Arbor Realty Trust Inc

NYSE:ABR

Earnings Call Analysis

Strong Earnings Amid Challenges

In the second quarter, the company achieved distributable earnings of $91.6 million, translating to $0.45 per share and a 14% return on equity. They modified 28 loans, amounting to $733 million, improving their delinquency situation. Agency business saw $1.1 billion in origination and loan sales, maintaining a consistent margin. Despite industry challenges, the company’s diversified model, substantial liquidity, and strategic loan modifications reflect its resilience. Future guidance suggests continued strength in agency volumes and stable revenue streams from diversified lending.

Navigating a Challenging Environment

In the latest earnings call for Arbor Realty Trust, company executives expressed optimism despite a challenging operating environment. The company successfully navigated these hurdles and delivered a strong quarter, showing resilience in performance metrics. CEO Ivan Kaufman emphasized a diversified business strategy that has enabled the firm to outperform its peers across vital financial metrics, including total shareholder return and book value appreciation over the last five years, which has grown by 30% compared to a 20% decline among competitors.

Operational Performance Highlights

Throughout the quarter ending June 30, Arbor reported distributable earnings of $91.6 million—equating to $0.45 per share—with a return on equity (ROE) of approximately 14%. Significant progress was made in loan modifications, with 28 loans totaling $733 million adjusted, allowing the company to assist borrowers needing temporary relief. This resulted in the recapturing of $155 million worth of loans that had been delinquent last quarter. Total delinquencies increased to $1.05 billion, up from $954 million in March due to loans migrating from a less than 60-days-delayed status into non-performing territories.

Addressing Delinquencies and Strategies for Resolution

The company highlighted its strategy for tackling delinquencies, with efforts focused on restructuring loans and bringing balance sheets back to stability. CEO Kaufman reiterated that these modifications, which included $23 million in fresh capital injections, were crucial in encouraging borrowers to recapitalize their deals. The modifications generally resulted in average payment rates falling to 7.8%, with nearly all delinquent loans now restructured to performing status.

Strategic Position and Guidance

Arbor Realty Trust's leadership communicated that they are strategically positioned to endure this market cycle while also planning for the future. It is guided that the upcoming quarters may continue to experience peak stress if interest rates remain elevated, although easing is anticipated should rates decline. As a pivotal insight, the agency business generated $1.1 billion in origination volume, enhancing net revenues to 45% amid volatile market conditions.

Cash Flow and Book Value Stability

The management also spotlighted the importance of maintaining a liquidity level of approximately $700 million to weather the downturn and seize advantageous opportunities. Meanwhile, book value rests at $12.46 per share, indicating good financial health despite market pressures. Arbor also reported a continuous effort in deleveraging its balance sheet, effectively halving exposure to bank debt from its previous peak, thus enhancing operational flexibility.

Diverse Income Streams and Future Outlook

The company outlined plans to enhance earnings further through different channels, including fee-based servicing, which grew to $32.3 billion, resulting in predictable cash flows. Kaufman articulated confidence in the single-family rental business and construction lending, aiming for unlevered returns ranging from 10% to 12% initially, and potentially mid- to high teens in growth once effectively leveraged. This diversified approach promises a more stable income generation path into the future, allowing Arbor to adapt and exploit incoming market opportunities.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2024 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 the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

[Paul Elenio, executive]

Thank you, Angela. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Royalty Trust. This morning, we'll discuss the results for the quarter ended June 30, 2024.

With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events.

I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

[Ivan Kaufman, executive]

Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had another strong quarter as we continue to effectively navigate through this extremely challenging environment. As we discussed in the past, we started preparing for the cycle well over 2 years ago and a plan to appropriately position the company to navigate through and succeed for our investors in this challenging market is being executed in line with our expectations.

We have a diversified business model with many campus cyclical income streams, are focused on the right asset class with the appropriate liability structures and are well capitalized, which has allowed us to continue to outperform our peers in every major financial metric.

Last quarter, we posted some compelling charts on our website, demonstrating this outperformance. We updated these slides again this quarter, and we encourage you to review them as they clearly demonstrate that our total shareholder return, dividend growth and book value appreciation over the last 5 years are outperforming everyone else in our peer group.

In fact, most of our peers have cut their dividend substantially, have experienced significant book value erosion and have generated a negative total shareholder return over the last 5 years. Clearly, this is not the position we are in, and we have continued to demonstrate over a long period of time that we are a consistent outperformer and a leader in the space.

As we have communicated, we expected the first 2 quarters of this year to be the most challenging part of the cycle, and we have also guided to this period of peak stress affecting the third quarter and fourth quarter as well if rates remain higher for longer. Even in the most stressful part of the cycle, we continue to post very strong operating results, which we'll discuss more in detail on today's call.

We are aware of certain erroneous information in the marketplace, which has been driven by short reports and is inaccurate. While our performance in this quarter speaks for itself, we would be remiss if we didn't point out certain factual inaccuracies as well as ill-informed and/or inaccurate statements that are causing the most concern.

First, there has been a swath of misinformation regarding 1 transaction in particular called the West Chase portfolio. For example, this information started that the transaction should have been reported in the first quarter when, in fact, the transaction closed in the second quarter and was appropriately and timely reflected in the company's financials. We believe that the merits of this deal were the ultimate interest of the shareholders. Specifically, we had $100 million bridge loan collateralized by a portfolio of properties in Houston, Texas, in which the bar defaulted.

We immediately exercised our right to foreclose on these assets as we believe that there was a value above the debt, we simultaneously sold it to a new entity, which was capitalized with $15 million of fresh equity and a $95 million bridge loan at SOFR plus 300 basis points that we provided.

Of the $15 million of capital that was invested in the transaction, $6.25 million or 40% was funded by the Austin Walker Fund, which is a private minority-owned real estate fund focusing on affordable housing that we have a 49% noncontrolling limited partnership interest in. The rest of the capital came from 2 independent separate investors, 1 of which is a borrower that we have a long-standing relationship, which has a tremendous amount of expertise in renovating these type of assets and maximizing their value.

