Arbor Realty Trust, Inc. Price & Performance (ABR)

Okay. Thank you, Madison. 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 12/31/2024. With me on the call today is Ivan Kauffman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward looking statements and are subject to risks and uncertainties including information about possible or assuming future results of our business, financial condition, liquidity results of operations, plans and objectives. These statements are based on beliefs, assumptions and expectations of our future performance taking into account the information that's currently available to us. Factors that could cause actual results to differ materially from Oliver'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 speak only as of today. Barbara undertakes no obligation to publicly update or revise these forward looking statements to reflect events, or circumstances after today on the occurrences of unanticipated events. I'll now turn the call over to our Auburn's President and CEO, Ivan Kauff. Thank you, Paul.

Thanks to everyone for joining us on today's call.

As you can see from this morning's press release, we had a solid fourth quarter [indiscernible] As another very strong year despite an extremely challenging environment. We've executed our business plan very effectively and in line with our expectation. And despite the tremendously volatile and elevated interest rate environment, almost three years now. We've managed to in every major financial category, including our dividend, shareholder return and book value preservation. We're well positioned for this this location. Going into the cycle, we had a large cushion between our earnings and dividends. But well capitalized Arbor invested in the right asset class. With the appropriate liability structures. This allowed us to outperform our peers and continue to pay our dividend on mostly all of our peers have cut their dividend substantially some multiple times during the cycle, also experienced significant book value erosion. One under the guidance we have consistently discussed on our calls is how we felt that this dislocation will persist and result in a much slower recovery, which remain higher for longer which is something we were well prepared for. However, rates have not just remained elevated. Have actually increased significantly with the ten year rise from pre 60 in September to as high as four eighty in January and now it's hovering around four fifty with current outlook suggesting we'll remain at these levels for the near term.

This is a material change in the market resulting in a significant headwinds that will affect everybody in the space. These elevated rates are creating a very challenging environment as we place agency origination volumes and where we've experienced success over the last few years in getting borrowers to transition to fixed rate loans, and we cap their deals we expect this environment will create a deceleration in this area as well. We have also seen a 100 basis point decrease in so far over the last [indiscernible] which is reducing the earnings on our escrows and cash balances. Additionally, we expect there will be a temporarily drag on earnings from the REO assets that we repositioning over the next twelve to twenty four months. At that time, we'll discuss in later detail. However, this will partially be offset by efficiencies we expect to generate from the goods and borrowing costs in the securitization market and with our commercial banks as well as growth in our servicing portfolio. As a result of these changing macroeconomic events, we have revised our earnings dialogue until we see improvements in the rate environment Based on these factors, we are now estimating our earnings to 2025 will be in the range of $30.0.35 dollars a quarter and will likely reset our dividend starting in the first quarter of this year in accordance with this new guidance.

This outlook is reflective of the newly elevated rate environment However, if there is a material change in short term or long term rates in the future, we will revise our outlook accordingly. It is important to note that we were the only firm in our peer group to set our dividend to grow our dividend over the last five years by 43% while every other company in our space has cut their dividends some multiple times, by 40% on average with only one company keeping their dividend flat the last five years. And we assume that we reset our dividend in the midpoint of our new earnings guidance, our dividend will be on approximately 8%. Which is again which again is compared to our peers who are down at an average of 40%. Additionally, over the last five years, we have also grown our book value by 26 while recording significant reserves which is an incredible accomplishment especially considering that appears to actually experience a 25% corrosion in net book values They've done a very effective job despite elevated rates of working through our loan portfolio by getting borrowers to recap the deals and purchase interest rate caps. In 2024, we were able to successfully modify $4,100,000,000 of loans with borrowers committing to inject $130,000,000 of additional capital into their deals.

Also modified another $600,000,000 of loans in 2023 bringing our total loan modifications over the last two years to $4,700,000,000 dollars or roughly 60% of the remaining legacy loan book. This is tremendous progress, especially in light of [indiscernible] That has resulted in the large portion of our loan book being successfully repositioned in holding assets with enhanced collateral values. We've also done an exceptional job in bringing in new sponsors take over assets even substantially or through foreclosure. In fact, in the last two years, we have bought a new sponsor cap deals with substantial under equity on approximately $900,000,000 of loans. This is a very important strategy that again success putting our loans in a much more secure position with experienced sponsors and create more predictable future income streams.

And again, our reflective of us recording the appropriate level of reserve on these expressed assets. And despite elevated rates, we also generated strong runoff over the last two years $3,400,000,000 of run off in 2023, and $2,700,000,000 of 2024. An amazing accomplishment. We also continue to make strong progress despite the unprecedented move up in rates on the approximate $1,000,000,000 of loans that were passed due at September 30. In the fourth quarter, we successfully modified $140,000,000 of these loans generated $151,000,000 of payoffs and took back approximately $120,000,000 of REO assets all of which we were able to bring in new sponsors to operate and assume our debt. This is from progress in 01/1930 is down from $534,000,000 at December Arbor a 44% decrease We did experience additional delinquency during the quarter of roughly $286,000,000 bringing down total delinquencies at December 31 to approximately $819,000,000 which is down 13% in the quarter and down 22% from Alpeida, which is in line with our previous guidance even in the face of rising interest rates. And our plans for resolving a remaining delay for APAC is already owned. Approximately 40% to 50% of this with the other 40% to 50% have been paid off or been modified in the future.

