Good morning, ladies and gentlemen, and welcome to the third quarter 2022 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press star one on your telephone. If you want to remove yourself from the queue, please press star two. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Okay. Thank you, Shelby, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter ended September 30th, 2022. 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 risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports.
Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.
Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had another tremendous quarter as our diverse business model continues to offer many significant advantages over everyone else in our peer group. We have a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings that are well in excess of our dividend. This has allowed us to once again increase our dividend to $0.40 a share, representing our tenth consecutive quarterly dividend increase with 33% growth over that time period, all while maintaining the lowest payout ratio in the industry. We've also strategically built our platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to thrive in this economic downturn.
We are invested in the right asset class with the right liability structures, highlighted by over $8 billion in non-recourse, non-marked-to-market CLO debt, representing nearly 70% of our secured indebtedness with pricing that is well below the current market. We also have no significant short-term debt maturities and are well capitalized with currently around $600 million in cash and liquidity, providing us with the unique ability to remain offensive and take advantage of the many opportunities that will exist to generate superior returns with our market capital.
Additionally, our dividend is well protected with currently the lowest dividend payout ratio in the industry, and we cannot emphasize enough the depth and experience of our executive management team, including our best-in-class dedicated asset management function that allowed us to successfully operate our business through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing REIT in our space for several years now. Our view of the current environment is that we are in a recession with runaway inflation, and we expect the market to continue to be volatile and dislocated for the foreseeable future. With this dislocation comes great opportunity for us to gain market share in our core business platforms and generate superior risk-adjusted returns on our capital.
As a result, we are excited about how we strategically position the firm to take advantage of what we believe will be extraordinary opportunities in this downturn. Turning now to our third quarter performance. As Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.56 per share, which is well in excess of our current dividend, representing a payout ratio of around 71%. Our financial results will continue to benefit greatly from rising interest rates, which has significantly increased our net interest income on our floating rate loan book as well as earnings on our escrow balances. Clearly, with our extremely low payout ratio and strong earnings outlook, we are uniquely positioned as one of the only companies in our space with a very sustainable protected dividend, even in a recessionary environment.
As we guided on our last call, in this market, we are being very selective with our balance sheet lending, looking to replace our runoff with higher quality loans with superior spreads. In fact, in the third quarter, we originated $600 million of new multifamily bridge loans with an average loan to cost of around 72% and interest spreads of 14.50 over the index. While the $600 million in runoff we experienced during the quarter had an average loan to cost of around 79% with average spreads of around 390 over the index. As a result, we're able to widen our spreads on average by around 25 basis points, while substantially increasing the loan quality with a 7% reduction in loan to value.
Additionally, we have a significant amount of replenishable capital in our low-cost CLO structures that have resulted in a meaningful increase in the levered returns on these loans. In fact, our third quarter originations averaged over 14% levered return, and the loans we financed through our CLOs came to over 18%. We have also placed a heavy focus on converting our multifamily bridge loan runoff into agency loans, which is a critical part of our business strategy as our agency business is capital light and produces significant additional long-dated income streams. In the third quarter, we successfully refinanced around 25% of our balance sheet runoff into new agency loans that produce strong gain on sale margins and long-dated servicing income.
Our strategy is to preserve and build on our strong liquidity position to allow us to remain offensive and go after premium yields on our capital. In our GSE agency business, we originated another $1.1 billion of loans in the third quarter. October's originations came in at $250 million, and we have seen some leveling off in the pipeline given the rise in the 10-year. Despite the current rate environment, we believe we can close out the fourth quarter with a similar volume as the third quarter, as again, we have the strategic advantages that we focus on the workforce housing part of the market and have a large multifamily balance sheet loan book that naturally feeds our agency business.
Again, this agency business offers a premium value as it requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flows. To this point, our $27 billion fee-based servicing portfolio, which is mostly prepayment protected, generated approximately $115 million a year in recurring cash flow. This is in addition to the strong gain on sale margins we generate from our originations platform and a significant increase in earnings in our escrow balances that we are experiencing as rates continue to rise, which acts as a natural hedge and is unique in our business. In our single-family rental business, we are gaining significant traction with a steady increase in deal flow. In the third quarter, we funded $150 million of prior commitments and committed to another $450 million of new transactions.
As we now source close to $1 billion in deals in 2022 to date, we have a very large pipeline of deals we are currently processing. Again, we love this business as it generates strong levered returns and it offers us returns on our capital through construction, bridge, and permanent lending opportunities. In summary, we had another tremendous quarter, and we're extremely well-positioned to succeed in this environment. Our dividend is well protected with earnings that significantly exceed our dividend runway. We invested in the right asset class and have very stable liability structures. We are well capitalized and have no significant short-term debt maturities, putting us in a unique position to take advantage of the many accretive opportunities that will exist in this market, giving us great confidence in our ability to continue to significantly outperform our peers.
I will now turn the call over to Paul to take you through the financial results.
Okay. Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $105 million or $0.56 per share, which is up from $94 million or $0.52 per share last quarter. The increase was largely due to substantially more net interest income on our floating rate loan book and from higher earnings on our escrow balances due to the increase in rates, along with a few one-time losses recorded in the second quarter on some one-off loan sales. Our third quarter results translated into ROEs of approximately 18%. Once again, our quarterly distributable earnings have substantially outpaced our dividend with a dividend to earnings ratio of around 71%, allowing us to increase our dividend for the tenth consecutive quarter to an annual run rate of $1.60 a share.