We believe the stabilized value of these assets to be around $128 million, which is well above the capital stack of this deal and the deal has now been recapitalized with the appropriate reserves given us confidence that the new ownership group will be able to hit the targeted business plan over the next few years. West Trace is an outstanding transaction that fits what we want, which is lend to affordable housing communities. We believe this transaction is a very effective workout with sound economics and consistent with our values, yet the short sellers have levied what we believe are baseless criticisms about this transaction.

Again, we are extremely pleased with the results of this transaction and the benefit it'll present for our stakeholders. We continue to do an effective job in managing through our loan book, and this transaction represents management's capabilities and taking back an asset and replacing it with new sponsorship and having it appropriately recapitalized.

Second, certain misinformation has been spread about the redemption of 1 of our CLOs. We have been a top issuer of CLOs for over 20 years, never once losing a single dollar of principle for our investors even through the historic financial crisis. We are experts in managing these vehicles and have issued and repaid many vehicles returning all invested capital to our bondholders.

We called the CLO on June 17 in the ordinary course of business, and in doing so, returned principal investments of each bondholder in full through outsized returns on our capital and maximize returns to our shareholders. Additionally, the short reports have also stated that we did not give proper notice to our bondholders prior to the redemption when time we file the appropriate SEC forms out for the redemption and that we committed securities fraud.

The rules are very clear. We are required to give notice to our bondholders 10 days prior to the redemption, which we did formally through the trustee on May 31, and we are required to file an SEC form on the redemption 45 days after the quarter in which the redemption occurred, which is, in this case, not until August 14.

We have collapsed and redeemed over a dozen CLOs in the past 10 years and each time given the proper amount of notice and filing all SEC required documents in a timely manner. Third, we have been criticized for how we've been managing our book -- our loan book in this distressed environment. When, in fact, the company has done a very effective job in maximizing return to our shareholders, which, again, are evidenced in the numbers that we have reported.

This quarter, we successfully modified over $730 million of loans with $23 million of fresh capital being injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, fund interest and renovation reserves, bring past due interest current and pay down loan balances where appropriate.

We also continue to make progress on approximately $1 billion of loans that are past due by either modifying these loans for closing and taking them into OREO or bring in new sponsorship either consensually or simultaneously with the foreclosure. In addition, we have an extremely successful quarter given the recent decline in interest rates by generating $630 million of payoffs with $490 million of these loans being refinanced into fixed rate agency deals.

And as I have said in the past, if interest rates go below 4%, obviously, as they've done in the last week or so, we expect that this will become more meaningful to our business. Despite these facts, Arbor has been subject to repeated attacks in the reports generated by short sellers, and we expect these attacks will continue. The best response to these attacks and which we believe are unfair and unjustified are our financial results and our earnings call here today.

It has also been widely reported that in the weight of these attacks over an 18-month period, Arbor has received requests for information from government agencies, including the Department of Justice. Arbor consistently has cooperated and will continue to cooperate with any such requests. Likewise, it is our policy not to comment on any such inquiries.

That said, I would like to provide more detail about some additional results that have resulted from our execution of strategies to manage the business through an environment that poses market-wide challenges. One of the items I touched on earlier is how important having adequate liquidity and appropriate debt increments are to your success in these types of markets.

As a result, we have focused heavily on maintaining a strong liquidity position. Currently, we have approximately $700 million of liquidity between around $700 million in corporate cash and $200 million of cash now CLOs that results in an additional cash equivalent of approximately $50 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 to take advantage of opportunities that will exist in this market to generate superior returns on our capital.

We also continued to do an excellent job in deleveraging our balance sheet and reducing our exposure to short-term bank debt. We are down to approximately $2.8 billion in outstandings from our commercial banks from a peak of approximately $4.2 billion, and we have 67% of our secured indebtedness in non-mark-to-market, nonrecourse, low core CLO vehicles. The CLO vehicles are a major part of our business strategy as they provide us with a tremendous strategic advantage in kinds of distress and dislocation due to the nature of their nonmarket nonrecourse elements.

In addition, they contribute significantly to providing a low-cost alternative to warehousing banks, which in times like this, have fluctuating pricing and leverage point parameters. In fact, 1 of the significant drivers of our income streams are our low-cost CLO vehicles as well as the fixed rate debt and equity rent instruments that make up a big part of our capital structure. We are very strategic in our approach to capitalizing our business with a substantial amount of low-cost long-term long-dated funding sources, which has allowed us to continue to generate outsized returns on our capital.

Another major component of our unique business model is our significant agency platform, which offers a premium value as it requires limited capital and generates significant long-dated, predictable income streams and produces considerable annual cash flow. In the second quarter, we had a strong originations of $1.1 billion despite elevated rates for most of the quarter. The recent drop in the 10-year and the 5-year combined with tighter spreads has allowed us to continue to build a strong pipeline of future agency deals, giving us confidence in our ability to grow our agency volumes going forward.

We have also done a great job in converting our balance sheet loans into agency products which has always been 1 of our key strategic and a significant differentiator from our peers. And it's also very important to emphasize that a significant portion of our business is in the workforce housing part of the marketplace. As we all know, Fannie and Freddie have a very specific mandate to address the workforce affordable housing needs, which is a major issue in the United States, making Arbor a great partner that continues to fulfill a very important mandate for the federal agencies as well as the social need for society.

Our fee-based servicing portfolio, which grew another 3% this quarter, and 4% year-over-year to $32.3 billion generates approximately $124 million a year in reoccurring cash flow. We also generate significant earnings on our rest on cash balances, which act as a natural hedge against interest rates. In fact, we are earning 5% on around $2.4 billion of balances or roughly $120 million annually which combined with our service and income annuity totaled $245 million of annual gross cash earnings or $1.20 a share.