This should put our REO assets on our balance sheet in a range of $400,000,000 to $500,000,000 $200,000,000 that we will have brought in new sponsorship to operate And this $400,000,000 to $500,000,000 of REO assets beyond the heavy lifting portion of our loan book we estimate will take approximately twelve to twenty four months to reposition. The performance of these assets has been greatly affected by poor management and from being undercapitalized. Today, these properties have an average occupancy of 35% and an estimated NOI of around 7,000,000 which is very low and will temporarily affect our earnings. We believe is great economic opportunity for us to step in and reposition these assets and significantly lower the asset is around 90% and NOI to approximately $30,000,000 over the next twelve to twenty four months, which will increase our future earnings significantly. As I mentioned, has been significantly affected by the current rate environment Rates come down sooner than we expect it will have a positive impact our ability to convert non interest earning assets to income producing investments earlier which will be accretive to our earnings This is a challenging and commanding work and despite this increasing headwind, I am very pleased with progress we have made today In our balance sheet lending platform, have had an active fourth quarter originating $370,000,000 of new bridge loans and $36,000,000 of preferred equity investments behind our agency originations.

As we said in our last call, have started to ramp up our bridge lending program to take advantage of the originate high quality short term bridge loans and generate long lever returns on our capital in the short term while continuing to build up a significant pipeline of future agency deals, which critical part of our strategy. Depending on the rate environment, we believe we can originate point $5,000,000,000 to $2,000,000,000 of bridge loans products in 2025 and enhance our 11 returns to its presuppess we've seen in the securitization model with our commercial banks. Another major component of our unique business model is our capital light agency platform [indiscernible] continue to delever our balance sheet and generates significant long dated income streams, which is a key part of our business strategy. Have been a significant player in the agency business for twenty years and now have been a top Annie made Doss London for eighteen years in a row. Coming in at number six in 2023 and an eight for 2024. We had a very strong fourth quarter originating $1,350,000,000 of new agency loans, which as you remember was supposed to top end of the range that we guided on last quarter's call.

We explained that our origination targets were $1,200,000,000 to $1,500,000,000 of Q4 depending on the rain environment. And despite a significant uptick in rates in the fourth quarter, we were well above what we had anticipated We still managed to reach very strong volumes. We closed out 2020 forward $4,300,000,000 of GSE agency volume despite a volatile rate environment throughout the year. With rates where they are today, we are we Arbor experiencing a very challenging visitation climate They continue to remain elevated despite likely going forward result in a 10% to 20% decline in our agency 2025 a range of $3,500,000,000 to $4,000,000,000 which will again be very We also did a good job converting our balance sheet bonds into agency product in 2024 despite elevated rates in the fourth quarter, we generated $900,000,000 of payoffs and $530,000,000 or 59% of these loans being refinanced since fixed rate agency deals for the full year 2024. We recaptured 65% or $1,600,000,000 of 500,000,000.0 All the family balance you've run off and PGT production. This is on top of the $3,000,000,000 of multifamily runoff we generated in 2023 with a 56% recapture rate [indiscernible] As I stated earlier, with rates at these levels, it is certainly become more challenging for borrowers obtain an agency takeout on our balance sheet loans.

Continue to do an excellent job in growing our single family rental business, We had a strong quarter with $1,700,000,000 in new loans in 2020.

Is our best year yet, and was well above our 2023 production of 1,200,000,000.0 We have now eclipsed $5,000,000,000 of production in this platform to date and we are very excited about the opportunities we're seeing to continue to grow this platform. Make it a bigger contributor to our overall business This is a great business that offers us free turns on our capital, construction, bridge and permanent lending opportunity, generates strong leverage returns in the short term, while providing significant long term benefits by further diversifying our income stream. Also continue to make steady progress on our newly added discretionary lending business We believe this product is very appropriate for our platform as offers free terms on our capital for construction bridge and permanent agents lending opportunities. And generates mid to high teens returns on that capital which was our first deal in the third quarter of $27,000,000 a second deal in the fourth quarter for $54,000,000 dollars with a long pipeline of roughly $200,000,000 on our application [indiscernible] And based on our deal flow, we are confident in our ability to grow it to date $250,000,000 to $500,000,000 of this business in 2025. In summary, we had a strong 2024 once again significantly outperforming our peers.

We've executed our business plan very Clearly, the landscape has shifted significantly in the last ninety days we expect there to be a substantial headwind in the near future. We do believe will have some positive offsets from reduced borrowing across our bank line in and will be greater efficiencies in securitization market as well as continue to fund up our bridge SFR and production lending business. Which generates strong leverage of our capital. Additionally, if short term and long term rates decline further, we'll mitigate some of our hedge recovery experiments and increase our future earnings. In the meantime, we remain heavily focused on working through and managing our long backlog, continue to grow areas of our business to increase the many diverse [indiscernible] We have a very seasoned experienced management team that is operating actively through multiple cycles. In their work history. [indiscernible] and are confident we will continue our long standing track record of being a top performer in this space. I will now turn the call over to Paul to take you through the financial results. Okay. Thank you, Ivan. We had a strong fourth quarter and full year 2024 producing distributable earnings of $81,600,000 or $0.4 per share for the fourth quarter and $1.74 for the year which translates into ROEs of approximately 14% in 2024.

As Ivan mentioned, due to the drastic change in the macroeconomic climate, adjusting our forecasted distributable earnings for 2025, to $0.3 to $0.35 per quarter.

