Paul, that makes sense. And then can you share your current LTVs and DSCRs and the CLOs in the total portfolio?

I don't have the information on the CLOs. We don't break it out that way for our disclosures. We do have the LTV, which you'll see in our 10-K. When it's filed, it's about 78% on our book -- our total book, and that's balance sheet. And remember, we're consolidating everything, so we look at everything as one. Where it's financed is just a different animal.

So our whole book of $12.6 billion has a 78% LTV right now on an as-is basis, some higher, some lower, obviously, depending on -- certainly, the SFR business is a much lower LTV right now, given the nature of that business. But that's the blended number.

I don't have the DSCR figures because again, the DSCR figures, you need to factor in your interest reserves, your caps, and all those things. But that's not something I think I have in front of me.

Okay, and then just one last question for me. Later in the year, there was a bunch of articles about potential fraud and the broker Meridian. Can you size any exposure that you have there to Meridian and any ramifications you would expect from that?

Yeah, we really can't speak to that. And clearly, what we can speak to is that the industry is changing and that the broker interaction for agency lending is being modified dramatically. Brokers were very involved with borrowers creating source documents and forwarding them to lenders. That obviously resulted in a problem, and the agencies are now changing how to source documents and the broker roles and disclosures.

Quite frankly, we never fully understood, on an agency product, why people will go to a broker, pay a fee to get to us when they could come directly to us and get the same result. So we think that there's going to be a real benefit in our franchise for borrowers to come directly to us rather than through a broker. And we think that our business is going to -- the agency business should be a very big beneficiary of that change.

Okay. Thanks, Ivan. I appreciate you both taking my questions.

Thanks, Crispin.

Lee Cooperman, Omega Family Office.

Thank you. I would just observe, Ivan, welcome to the world of short sellers, the 64 million shares short. And these guys are smart, and they play a very vicious game. They put out information. At times, there's false. You got to deal with it.

Now I'm reminding the expression, we are tough -- when the going gets tough, the tough get going. I think you're a very tough guy, and I don't think that they realize who they're dealing with. But I wish you good luck, and you could be very [active in it].

Thank you, Lee. This is already four quarters. They've been four quarters for long. It's created an enormous amount of stress on the organization at tremendous cost because the amount of extra work that has to be done has been very stressful. But we will continue to work hard and provide numbers, okay?

Good luck. You've done a very fine job.

Thank you, Lee, and I appreciate it.

Thanks, everybody. Ivan, you want closing remarks?

Sure. It was a long call. We had a lot of data to go through. Clearly, it's been a sustained period of elevated interest rates and elevated distress. As I've mentioned previously, the fourth quarter was going to be a difficult quarter, and the first and second quarter will continue to be similar to the first quarter, even maybe slightly more stressful. If rates remain somewhat elevated as they are right now, the stress can drip into the third quarter.

Pay close attention to where the 10-year floats to and where short-term rates go because that will have a significant impact on relieving the stress in the system. But we really appreciate everybody's commitment to the company and the time on this call. And we look forward to the next earnings call. Everybody, have a great weekend. Take care. Bye-bye.

Thank you, everyone.

And thank you, ladies and gentlemen. That concludes today's teleconference, and you may now disconnect.