This is in addition to the strong gain on sale margins we generate from our origination platform and is extremely important to emphasize that agency business generates 45% of our net revenues, the vast majority of which occurs before we even open our doors each day. This is completely unique to our platform. In our single-family rental business, we continue to be the leader of choice in the premium market we traffic in. We had another strong quarter with $185 million of fundings and another $280 million of combined signed-up commitments.

We have a large pipeline and remain committed to this business and offers us returns on our capital through 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 seeing steady progress in our newly added construction lending business.

This is a business we believe can produce very accretive returns on our capital by generating 10% to 12% unlevered returns initially and eventually mid- to high teens returns on our capital once we leverage this business. We continue to see a nice increase in our portfolio of potential deals with roughly $250 million under application another $250 million in LOIs out LOIs outstanding and $850 million of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us free tons on a capital through construction, bridge and permanent agency lending opportunities.

In summary, we had another very productive quarter and are working exceptionally hard to manage through the teeth of this dislocation. We feel we have done an excellent job in working for our loan book and getting borrowers to recap their deals with fresh equity as well as bringing in quality sponsors to manage underperforming assets and working through our nonperforming loans.

We understand very well the challenges that lie ahead, and I feel we are well positioned. We have a diversified business model. We are invested in the right asset class with very stable liability structures. We're also well capitalized and a best-in-class asset management function and executive team giving us confidence in our ability to navigate through this distressed environment.

And despite the misinformation circulated in the marketplace about our business strategies, we continue to reiterate that we stand by our financials and our disclosures, and we have always conducted our business operations and practices in the best interest of our shareholders.

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

[Paul Elenio, executive]

Okay. Thank you, Ivan. We had another strong quarter, producing distributable earnings of $91.6 million or $0.45 per share which translated into ROEs of approximately 14% for the second quarter. As Ivan mentioned, we successfully modified 28 loans in the second quarter, totaling $733 million. On approximately $398 million of these loans, we required borrowers to invest additional capital to recap their deals with us providing some form of temporary rate relief through a pay and accrual feature. The pay rates were modified on average to approximately 7.8% with 2.14% of the residual interest due being deferred until maturity. $155 million of these loans were delinquent last quarter and are now current in accordance with their modified terms. .

Our total delinquencies were $1.05 billion at June 30 compared to $954 million at March 31. These delinquencies are made up of 2 buckets: loans that are greater than 60 days past due and loans that are less than 60 days past due that we are not recording interest income on unless we believe the cash will be received. The 60-plus day delinquent loans or nonperforming loans were approximately $667 million this quarter compared to $465 million last quarter due to approximately $264 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, a $9 million loan that went nonperforming this quarter, which was partially offset by $62 million of loans being modified in the second quarter that are now performing.

The second bucket, consisting of loans that are less than 60 days past due came down to $368 million this quarter from $489 million last quarter, mostly due to $264 million of loans that progress to nonperforming and $138 million of loans being modified or that paid off during the quarter, which was partially offset by approximately $281 million of new loans this quarter that we did not accrue interest on.

And while we expect to continue to make progress in resolving these delinquencies, at the same time, we do anticipate that there'll be some new delinquencies in this environment. We're currently working through a number of these loans that we expect to resolve by taking back the properties and then working to improve these REO assets to create more of a current income stream. This could take 60 to 120 days which will likely result in a low order mark for net interest income over the next couple of quarters until we have worked through this portfolio.

This is what we expected and is consistent with our previous guidance that this would be the period of peak stress at the bottom of the cycle. We also continue to build our CECL reserves given the difficult market backdrop recorded an additional $29 million on our balance sheet loan book in the second quarter. $7.5 million were specific reserves we took on assets this quarter with the balance in additional general reserves. The increase in general reserves from previous quarters was mainly due to changes in the assumptions in our models on real estate values given the challenging environment.

We feel it is very important to emphasize that despite booking approximately $145 million in CECL reserves across our platform in the last 18 months, $117 million of which was in our balance sheet business, we still were able to maintain our book value. This performance is well above our peers, the vast majority of which have experienced significant book value erosion in this market.

Additionally, we're one of the only companies in our space that has seen significant book value appreciation over the last 5 years with 30% growth during that time period versus our peers whose book values have declined at an average of approximately 20% in that time frame. As discussed -- as Ivan discussed earlier, we're pleased with the success we are having in working through our balance sheet loan book and in resolving our delinquencies.

As we've stated many times, we have several recourse provisions in our loan documents that lend value to the resolution process. Last quarter, we realized a $1.6 million loss on $11.3 million loan that paid off at a discount. We immediately pursued 1 of our recourse provisions and are pleased to report that we received a $900,000 settlement payment in the second quarter related to this loan. We also had a very successful resolution on the legacy REO office property that we foreclosed on back in the fourth quarter of 2021 through a lengthy marketing process we were able to sell this asset above our carrying value, resulting in a second quarter gain of $3.8 million.

In our Agency business, we had a strong second quarter with $1.1 billion origination and loan sales. The margins on our loan sales was flat at 1.54% for both the first and second quarters. We also recorded $14.5 million of mortgage servicing rights income related to $1.1 billion of committed loans in the second quarter representing an average MSR rate of around 1.32%, which was also flat compared to last quarter.

Our fee-based servicing portfolio also grew to approximately $32.3 billion at June 30 with a weighted average servicing fee of 38 basis points and an estimated remaining life of 7.5 years. This portfolio will continue to generate a predictable annuity income going forward of around $124 million gross annually. And this income stream, combined with our earnings on escrows and gain on sale margins represented 45% of our net revenues for the quarter.

In our balance sheet lending operation, our $11.9 billion investment portfolio had an all-in yield of 8.60% at June 30 compared to 8.81% at March 31, due to a combination of an increase in nonperforming loans and some new loans that we did not make their full payment that we did not accrue interest on, which was partially offset by modifications in the second quarter on some of our previously delinquent loans.