Fizzie rates have played a big factor in the value of earnings outlook and future changes in the interest rate environment will most certainly dictate whether we can grow our earnings sooner than planned We've also been affected by elevated legal and consulting fees as a direct result of the short sell reports which is something we expect will continue for the foreseeable future. We estimate these fees will be approximately $0.03 to $0.05 a share going forward which is reflective in our new guidance. In the fourth quarter, we modified another 15 loans totaled totaling $470,000,000 and approximately $2.00 $6,000,000 of new loans we require borrowers to invest additional capital through capital deals, thus providing some form of temporary rate relief [indiscernible] The pay rates were modified on average to approximately 5% to 9% with 2.3% of the residual interest due being deferred until maturity. $140,000,000 of these loans were delinquent last quarter and now recurring in accordance with their modified terms. In the fourth quarter, we accrued $18,700,000 of interest related to all modified taking a cool features dollars 7,600,000.0 is related to modifications that were completed in years prior to 2024. And $1,000,000 is on mezz and PE loans originated in 2024 behind Agency loans that have a paying approval feature as part of their normal structure.

This leaves $10,000,000 worth of accrued interest in the fourth quarter related to modifications of grid loans in 2024. $1,500,000 of which is related to our fourth quarter modifications. The table summarizing all of our 2023 and 2024 material modifications and the related accrued interest on these loans is detailed at our 10 ks which we expect to file later this afternoon. Our total delinquencies are down 13 percent $819,000,000 at December 31, compared to $945,000,000 at September 30, these delinquencies are made up of two buckets, loans that are greater than sixty days past due and loans that are less than sixty days past due we're not reporting interest income on unless we believe the cash will be received. The 60 plus delinquent loans or NPLs were approximately $652,000,000 this quarter compared to $625,000,000 last quarter due to approximately $128,000,000 of loans progressing from less than sixty days delinquent to greater than sixty days past due, and $153,000,000 of additional defaulted loans during the quarter, which was largely offset by $134,000,000 of payoffs and modifications and $120,000,000 of loans taken back as REO. The second bucket, consisting of loans that are less than sixty days past due, came down to $167,000,000 this quarter from $319,000,000 last quarter, due to $157,000,000 in modifications at runoff $128,000,000 of loans progressing to greater than sixty days past due, which was partially offset by approximately $133,000,000 of new delinquencies during the quarter.

And while we're making good progress in resolving these delinquencies, at the same time, we do anticipate that we will continue to experience new delinquencies especially in this current rate environment. In accordance with our plan of resolving certain delinquent loans, we have foreclosed on some real estate and we expect to take back more over the next few quarters as Ivan guided to earlier. The process of taking control working to improve these assets and create more of a current income stream takes time, which is even more challenging in this climate. Additionally, we've been very successful over the last few quarters in collecting back interest owed we would modify certain loans a good portion of our remaining delinquencies are more of a heavy lift through foreclosure and repositioning over time, which will likely result in less back interest being collected going forward on workouts. These are some of the reasons we're guiding to reduce earnings in the near term.

In the fourth quarter, we took back $120,000,000 of REO assets, We've been highly successful at bringing in new sponsors on certain assets [indiscernible] This strategy is a very effective tool turning dead capital into non performing loan into an interest earning asset, which will increase our future earnings In the fourth quarter, we accomplished just on two REO assets totaling about $70,000,000 which were accounted for as sales and new loans. The other $51,000,000 of REO is related to one asset that we took back in the fourth quarter that we subsequently decided to flip to a new sponsor and provide a new loan. We closed on this deal yesterday, and the purchase price was at our net carry value of $45,000,000 which is net of $5,700,000 specific reserves that we took on this asset in 'twenty three and 'twenty four.

As a result we will have a one time realized loss in the first quarter of approximately $6,000,000 which we've already reserved for and is reflected in our book value and we will now have a performing loan will add to our run rate of income. We believe we've done a very effective job of properly reserving for our asset the last two years. We did not incur any material losses in 2024. We are expecting to have some realized losses in 2025, through similar executions on REO assets and by repositioning certain loans with new sponsors, which we expect will be in line with our prior reserves on these assets. The timing and magnitude of these losses is hard to predict at this point, but once we know a transaction is likely to occur, we will continue to signal that result ahead of time if possible. And again, please keep in mind that these potential losses reflect the reserves we've already taken in demonstrates how prudent we've been in reporting the right level of reserves on our loan book. As a result of this environment, we continue to build our CECL reserves recording additional $13,000,000 in specific reserves in our balance sheet loan book in the fourth quarter.

And again, we feel we've done a good job of putting the right level of reserves in our assets which is evident by transactions we have been able to effectuate to date at or around our carrying values net of reserves. It's also important to emphasize that despite booking approximately 100 and million in seasonal reserves across our platform in the last two years $135,000,000 of which was in our balance sheet business we saw a very nominal decrease in book value of around 2% Our peers experienced an average book value decline of approximately 20% over that same time period.

Additionally, we are one of the only companies in our space that has seen significant book value appreciation on less five years. With 26% growth during that time period versus our peers whose book value has actually declined an average approximately 25% In our agency business, we had exceptional fourth quarter despite headwinds from higher rates We produced $1,400,000 in origination and $1,300,000,000 in loan sales with very strong margins of 1.75% for the fourth quarter compared to 1.67% last quarter.

We were also incredibly pleased with the margins we generated in 2024 of 1.63% which exceeds twenty twenty three's pace of 1.48% by 10%. And we recorded $13,300,000 in mortgage servicing rights income related to $1,350,000 of committed loans in the fourth quarter. Representing an average MSR rate of around 1% which is down from 1.25% last quarter due to a higher mix of Freddie Mac loans in the fourth quarter, which contained lower servicing fees. Our fee based servicing portfolio also grew 8% year over year to approximately $33,500,000,000 December 31, with a weighted average servicing fee of 38 basis points and estimated remaining life of seven years, This portfolio will continue to generate a predictable annuity income going forward around $127,000,000 gross accruing. As Ivan mentioned earlier, 100 basis point decline in short term rates has reduced the earnings on our cash and escrow balances.

We are now at a run rate of between $80,000,000 and $85,000,000 and oneone hundred and 25 compared to approximately $120,000,000 that we earned in 2024 for a $35,000,000 to $40,000,000 reduction, which will affect our 2025 earnings. In our balance sheet lending operation, our $11,300,000,000 investment portfolio has all in yield of 7.8% December 31, compared to 8.16% at September 30, mainly due to a decrease in sulphur during the quarter. The average balance in our core investments was $11,500,000 this quarter, compared to $11,800,000,000 last quarter due to runoff exceeding originations in the third and fourth quarters.

The average yield of these assets decreased to 8.52% from 9.04% last quarter mainly due to a reduction in sulfur which was partially offset by more back interest collected in the fourth quarter on loan modifications and paydowns. Total debt on our core assets decreased to $9,500,000,000 at December 31, from $10,000,000,000 September 30, mostly due to paying down CLO debt with cash in those vehicles in the fourth quarter. The rolling cost of debt was down to approximately 6.88% at twelvethirty one versus 7.18% at ninethirty, mostly due to a reduction in so far which was partially offset by lower rate debt tranches being paid down from CLO runoff and the new $100,000,000 unsecured debt instrument we closed in the fourth quarter. The average balance on our debt facilities was down to approximately $9,700,000,000 for the fourth quarter compared to $10,100,000,000 last quarter mainly due to paydowns in our CLO vehicles from runoff in the fourth quarter. And the average post the funds in our debt facilities was 7.1% in the fourth quarter, compared to 7.58% for the third quarter again from a decline in silver. Our overall net interest spreads on our core assets was relatively flat to 1.42% this quarter versus 1.46% last quarter, and our overall spot net interest spreads were 0.92% December 31, and 0.98% September 30.

And lastly and very significantly, we managed to delever our business 30% during this dislocation to a leverage ratio of 2.8:one from a peak of around 4.0:one two years ago. That completes our prepared remarks for this morning.

I'll now turn it back to the operator to take any questions you may have at this time.

And we'll take our first question from Steve Delaney with Citizens JMP. Please go ahead. Good morning, Ivan and Paul.

Thanks for taking the question. And look, For starters, just really appreciate you guys being upfront with us today. About your expectations for the dividend in 2025. It's just I think it's a lot easier for the market to hear that today than in March. When you have to declare first quarter. So thank you for that clarity. Ivan, you talked about some resolutions involving outside money. I'm curious this opportunity that [indiscernible] distressed bridge loans and eventually just it rolls into REO.

I think we're talking about investment opportunity. Are you seeing institutional money [indiscernible] fresh money looking at this as a unique maybe once in a decade opportunity is that money coming in And if it's not coming in, do we need that to get this problem cleaned up in the next one to two years? Thank you. So I'm going to bifurcate my response because you have and as little color to it. Number one, In the third quarter or fourth quarter when the ten year and the IV has stopped. Considerably we're seeing a level of that and reentry into the space. And then right prior to the election, as you know, the ten year jump from three sixty to four eighty. I think everything went on pause. So there's a bit of a pause period. But there are two types of collateral that we're looking at. Mentioned in my comments. The ones that we effectively transitioned to new sponsors, there's a lot of demand. [indiscernible] is plenty of capital and plenty of entrepreneurial capital. A lot of it is people have access to institutional money or Network, but they're all network. And there's plenty of activity every time we do have an asset.

In multiple there's lots of assets. The more difficult part is the ones where the heavy lift carry goes, which is kind of where it takes time to get your hands on those assets. Sponsors are kind of rascals, still with cash flow and don't manage those assets. And they get brought down to a level where we need to bring in our own capability, get those up to speed. Once they're up to speed, [indiscernible] But I think there's a little bit of a pause in the market and that's really reflective of our comments. I'm not sure why everybody's phone excited. And I went to NMHC about a month and a half ago and I was shocked at how people were thinking they're going to have a great year light of the increased [indiscernible] So I think a lot will have to do with where rates settle in. It's fairly well run around four fifty If you see rates go down to where they were, we'll see tons of money flood back into the space and not the exuberance of our [indiscernible] on last quarter's call where the refinance volumes and the activity was solid pick up. So it's very much So I'm hearing you say the outside money right now as you sit today you rework a bridge loan and there's new sponsors, there's people willing to step in there, The heavier lift if you've got an REO 30% leased needs further renovation, whatever.