The average balance in our core investments was $12.2 billion this quarter compared to $12.5 million last quarter due to runoff exceeding originations in the first quarter and second quarter. The average yield on these assets decreased to 9% from 9.44% last quarter due to substantially more modifications in the first quarter, resulting in the collection of a significant amount of back interest owed combined with an increase in nonperforming loans and some new nonaccrual loans in the second quarter.

Total debt on our core assets decreased to approximately $10.3 billion at June 30 from $11.1 billion at March 31, and mostly due to the unwind of CLO 15 and the paydown of other CLO debt with cash in those vehicles in the second quarter. The all-in cost of debt was up to approximately 7.53% at 6/30 and versus 7.44% at 3/31. The average balance on our debt facilities was approximately $10.8 billion for the first quarter compared to $11.4 million last quarter.

The average cost of funds in our debt facility was up slightly 7.4% for the second quarter compared to 7.50% for the first quarter. Our overall net interest spreads in our core assets decreased to 1.46% this quarter compared to 1.94% last quarter again, from a significant amount of back interest collected in the first quarter for modifications.

And our overall spot net interest spreads were down to 1.07% at June 30 from 1.37% at March 31, and mostly due to an increase in nonperforming and nonaccrued loans during the quarter. Lastly, as we continue to shrink our balance sheet loan book, we have delevered our business 25% over the last 18 months to a leverage ratio of 3:1 from a peak of around 4:1.

Equally as important, our leverage consists of around 67% nonrecourse non-mark-to-market CLO debt with pricing that is 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 guys may have at this time. Angela?

[Operator]

[Operator Instructions] We'll take our first question from Steve Delaney with Citizens JMP.

[Steven Delaney, analyst]

Ivan and Paul, congratulations on a solid performance in this difficult market. One of the things we noticed, obviously, you're very active on modifying loans of the 60-day or less bucket. We did note that, that number of loans and the dollar amount declined you know the figures, but in the quarter, 2Q, fewer loans to modify than in the first Q. Looking at the modifications, which I guess so far this year, 67 modifications $2.5 billion of loans. When we -- looking at taking that data and then looking at the NPLs, which increased slightly in the second quarter to 24 loans and $676 million.

The question is just in terms of your process. Is it still -- once you as an -- are you still actively working to could you modify that loan and get it back in a current state or once they go to NPL, is there a much higher probability that it might end up in REO.

[Ivan Kaufman, executive]

Thanks, Steve. Let me give you a little overall view of the process. We're talking about an overall number of about $1 billion, give or take, give or take and we believe we're pretty much in the peak part of the cycle with the most rest. And as you know, the $1 billion has a negative effect on our financial performance, which is factored in because we're not accounting for the income on that.

So it's really incumbent on us to give you a good view of how that $1 billion is going to flow through the system. I'm pretty involved in this stuff. So we look at it this way. Of the $1 billion we estimate about 30% of the REO.That's the toughest part of it. Those of you who are ones that are not consensual they take a bit of time. And they're not income-producing for us for that period of time. And it could take anywhere from 3 months to a year depending on the jurisdiction and then us getting into those assets and bring them up to speed and then getting them cash flow and selling them. So that's the stickiest part.

There's about another 10% or 15% of that we're working with the existing sponsors to bring in the sponsorship. And we believe that over a period of use 3 to 6 months, that those assets will have new buyers. And we estimate that just to be conservative, it will throw off about a 6% return once that's done.

In that $1 billion, we estimate there's going to be about 40% of payoffs. That's was the assets are being sold. It's just a normal process. And then the other 40% are in the process of being more that not take time. And a big part of what we do is we proceed to foreclosure when all is not paying. And that path to a foreclosure usually leads to a very effective process of getting moderate.

So we would estimate that that's the product that's moved through the system, the quickest and generally, the average time is probably 90 days and then it returns to an interest-earning asset and we use about a 7% rate on that. So we're in the thick of it. It's about $1 billion. We expect to get it through the system. There will be some new ones coming in. But that's what we're expecting. Clearly, this drop in interest rates is extremely favorable for the company and this business model as it will stimulate more multifamily sales and people will be able to buy these assets with more affordable financing.

[Steven Delaney, analyst]

Got it. Well, what I heard you say there, Ivan, is that because something is currently classified as an NPL, there is still a possibility that those loans could be modified. Did I hear you correctly?

[Ivan Kaufman, executive]

Yes. I'm thinking about 40% of them based on based on what I see in the portfolio, I'm pretty intimate with the asset management group and the progress they're making. It takes time for a lot of these borrowers to find the capital and get these things brought up to speed. So that would be the accident number I would be using to get modified.

[Steven Delaney, analyst]

Great. And the 30% to REO, Paul, I look on the balance sheet, can you tell us what's in REO currently? And I assume you have that in other assets? We couldn't track...

[Paul Elenio, executive]

We do, Steve. We absolutely do. So it is in other assets. REO is $78 million right now on our books. It's sitting in other assets. we did sell, as I said, a South Carolina office property that we our books for $10 million. So it was $88 million last quarter at $78 million this quarter. And of that $78 million, just to give you a little color, the 2 biggest ticket items is a $41 million New York City office property we took back in 4Q of '23 that we disclosed and that's a building that we brought in new sponsorship and are converting it to a condo, and that will take some time.

And then the other big piece is we have about a $30 million multifamily deal in Texas that we took back in the fourth quarter of '22 that we're working through. And then there's some little odds and ends. But it's a small number. But as Ivan said, we are expecting, as we work through this $1 billion that a decent amount more could go REO, and that number will grow, right, Ivan, that's what we're talking about.

[Ivan Kaufman, executive]

Yes, that's the guidance that we gave about 30%.

[Operator]

Our next question comes from Stephen Laws with Raymond James.

[Stephen Laws, analyst]

Just a follow-up, a minor point on the REO, about how many assets is that? What is -- is the average loan size consistent with kind of the $20 million for the portfolio? Or how do you see that, I guess, $300 million of potential REOs from a property count standpoint.