That's something you feel like your team at Arbor is better equipped to take that property over manage the property and then look to sell that property in twelve to twenty four months. I hearing you clear on that? That's correct. Every time we got on hand and these are the ones where it's more difficult. Your hands on was the sites that these sponsors were a bit of competitors in the market using the legal system. The way the process deal and the cash flow and how manage the assets. So every single asset that we take back as we're taking it back, we have a twenty four month plan We weren't able to really show how we can get it from where it is today monthly, monthly, monthly, increase the NOI, put in the right CapEx to get the stuff going to be able to sell those assets somewhere between twelve and twenty four months.

Of bank valuation once we stabilize it. Okay, thanks.

Paul, a quick one for you to close out. I'm into Fitch upgraded Arbor's Arbor servicing rating to CP [indiscernible] It looks like a large focus of that we on your agency servicing. But to any extent that servicing upgrade reflect the work you were doing on the bridge loans in your CLOs? Yes, I don't have the definitive answer but I do believe you are correct.

Steve, that the majority of that rating, if not all of it has to do with how we're servicing the agency book. It may have some impact with the balance sheet book, but we would just upgrade it because of the quality of servicing shop we have. We've made a lot of investment in that division, both from a technology perspective and staffing perspective. Our rating just keeps getting better and better, which I think should not be overlooked as you just mentioned. I'm glad you pointed that out.

Steve, getting back to your comment, I was just assets. We tried very well [indiscernible] And the level of improvement [indiscernible] and well on their way to 19. The cosmetics [indiscernible] So when we're able to transition to do all we should, we end up with an asset that becomes extremely more valuable in a very, very short period of time as we're able to bring our expertise to the table where that expertise capital we're lacking. [indiscernible] is to get these assets in that position in 12/2024, whatever it is, then bring in those sponsors, we can get the right valuations more reflectively where we think the values are. We have a great track record on it.

In fact, we have only come back two years ago which was 70% occupied We're just selling it right now. [indiscernible] [indiscernible] almost where it needs to be, so that's kind of standard for how we run our business. Thank you both for the color this morning.

Thanks, Steve.

Thank you.

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

Hi, good morning.

I wanted to touch on modifications from last year. I think it was around $4,000,000,000 a lot of which was done in early part of the year, maybe when borrowers and everybody had a different interest rate outlook. Can you talk about how you expect those modified loans to perform over '25? Were those modifications how many were somewhat reliant on some relief from rates over the course of '25 and how do you expect are those modifications typically 12 Arbor six month duration extensions? Or how do we think about those modified loans maturing over the course of this year? I think it's important have a little bit of an overall view. Keep in mind, that we have run off in our portfolio over the last two years $6,100,000,000 and then so we either do a refinance or sale or all the people taking them out. So the amount has been respect to the modified loans, keep in mind, bridge loans are short term loans in nature. And they have a lot of tests. So it's very, very normal to modify a loan and this kind of rate environment. And give people a little bit more runway to bring more capital There's a period of time when sulfur was sitting at 05:30 when it dropped.

It was a lot of relief for borrowers, rebalanced by caps. Their lifetime to give them more opportunity So when we look at a modification of the loan, we take a look at whether the sponsor could bring more capital the sponsor doing a good job and whether he has a capability to improve the performance of those assets track their performance and doing extremely well. There are periods of time when they don't quite do in this month. They could resolve in additional delinquencies and take backs. But on the whole, the strategy has been extremely effective in terms [indiscernible] Keep in mind, that almost all our loans have [indiscernible] multiple sponsors So it's not like people could just hand back the keys as an alternative they are being put in a position where they have to bring capital to and there are many circumstances [indiscernible] still have access to those personal financials and judgments as well. So our goal is always to improve the Grammar get into that position specifically in markets that were experiencing a little bit of softness or delays in courts and things of that nature. So for the most part, we have seen tremendous improvement in the NOIs of the the properties that we've Appreciate the comments there.

And Paul, could you touch on the servicing escrow balances again? I think you said $80,000,000 to $85,000,000 but I want to make sure I understand the new level we should think about and kind of what's driving the change in that, what the components are driving that that reduction?

Sure. So when I speak of earnings on our S SCOs and cash, it's two components. We lump it into one, we can break it out. So we're sitting with $1,500,000,000 of escrow balances right now. And we have at year end, we had about $500,000,000 of cash between cash on hand and cash in the CLOs. So [indiscernible] Right now, silver is at on the $4.30. We're earning slightly below that probably about $4.50. What we're earning currently. So if you take that $2,000,000,000 multiply it by $450 you're probably at 85,000,000 both in earnings on the cash that we have on our balance sheet and in the vehicles and on our escrows.

Last year, we earned $120,000,000 between earnings on escrows and earnings on cash for two reasons. One, SOFR was higher throughout the year remember sulfur has been dropping. So the full effect of the drop in sulfur is not in the 24 numbers, it will be in the 25 numbers and our cash has come down obviously as we've used some of our cash to run our business. So that's the two components that are driving 120 versus the 85. The one thing I will say is that's a number and that's math. One thing I'll say that will partially offset that is we are expecting even though we're guiding to lower an agency volume today if rates stay where they are, we still believe our agency volume will eclipse our runoff in the agency business So we will have some growth in servicing portfolio that will partially offset that. But that's the math. Great. I think I want to add to that. I want to add to that.

We experienced $3,400,000,000 of runoff in 2020. That was at the sort of interest rate environment that existed In today's interest rate environment, we're forecasting remains at this four fifty level to four seventy five or four levels numbers will be more like 1.5 However, if we go back to the interest rate environment that we had We'll revise up our numbers of runoff billion dollars That's a material difference. And that material difference will result in a build price in our rate. So our outlook is really we're expecting is an elevated interest rate. Environment and how it impacts our business.

And we would see a similar run rate as we did last year to go back to where they were. And the real inflection point is really going to be the five year and the ten year. If we see the ten year and the five year get back around that 4% level, you'll see same trend that we were seeing in the third quarter and fourth quarter.

And Steve, one of the things I want to add is, we were obviously very aware of SOFA was dropping and we knew it would have an impact on our escrows and our cash. But I think that the real fundamental change over the last ninety days that was a little bit surprising to us and we talked about this on prior calls We knew and you could look at our filings, which shows what the shock would be if rates go down or up on our cash and escrows. And our portfolio, but we thought they would be a pretty big offset in the fact that the ten year would be low and we'd have significantly more origination volume on the agency side. That is not happening right now. It may change, as I've said with the rates, but that's the big change So it's not a surprise to us that escrows and cash earnings go down with sulfur dropping. But we also thought we'd have a lower ten year, which was where we were last quarter, we have a much more robust origination platform to offset that. Yes. I appreciate the comments on that. And one last question.

Regarding new dividend level being determined. I know the $0.3 to $0.35 guide for the quarterly distributable earnings. Are you going to base the dividend on that? Will you look at kind of distributable earnings less pick income and think about the dividend closer to a cash earnings level? How do we think about or how will you and the Board think about determining that new dividend level?

Yes. So I think we will look at it as distributable with PIK. But again, we adjust as we go, right? Just to give an example, we've modified $4,700,000,000 of loans in the last two years, as Ivan said in his commentary. $2,400,000,000 of those have pay and accrual features. But we're only accruing on $1,700,000,000 of those.

There's another $500,000,000 that we've decided not to accrue on. So we make decisions as we go along we adjust as we go along on whether we think we still should be accruing this or not. But the ones we are accruing, we feel really confident we're going to receive we have those in distributable earnings. But again, none of this has been decided yet with the Board. We need to see what we've done today is give you as of today, where we think the short term guidance would be. We need to see where the first quarter comes in. We need to see a couple of more months of this market.

And by May, when we're on our first quarter call, we'll have three months in the books and another month of market data we will base our dividend on what we think it looks like going forward, not just for one quarter, So we'll look at it out twelve months and we'll say, where do we think we get it to? Where are we comfortable.

Just to give you a concept, we're sitting with $1,000,000,000 of pipeline that are extremely sensitive That can't close unless the ten year drops to the four to four quarter range. So our guidance couldn't change to the upside with the change in interest rates. But to be realistic, don't want to We don't want to mislead anybody. That's right. We want to take a consideration with this new elevated range stay this huge volatility with the election is And it seems like we're in a range whether it be a quarter to three quarters or four quarters. We're not sure We'll adjust accordingly. We think we're just responsible by laying down where this current interest rate environment is, which is different than where it's been on that affects our business.

That makes sense. Appreciate the comments this morning. Thank you. Thanks, Steve.

Thank you. And we will take our next question from Leon Cooperman with Omega Family Office. Please go ahead.

I missed most of this call because I had a conflict with another company. I jumped off their call. But unless there's something said differently, let me just say that I think that you guys have done a terrific job in managing through a difficult environment. And I personally am offended by the cost of dealing with these short sellers because I think you've been extremely transparent in your dealings with the with the investors. No surprises here. I think you've done a very good job of navigating the environment. But let me ask you some questions rather than give you a shout out. What's your confidence in your book value? Number one. And secondly, were you willing to use liquidity by back equity if it drops below state of book value? And kind of return do you think you should earn on a recurring basis on your book in a normal environment?

Relative to our portfolio, I'm glad you asked that question because we've had a tremendous success at TrackWag terms of taking distressed loans, bringing [indiscernible] [indiscernible] taking back a So we're really comfortable with it. When we modify our loans, which are always the loans which have that I don't think it's highlighted on them. On the workforce by Canada for any major modifications to the reappraisals Based on those reappraisals, we're forced to take whatever reserves are necessary. We've been right on the mark. So I'm extraordinarily comfortable with the reserves that we've taken But track record speaks for itself. Paul, you want to address something? Yes. I just think the book value where it is today, Lee, if the market stays where it is today, we may have to take some more level of reserves on certain assets as we move through this higher for longer scenario and it may ding book value a little bit, but we don't think it will be material because we think we have provided the right level of reserves to date. So think it could go down a little bit, but I don't think it goes down significantly. And our track record has been that it has down significantly over the last two years in a very difficult market.

As far as Returns on equity, I think yes, it depends on where we set our dividend. But if you look at our range, on the low end of the range, we're probably 10% or 11%. On the high end of the range, we're 12%. So return on equity, right, Ivan, given where it is. So we did a 14 for 2024 I think we did similar for 2023. Think 10% to 12% is realistic and I think there's upside on top of that if this market doesn't stay where it is.

Longer than we're expecting. In terms of buying back stock and things at H. Arbor enough, keep in mind, that we have a very, very vibrant business, specifically on ESFR SFR side. Generating outside returns, we have to fund that business. Our construction lending business, we have to fund in condition. Expecting to do $1,500,000,000 to $2,000,000,000 dollars of bridge loans. So we have a $5,000,000,000 worth of growth business. [indiscernible] And [indiscernible] But we have to be sensitive to keep our business growing We've done an outstanding job of that. And that's where our focus is going to be, yield returns on the new business. In the mid teens, which is very accretive business for the time, so we'll continue to focus on rolling out business in then of course managing some of the legacy issues we have.