[Ivan Kaufman, executive]

We'll take a look at the list. I would think yes but Paul can be more accurate. It's probably an average loan size of around $30 million.

[Paul Elenio, executive]

Yes. We have some chunkier stuff we're looking at, Stephen, that was in the $50 million, maybe even $100 million, but that's not a lot of what we do. and then we have some $10 million and 15s and 20s. So it's hard to really project where these are all going to end up. But I would say that we're thinking it's probably in the $30 million to $40 million average range.

[Stephen Laws, analyst]

Great. And then, Ivan, I want to go back to something you commented on around interest rates. And you said we go below 4%, certainly beneficial. And I think since the last time we spoke at the long end of the curve is down almost 100 basis points are fairly close.

Can you talk about maybe how -- and I know that most recently, it's only been a couple of weeks, but can you talk about how that maybe has changed behavior from sponsors? Do you think -- they're more likely to protect assets, cheaper to buy new caps? And then how do you think it impacts agency volumes as you move forward?

[Ivan Kaufman, executive]

Well, let me address the cap issue. The cap issue has been an extremely expensive proposition from all of these sponsors assuming for the last 3 years, they've had to pile in another 6 to 8 points of capital to buy caps. We believe the curve is going to change and the cost of cap is going to go down, which believes they're paying a little bit -- that's on that side.

But the real meaningful issue is the drop in the 5-year and the 10-year I mean you could effectively borrow close to 5% off the 5-year. Up until now, people are paying close to 6%, 6.5%, but spreads have tightened, rates have come down. So if you have a borrower currently paying on a floating rate basis, close to 9%, you can then go ahead and pay 5%. So that's a great option for that particular borrower, even if they put a little more capital into it, and they can secure long-term financing and really put themselves from a negative cash position into a positive cash position assuming of an asset, that's 6%, 6.5% cap rate all of a sudden you vacated positive cash flow from negative cash flow, and that's becoming very meaningful.

The real key for people is are they managing their assets while they stabilized because then we get fixed rate financing the 90-plus occupancy somewhere in that range. So to the extent people have their assets stabilized, then that becomes a great option for them, and we'll relieve the pain of carrying those assets, which have been extremely painful.

Make no mistake about it. When you going to borrow alone and you pay 4.5% to 5% and the next thing you're paying 9% and it's for a prolonged period of time, you have a lot of capital needs. So I think we're at a great inflection point right now for many of these borrowers if their assets are stabilized that they can look through the fixed rate market and reposition our assets and not have negative trend.

[Stephen Laws, analyst]

Great. Appreciate those comments, Ivan. And 1 last one, if I may. On portfolio seasoning. Origination volume was very strong in '21 in the first half of '22, really lightened up a lot in the second half of '22. As you think about the seasoning of those loans, is it fair to say that you've covered the $1 billion of NPLs.

But should we continue to see kind of the new to be a delinquency start to start to decline. I know there'll be more and then some will move. But are we past the peak of kind of identifying the problem loans as you think about your portfolio?

[Ivan Kaufman, executive]

I think that we've given pretty good guidance that the first quarter and second quarter would be peak stress and if rates remain higher for longer over to leak into the third and the fourth quarter. I believe that with this rate moved out, I think you'll see the market change a little bit.

So perhaps the third quarter may be a little bit tough, but we're seeing a little bit of easing and if rates remain in this level, I believe there'll be a lot of liquidity to return to a multifamily sector and a lot of trades being done. So I'm hopeful and optimistic that perhaps the second quarter was the peak little leakage into third quarter. But we're definitely seeing the light at the end of the tunnel.

[Stephen Laws, analyst]

Well, that's great to hear. And nice job managing our assets in a difficult market and look forward to next quarter.

[Operator]

Our next question comes from Rick Shane with JPMorgan.

[Richard Shane, analyst]

A couple of different things. Just bookkeeping perspective, cash balances within the structured business declined by about 50%. I assume some of the decline in the restricted cash is from calling the CLO. But can you just help us understand what's going on there?

[Ivan Kaufman, executive]

Yes, sure. I mean the reason we did call our CLO was because we were sitting on excess cash balances and it was inefficient. So that's expensive to be sitting on cash balances which are being deployed. So in the normal course of business when we have those excess cash balance -- that's why we call a vehicle. And the efficiency of these vehicles has cash balances as low as possible. So it achieved exactly what we wanted.

[Paul Elenio, executive]

Yes. And to add to that, Rick, that is a big piece of it. The other piece of it is some of these vehicles, as you know, are out of replenishment period, so they're naturally delevering as loans are running off. So the restricted cash is paying down debt and that's part of the component as well.

And then the third component is that we did pay off $90 million of unsecured debt in April, as you are aware, with cash. So those are kind of the 3 big components that got you a decrease in cash for the quarter.

[Richard Shane, analyst]

Okay. Second topic, you talked about modifying $730 million of loans in the second quarter. We've gone through the disclosure in the last Q related to Mads. And I'm going to be honest, I don't fully understand all of the implications. Can we just walk through clearly the implications of the mods in this quarter in terms of what it means for the difference in cash that you will receive and the difference in interest accrual.

So if you do modify the loans, what would you have expected to receive? How much are you giving up in cash over the next year or 2? And what is the difference in the accrual rate we understand the implications from an income perspective.

[Paul Elenio, executive]

Okay. So let me try to attempt to answer that. It's a little more complicated than that, and our Q will be out early next week, we hope. So you'll get more details on that disclosure. But the way I think I look at it and don't know it'll completely answer your question is we did mod a $1.9 billion or $2 billion of loans last quarter. I think $1.1 billion had pay in approval features. And so what we did was we -- what management does is we look at every single loan we modify and we go through it on a loan-by-loan basis to determine how strongly we feel the value in the mod has put us in a position, we'll still be able to recover the accrued interest. .

If we don't feel we're in that position, we won't clearly accrued interest. If we do, we accrue it. For the most part, we accrue it. There are exceptions, there are loans that we decide not to accrue the after the mod if we think it's still a challenging asset.

Having said that, in the first quarter, our mods generated about -- right here. I'm going to get it in front of me. Our mods generated about, call it, $3 million of accrued interest that hit our P&L that wasn't cash. In the second quarter, those first quarter mods were now $6 million of accrued interest that didn't hit cash because it was for a full quarter.

And the second quarter mods were $2 million in the second quarter of accrued interest. So our PIK interest, as you call it, for 1Q mods was about $3 million in the first quarter. In the second quarter, the 1Q mods were $6 million and the 2Q mods were $2 million for a total of $8 million. So that number will obviously grow because the second quarter numbers, the mods will be fully affected in the third quarter and fourth quarter and then if we mod new loans. I don't know if that's answering your question, but that's the numbers. for the first and second quarter mods of how those accrual rates that we accrued affected interest income but not cash.

[Richard Shane, analyst]

All no, it's a very thoughtful question to -- response to a question. I wasn't sure objectively that you would be able to answer. And so I was a little bit circumspect about asking that. So it's very helpful.

Last question, implicitly, the mods $23 million of additional capital on $730 million of mods, that's about a 315 basis point contribution of capital. I'd love to understand that in the context of your comment and answer or 2 ago about caps running 6% to 8% for your borrowers. I'm just curious how we sort of square those 2 numbers.

[Ivan Kaufman, executive]

Okay. It's 6% to 8% over a 2- to 3-year period each year a tap cost can be anywhere between 1.5% to 3% depending on the loan. So in context, we're looking at more of an annual an accumulative on that number. But Paul can give you a good number in terms of the mods and how they work for the second quarter.

[Paul Elenio, executive]

Sure, I can. So of the $733 million of loans we moded and $23 million of capital is committed to be injected. $6 million of that capital went to buy rate caps and they're at all different strike prices. Rick, somewhere out of the money strike, some are way in the money strikes.

And I think the average strike was about 3.7%. And then the rest, we had 1 loan that paid down the principal balance by $2 million. We had pass-through interest of about $2 million that was collected and then the rest were to fund rental reserves, interest reserves and OpEx reserves. Those are kind of how it breaks out if that helps you.

[Richard Shane, analyst]

It does. Very thoughtful answers. I appreciate the time. I would throw in 1 last request. There are a lot of numbers that get thrown around on these calls. You guys are unique amongst the companies that we follow and not providing a slide deck on the calls.

And I think given the complexity of what Paul, you've described, it would be really helpful as people could see the numbers and you could be walking through slides on the call. So I'm just going to throw that out there, but I appreciate the time.

[Paul Elenio, executive]

Sure. Thanks. Thanks, Rick. We appreciate it. We always want to be more transparent and have the best disclosures. We try to be when the Q gets filed, there'll be a lot of good information there. And then we'll always take into consideration whether we think we can put it in a better form for readers. And thank you for that comment.

[Operator]

The next question comes from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Can you please give the second quarter or 6-month year-to-date cash flow from operations number?

[Paul Elenio, executive]

Yes, it's in the 10 -- well, you don't have the 10-Q, obviously, it's not filed yet. So I'll give it to you. So the cash flow from operations number is $335 million, but you got to back out the changes in the originations and sales of held to sale assets, which is $220 million swings. So -- and then you've got $90 million in changes in operating assets. So call it, call it, $335 million is cash flow from operations for the 6 months and then you have a $220 million positive swing on originations less proceeds from sales and $100 million negative swing in the change in operating assets and liabilities.

[Jade Rahmani, analyst]

Okay. That's great. the NPLs of around $1 billion. Do you have any numbers in mind as to where that total balance peaks?

[Ivan Kaufman, executive]

I'd say we're within the range of the peak right now. I mean, maybe you can go up a little bit more, but we're kind of in the peak period of time. we're pretty optimistic about the number I've given you on the months because we're pretty close to a conclusion on those mods. So I think that's a good number to ballpark.

[Paul Elenio, executive]

Yes. It's a tough 1 to predict, as you know, I mean, I think Ivan is right. It kind of has -- it's gone up a little bit since the first quarter, not significantly $954 million to $1.5 billion. We do expect a few more delinquencies. Hopefully, we're at the peak, but we do have our eyes on a bunch of loans that are delinquent that we're going to successfully mod -- so hopefully, that number will not peak higher.

And then we're going to have some of those loans come out and be They'll be on a different line item, but there'll still be they'll still be nonperforming until we work through them. So it's a tough answer, but I think Ivan is right. I think we feel like it shouldn't be significantly...

[Ivan Kaufman, executive]

Yes. I mean, what I would do is the sticky part is the REO because it takes time to get your hands on the asset. And then once you get your hands on the asset, you've got to stabilize that asset. That's a sticky part. The rest is somewhat transition.

[Jade Rahmani, analyst]

And when you look at the NPL and taking learning what's been going on in this cycle, do they have anything in common in terms of maybe 1 issue that's been driving it? Do you think the main issue is really the borrowers basis than having paid too much to lower cap rate for the assets or to think of and perhaps it's sponsorship, maybe leverage ratio or the third category underperformance.

[Ivan Kaufman, executive]

It's a whole flow of activities. And clearly, when interest rates go up as dramatically as they did whatever model is, we've been a low interest rate market forever. That's probably the single biggest driver. I've said in many calls before, the impact of COVID had a very significant impact because people were not able to move out tenants for many, many years.

We've had in some of these properties 10% to 15%, even 20% economic occupancy with tenants, so living for 3, 4 years without paying rent. That was a big factor. That's an unanticipated factor. A third factor, which we spoke about as well as the increase in insurance costs. I mean a doubled, tripled and quadrupled they're coming down a little bit now. the insurance costs, the economic on, you can't predict those. So that creates a lot of headwind.