What does it mean? The stock got down $10 $11 you We it would be a strong possibility. I think what you happen to is if you ask me if I would buy it, listen to what I say and watch what I do.

So I've always been very forward and covered in my own actions.

I'm the largest shareholder of Dow. The REIT. And if there's an opportunity at this time perhaps, you will see me and I'm sure plenty of management be active in the spot. And in the stock.

Good luck and congratulations You've done a very good job in the [indiscernible] the quality of the earnings and quality of the management. Leon, you said a lot more than I you please say about [indiscernible] anyone who cares to take in time can look at the history of the problems of the short sellers and their founders and a look at the reports and see the issues they've had with the regulators and the customers around the world. And they can take their comments for what they were. You've done your research, I've done mine. [indiscernible] Thank you. And we will take our next question from Rick Shane with JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my questions this morning.

I sort of two lines. First, a little housekeeping. Paul, you mentioned $500,000,000 of non accruing loans. Can we just go through in the $0.3 to $0.35 guidance, what's the drag from non accruals? What's the $0.03 to $0.05 that you cited for legal and regulatory quarterly And can you help us sort of understand the context of that expense?

Yes. No, so the $0.03 to $0.05 is annually.

We run We've run probably $0.02 to $0.025 already in 2024 and we're expecting that number will just be The same number for a longer period of time because it really wasn't ramping up until the second quarter So I would say that it's $0.03 to $0.05 for the year. On the cost between consulting, legal, administrative related to the short sellers if it That's our view. And then as far as the drag on earnings, I think we have $819,000,000 of loans earning zero.

We've commented is that we do think in this environment we'll resolve some and we'll have some new ones. I think our track record has been and we still think even in this rate environment we'll be able to make progress in the 10% range. We did 13% this quarter, which we were impressed with. But it will also impact us on the REO side because I think the big the big temporary drag Rick, is that as Ivan alluded to, we already took back $100,000,000,000 of loans in the first quarter. And we have $50,000,000 on our books right now that aren't legacy. We have 100 and to look at the numbers, we have $176,000,000 in REO on our balance sheet. $45,000,000 is a loan we flipped yesterday that I mentioned. So now you're down to $13,180,000,000 dollars of that are legacy assets we've had on our books before the crisis and we're working through to try to to dispose of them. So about $50,000,000 to $55,000,000 is due for this crisis. We took back another 100 in January already, so up to 150. And as Ivan said, probably going to end up between $400,000,000 and $500,000,000 So the drag is that $400,000,000 to $500,000,000 has an NOI of about $7,000,000 But certainly not nearly what it would have been had it been paying the current interest rates And then that's going to be temporary until we can reposition those assets And then hopefully, we'll have a significant upside in the future, but that's probably twenty four months out.

So I think the drags from where we are now to where we're guiding to $0.3 $0.35 are these are the components Reduced the agency origination volumes, which obviously hit earnings. [indiscernible] The full effect of SOFR on your escrows and your cash balances offset slightly by servicing The full effect of the delinquencies for a longer period of time than they've been out the drag in the REO assets. Will we have some positive offsets? Yes. We'll probably need largely more efficient through the securitization markets. And obviously, if rates change, we could pick up volumes and have a better performance on our assets. But those are kind of the components. And how much of the quarterly $0.3 to $0.35 is from PIK? I don't have those numbers here, but I would say it's probably going to be similar to what we've had. It's probably $10,000,000 to $15,000,000 a core. Okay, great. Thank you. And then pivoting, that was sort of the housekeeping stuff. In the quarter, you guys did $35,000,000 almost $36,000,000 of prefs in mezz. 97 for the year.

Arbor those part of is that loans on outside investments opportunistically or is that related to the structured portfolio where you're providing additional capital to existing borrowers. And I'd love to I'd love to relate that to some extent to the $130,000,000 of capital contributed on the mods during the quarter during the year.

Yes.

So I think they were a little different. We may be combining concepts. But So the $97,000,000 that you referred to, if not all, vast majority are not new investment opportunities there. Preff and mezz were putting behind agency loans that are taken off our balance sheet. So what happens? The guys, the balance sheet loan and he wants to convert it to a fixed rate loan. And depending where rates are, he'll come to the table, it'll be short capital because of the the restrictions in the agencies on the debt cover and the LTV. And he'll bring to the table some money and we'll put some money the form of medicine PE behind him, which puts us in a better spot right? Because if we were 80% LTV, on a bridge loan and struggling, and now he has a 70% LTV loan on the agencies. He had a kick in 5%, we had a kick in 5%.

Our PE in Mezz is behind 70%, not behind 80 right? So and then they they usually get about a 14% return.

And then there's a pick on it because you you have to give you have to have the current pay has to be a debt cover of like 110 through your MES and PE. So it's just a calculation. Of like some of the ones we did this quarter were 9%, 10%, 11% pay. And the rest was picked because we had good coverage through our PE. I wanted to just answer that. That's been a normal core [indiscernible] I really appreciate the clarification on that. It is helpful. And if I can just pivot to my very last question. So during the year, you guys modded $4,100,000,000 You took in $130,000,000 of additional capital associated with that. Which equates to about 3%. Can you put that 3% additional capital in the context of what you see the decline in property values, how does that sort of match up in terms of how much property is actually down.