I think when people going to a buying frenzy in the top market, they focus on buying and not on management. And that's something that we've certainly learned a lot from because if 1 thing could be an effective capital raiser and buyer of an asset, it's another thing to be an effective manager. So management draws a lot of hills -- and one of the things that's extremely important for us when we're modifying alone is that if we don't think these assets being managed appropriately, either we won't modify and we'll take it to OREO or will assist and make sure they bring in new management. Management is also is a major part.

[Jade Rahmani, analyst]

That's excellent. My last question would just be on the GSEs. We've seen a lot of stories around the being pretty cautious right now, not just the Meridian issue, which started back in maybe in the third quarter of last year. But there have been others appraisers, local small regional title companies -- what exactly do you think is going on with the GSEs? Are they tracking down? Are they tightening their underwriting standards? Or are those just sort of a select few cases?

[Ivan Kaufman, executive]

I think in every cycle, you always have certain things that happen and in this cycle with all the volume, there's sort of things that occur. And clearly, the agencies have changed their attitude toward brokers. And Meridian is just a broker, but brokers have played a major role and was very dominant in garnering a lot of volume.

And then garnering on our volume, obviously, they control a lot of the source documents. And the industry has changed, many of have learned that if they are brokerage in between that are not direct with them, they can't control the source documents, so they've changed the guidelines. I think that was a long time coming. You have to understand that since 2010, basically, we've been on a tremendous run and a lot of deals have been hidden. This is the first time that a prolonged downturn.

And now you can see some of the -- some of the things that we've done in the industry that finally caught up. So I think that's going to be a healthy change that the lenders have to deal directly with the borrowers, and that's a very healthy change. appraisers have always been a sore point within this industry, right? We rely so much on appraisals, I believe that a big part of AI and a big part of technology will have a significant impact on improving the valuation process.

And appraisers are sometimes aligned, sometimes not aligned. It's like any other process that's human within the human process. There are always of corruption. And I think it happened to them, not abnormal. It's part of life, everybody like this corruption. So they got hit with a little bit, not a lot, very small relative to the overall thing. And I think when they find a bad actor, it's called to light, they eliminated that actor.

But I think the whole appraisal process, which everybody has relied on valuations extensively. I think with technology, that's going to be a much better process going forward.

[Operator]

The next question comes from Jay McCanless with Wedbush.

[James McCanless, analyst]

Congrats again on AB covering the dividend, but that spread continues to narrow. Can you maybe talk to us about how comfortable you are with the current dividend level and especially if economic conditions worsen from here?

[Paul Elenio, executive]

Sure. Jay, it's Paul. Thank you for the question. I think it was clear in my prepared remarks that our spreads have come in, given the fact that we've got $1 billion of loans not paying I think 1 of the things we really need to stress is that because our business model is so diversified and because we have so many different income streams, the agency business being 1 specific one.

Our business being another that we continue to ramp up and get a 15% yield on our money. We have the ability to do things others don't, right? We're not afraid to take back an asset right, Ivan, I'm not afraid to work it through even if it means it's going to be noninterest earning for a little bit. So I've guided you guys to a little bit of a low watermark in the third and fourth quarter.

It's possible our numbers in the third quarter and fourth quarter could approach that number to be slightly below it. It will depend on how successful we are in getting back interest and getting those loans back online. But what also will affect it is the drop in the 10-year, right? If the drop in the 10-year continues and our agency business starts to explode, that will obviously offset any negative drag we have on nonperforming loans. So it's a tough one.

I'd say it's getting tighter. It will continue to get tighter. It may then dip around there or below for a quarter or 2, but we're not concerned because we know that we're going to take this $1 billion of assets and some good portion of it is going to turn into interest earning at some point.

And on top of that, our agency business is going to continue to generate sizable returns. And as Ivan said, we are working on a bunch of assets now that we think are going to pay off and we're going to take that capital on loans that were earning 0, and we're going to deploy it back into our system even at 10%, 12%, 13%, whatever it is we come up with on an unlevered basis, which will be accretive. So it will be a little bit of a timing issue and that the third quarter and fourth quarter may get tight, and we've talked about that. But long term, we're very, very comfortable with the protection.

[Operator]

The next question comes from Crispin Love from Piper Sandler.

[Crispin Love, analyst]

Just asking the GSE question from earlier, just a little bit differently. Can you discuss recent activity with Freddie and Fannie because we did see Fannie originations come down meaningfully in the first quarter, but they bounced back nicely in the second quarter.

So curious if there were any changes there on tightening standards in the first quarter versus the second quarter? And then just what you expect going forward from the agencies.

[Ivan Kaufman, executive]

I think it kind of mirrors a lot of the conversation we've had, and it's very much tied to interest rates. I think that the agency's volumes is going to increase considerably as rates drop. There are a lot of people who have been sitting on the sidelines waiting to refinance their loans when they got to a certain rate range.

We're in prime time rate range today with today's drop rates that have dropped. And I think the agency's volumes are going to really, really increased considerably. You have to also keep in mind that there hasn't been that much in multifamily sales activity, very, very low. I think that will pick up and I will see the agencies as well. So I think I'm very optimistic that the agency's volumes will really benefit off of this and will increase and will grow.

And then we'll go back to the same old problem of all of the agencies are backed up in are taking longer. We're not that far away from that. We've experienced that. So I think that the agencies are going to have a very, very, very strong period of time relative to the last couple of quarters.

[Paul Elenio, executive]

Yes. And I think to add some color to that, Crispin, we did $360 million of volume in our agency business in July. So that number was actually just around the target we did for the second quarter. But we think, and as Ivan said, we think given the recent move in rates, some people are going to move off the dime here. And I think we're going to see an increase to that volume in August and September. That's our view.

[Crispin Love, analyst]

Great. I appreciate the July number there as well. And then just 1 more for me. Can you just talk a little bit how you expect the first couple of rate cuts at the end of the year, assuming they do happen at the end of the year and into 2025 could impact you.

And could it be a net negative to your net interest income over the near term in the structured business, but of course, benefit originations and agency, as you mentioned. Just curious on how you think about the impact there, especially in NII going lower yields, lower cost of funds, but I'm sure how much it would improve the borrower profile just with a couple of rate cuts.