I don't understand your question.

So you had borrowers put in you had borrowers put in 3% in order to modify loans. And I think anecdotally, property values are down substantially more than that. So I'm kind of curious how you think about how much additional capital a borrower needs to put in, in order to maintain an LTV?

Okay. Every case is different, Rick? Some improvement performance. So I can't answer your question in the macro We take each situation we evaluate the capital income put in, how the assets perform and how can improve.

So each one is different. Okay.

Got it. Hey guys, thanks. I always appreciate you taking my questions. Thank you. And we will take our next question from Jade Rahmani with KBW. Thank you very much. Can you discuss the lower cash balance in the structure of the business? What drove the quarter on quarter decline?

And also, did you experience any margin calls? Sure. So we did not experience any margin calls. We have great relationships with our lenders. In fact, Iman probably gets caller that the market for commercial banks and securitizations is really, really strong right now. So we're not maybe it's a good time to comment on that. I'm sure you're aware that the CLO market and the bank lending market has improved dramatically and those are some of the benefits that we'll all set some of these other factors. The CLO market, I'm sure you've seen deals are getting done in the 150 to 175 as opposed to deals that two years ago couldn't get done and then Express were in the vicinity five range. So we see Huge efficiencies on that side. The commercial banks are farmers and they've been more and more aggressive at higher advance rates. And lower spreads. And these things will translate to better margins for us going forward. It's a lagging effect. It's all beginning over the last couple of months, and we should have some real positive impact on our income streams going forward, which will be an offset to some of the And as far as the cash balance dropping, it's math, right?

We had We had put on, as you saw $377,000,000 of bridge in our new product that we love. We funded up our SFR business, which continues to grow. So that requires cash. Obviously, the runoff has partially offset that.

There's also timing on cash right? When you are taking back an REO asset, you may have to buy it out of vehicle and then you relever it. So there's always timing. On why those cash numbers move. But we're sitting at about $450,000,000 of cash and liquidity today.

And obviously, we've used some of that cash to grow the platform.

And then just the agency business cash balance different segments, is that more akin to corporate cash? How fungible is that cash?

Yes, it's all fungible. You just the agency business obviously generates cash capital light, and then it gets moved up to the it's just the way you break out the segments, but when you look at a company like ours and you're managing cash, all of that cash is fungible and all of that is corporate cash.

Lastly, just on the GSE side, have you gotten any put back I know JLO was one Walker and Dunlop talked about what they'd received be helpful to hear if you've received any loan putbacks?

We have not We have not Had a put back or had a buyback Thanks a lot. Thanks.

Thank you. And we will take our next question Chris Van Love with Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. First, you've had $307,000,000 plus of bridge origination in the fourth quarter, highest level in a long time. In line with your guidance last quarter. Can you speak to expectations going forward in bridge as rates have backed up since September? And then do you have an outlook for agency originations for the first quarter? [indiscernible] The $370,000,000 of bridge is a good quarter. I mentioned in my comments, we're expecting to do about $1,500,000,000 to $2,000,000,000 for the year. And we expect that it would fairly evenly over the year. I think if short term rates crop, you can see that number going up considerably. But that's the level that we think And as far as your second part of your question, Chris, but yes, the reason we've given a $0.3 to $0.35 kind of guidance per quarter is it won't be linear, right? Certainly, the first quarter or two, maybe on the lower end of our range, then it will grow from there. And a lot of has to do with the fact that the agency business given where rates are, it's off to a slow start. So we're expecting a a much lower first quarter in the agencies and then we expect it to build from there.

Two reasons, one, historically, the first quarter is usually a slower quarter because a lot of people close all their loans at the end of the year. And through the back of the race, put some people on the sidelines to get a big pipeline. Got a lot of loans ready to go.

It's just a matter of convincing borrowers to transact at these levels and a lot of them are still patiently waiting to see where where the ten year goes. So we are expecting the numbers to be much lighter in the first quarter then hopefully grow from there.

And what you did see is a strong fourth quarter, not only with Arbor, but all agency lenders. [indiscernible] And if you look at the comments I had, We would have even done more, but the agencies were backed up. And when rates jumped, we have this huge pipeline sitting on the sides So the first quarter is going to be a little light because so much was done in the fourth quarter. And where the rates are today is just a unsetting on-site of allogene on the pipeline. And if you see a meaningful move for the ten year down, you'll see that number. Increase substantially.

Yes. And it wouldn't be surprising if the agency business for the quarter was $600,000,000 to $800,000,000 It all depends on what's going to happen.

Great. Thank you. I appreciate all the color there. And then just last one for me. Can you provide any update on the DOJ SEC investigation from last year? And you mentioned legal fees related to short seller reports in your prepared remarks, does that also include legal fees related to these investigations as well?

Well, as you know, we don't comment on regulatory inquiries.

Respect to the elevated costs, we, as you know, go with respect to auditing [indiscernible] all those kind of factors. So we are working extremely hard Our auditors are doing double and triple quadruple and all our procedures processes. So that's what we estimate the course is going to be. For working in this environment.

Thank you.

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

Okay. Well, thank you everybody for your time. We expect next year that we will get it given this current rate environment. [indiscernible] Even with this adjusted interest rate environment, we still expect our performance to be extremely strong. And powerful among peers in the space. Thank you. You only have a great weekend.

Thank you. This does conclude today's presentation.