[Ivan Kaufman, executive]

I think we have to look at the rate cuts also in conjunction with what we've been talking about with the 5 and 10-year coming down. I think if there are rate cuts, 2 things will happen, it will put the book in a better position because people could buy rate caps cheaper. I also think there'll be more transaction activity and people will go with the floating rate loans on some of these underperforming assets.

So I think our book of floating rate loans will increase as well. So I think there'll be more volume on that side. I think, offset some revenue drop. I think you'll see the Agency business pick up considerably. And I also think it will stimulate some of the modifications and bring some of those modifications more online and create life income producing opportunities on that side to offset some declines in revenue. I think net-net, the rate drops are beneficial for the company. That's the way I would look at it from my chair.

[Paul Elenio, executive]

Yes. And I would say I agree with Ivan, the timing may be something that's hard to predict. You're right. If rates drop, your net interest income squeezes, but you've got $1 billion of loans not paying. Obviously, the health of the portfolio will increase the rate drop and then your agency business will pick up, but it's just a matter of the timing, and that's the stuff that's hard to tell. May have a little bit of a dip in net interest income right away, and then it builds back up with your agencies. But long term, and as Ivan said globally, that's a positive for us. .

[Ivan Kaufman, executive]

Yes. And I want to also point out what we've talked about for a long time on the calls that we put a big investment for our single-family -- for business and concussion lending business. That's a business that funds up over time. We have these commitments, and those commitments in the equity deployed will go up, and that should be in mid- to high teens for time. So that will offset some of the runoff in the portfolio, and that was clearly by design on our part.

[Operator]

The next question comes from Lee Cooperman with Omega Family Office.

[Leon Cooperman, analyst]

Finally, so let me you're doing -- let me first -- I'm not a pint for you guys, but I just want to say I congratulate you on your performance. 1.5 years ago, you told me how negative you were about the environment, and you couldn't have been more right. .

I detect a real frustration on your part in the beginning part of this call and dealing with the shorts. These are unmercifule and in this case, uninformed people, basically. And I just would tell you, he -- and so you're performing. They don't understand the uniqueness of the company and how you position the company. And let me tell you, you've been very right, and I congratulate you and I thank you as a lot shareholder.

Let me ask your questions in have been more right to me about the environment. Do you think we're heading into a recession, number one. Number two, in terms of the book value, I mean I'm not on vacation, so I'm dialing in on a cell phone. What is our book value at the end of the quarter? And are you a buyer of your stock in the low -- in the $10, $11, $12 area? Is that down here?

[Ivan Kaufman, executive]

Yes. So you and I have had a lot of conversations over the last year or 2 and I have told you my view on unemployment and the economy. And obviously, I've been more right than wrong and might be able to more towards interest rates. And we're exactly where I said we'd be. And we're exactly where I said we'd be almost at the exact timing.

And what I've said on the calls repeatedly, the first and second quarter being the most difficult. I get a good run for really the unemployment, more on the workforce type of people. And I get a good read, and I do a lot of intel. So I think that the economy is both -- and I also get a good idea from building costs and trades and there's like a 20% differential in the period of post-COVID, people paying 10% to 20% premium to build their projects. Now they're getting a 10% discount.

So you almost have a 20% to 30% differential from the peak in construction costs. People are hiring clues more recently and readily. Subcontractors are out there bidding and wanting jobs. So I think you've seen a tremendous change. So I think we are in a bit of a recession. And I think that you have another big factor here. You have the shadow unemployment being impacted by the 10-plus million immigrants who have been living in this country, and they're going to be starting to work.

They're only letting about 10,000 or 20,000 at a month working. So that's a big impact on our employment. So I do think that we're in a period of time, we will be a little bit recessionary. And I think rates will remain in this range or short-term rates should come down, which is all good for our business.

[Paul Elenio, executive]

And as far as Lee, it's Paul, our book value was $12.46 at the end of 6/30. And to your question about buybacks, we certainly have around $140 million of capacity left in our buyback plan. And I will always assess where we think it's appropriate based on our capital and clearly at levels that you talked about, we'd like to be we'd be active because it'd be very accretive to want our book value and also to our earnings, right, Ivan?

[Leon Cooperman, analyst]

I know it's been very frustrating to you. The short guys are unmerciful. They come out with inaccurate accusations on a Friday afternoon when you're in your quiet period and you can't respond. And it's just terrible with the damage you're doing to the public shareholders. But we're all lucky to have you guys in our corner because you've done a terrific job, and I appreciate it.

[Ivan Kaufman, executive]

Thank you, Lee. And as you know, we're in a heavily regulated environment to run regulated. And we do get frustrated blackouts -- and then we prepare very heavily for these earnings calls where it's not being in court. And as I said on my call, the numbers speak for themselves and the company's performance even in these very stressful times we are performing extraordinarily well. And when you compare us to our peers, it's not even the same well we've posted those jobs to do comparison.

So we'll continue to work hard and navigate these times and appreciate you as a shareholder and all our shareholders who have got a lot of confidence in us. So thanks to you Mark. It's very meaningful to us and to our management staff. We've been working extraordinarily hard just to get back to breakeven. As a entrepreneur, I always work to grow companies and it's not the most rewarding thing in the world to work to get back to breakeven. But life is life and that's part of our job. And we're working hard, and we've done a good job, and I think the quarter speaks for itself. And thank you again for your comments.

[Leon Cooperman, analyst]

It's my pleasure they're well deserved. Congratulations. .

[Ivan Kaufman, executive]

Thanks, Lee.

[Operator]

This does conclude today's question-and-answer period. I will now turn the program back over to our presenters for any additional or closing remarks.

[Ivan Kaufman, executive]

All right. Thank you, everybody, for listening today and for the long call and for your patience and thank you for your participation in the call. Everybody, have a great weekend and enjoy the rest of the summer.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.