As Ivan mentioned earlier, we are well prepared for this downturn, and our model offers many strategic advantages, giving us great confidence in the quality and sustainability of our earnings and dividends. In our GSE agency business, we originated and sold $1.1 billion in GSE loans in the third quarter. We generated margins on these GSE loan sales of 1.3% in the third quarter compared to 1.59% in the second quarter, mainly due to a greater percentage of FHA loan sales in the second quarter, which have a much higher margin, as well as some overall general margin compression given the current rate environment.
We also recorded $17.6 million of mortgage servicing rights income related to $1.2 billion of committed loans in the third quarter, excluding $300 million of balance sheet loan sales, representing an average MSR rate of 1.51% compared to 1.48% last quarter. Our servicing portfolio was approximately $27.1 billion at September 30th, with a weighted average servicing fee of 42.4 basis points and has an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $115 million gross annually, which is down slightly from last quarter due to increased runoff in our Fannie Mae portfolio, mostly due to extensive sale activity again this quarter.
As a result of the runoff, prepayment fees related to certain loans that have prepayment protection provisions continued to be elevated, with $11 million in prepayment fees received in the third quarter compared to $15 million in the second quarter. In our balance sheet lending operation, our $15 billion investment portfolio had an all-in yield of 7.19% at September 30th compared to 5.82% at June 30th, mainly due to the significant increase in LIBOR and SOFR rates. The average balance in our core investments was $15 billion this quarter as compared to $14.6 billion last quarter due to the full effect of our second quarter growth. The average yield on these assets was up to 6.57% from 5.26% last quarter, again, due to increases in SOFR and LIBOR rates.
Total debt on our core assets was approximately $13.9 billion at September 30th, with an all-in debt cost of approximately 5.33%, which is up from a debt cost of around 4% at June 30th due to the increase in benchmark index rates. The average balance on our debt facilities was up to approximately $13.9 billion for the third quarter from $13.4 billion last quarter, mostly due to the full effect of our second quarter growth and from the new three-year convertible note we issued in August. The average cost of funds on our debt facilities was 4.49% for the third quarter compared to 3.10% for the second quarter, primarily due to increases in the benchmark index rates.
Our overall net interest spreads in our core assets decreased slightly to 2.08% this quarter compared to 2.16% last quarter, mostly due to less acceleration, some early runoff in the third quarter. Our overall spot net interest spreads were up to 1.86% at September 30th from 1.82% at June 30th, mostly due to positive effects of rising rates on our floating rate loan book. As we've stated before, 97% of our balance sheet loan book is floating rate, while 88% of our debt contains variable rates, further enhancing the positive effect on our net interest income spreads as rates increase. In fact, all things remaining equal, a 1% increase in rates would produce approximately $0.10 a share in additional annual earnings.
Additionally, as we mentioned earlier, we have $8 billion of CLO debt outstanding with average pricing of 163 over, which is well below the current market and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations. Lastly, as rates are predicted to continue to rise, we will also earn significantly more income from the large amount of escrow balances we have from our agency business and balance sheet loan book. These earnings will grow substantially as we have approximately $2 billion in escrow balances that are now earning almost 3% or around $60 million annually, effective November 1st, which is up significantly from a run rate of approximately $25 million annually at June 30th.
As Ivan mentioned earlier, these features are unique to our business model, giving us confidence in our ability to continue to generate high quality, long-dated recurring earnings in the future. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have at this time. Shelby?
Thank you. As a reminder, to ask a question, please press star one on your telephone. To withdraw your question, press star two. Others can hear your questions clearly, we ask that you pick up your handset for best quality. We'll take our first question from Steve Delaney with JMP Securities.
Good morning, Ivan and Paul. I would congratulate you on another great quarter, but I think the fact that ABR shares are up 9% this morning says it much better than I could. Congratulations. Nice to see.
Thank you.
Yeah. Obviously a lot of talk about the CLO market. That had been a very important tool in building your bridge portfolio. We know it's, you know, dislocated right now. We're starting to read just in the last four to six weeks about Freddie Mac and their Q-Series shelf. That seems to frankly, I hadn't heard about it until the last couple of months. You know, you hear about K-series, obviously, but Q, I don't know what Q is. But I think a deal got done in October. I'm just curious if for you, for Arbor and the business you do, is that program viable as an alternative to your normal CLO shelf?
Sure. Let me respond to that, Steve. Once again, thank you for your positive comments and the great relationship that we've enjoyed over the years.
Thank you.
You know, we're a Freddie Mac seller-servicer. We've evaluated the Q-Series, and it is a viable program. It is really geared towards affordability to enhance.
Mm-hmm.
Their affordability numbers. We think it's an important program because it offers the ability to access securitization through the government for those type of products. That's right in our wheelhouse. It's something that you don't be surprised if we're a participant in that program.
Great to hear. We're gonna be talking about affordable, I think, in a couple weeks at our conference, hopefully. I was glad. I figured if anybody was gonna be involved that with your relationship with Freddie, that you probably would. Paul, jumping over to you. When you were talking about your CLO, I think you were talking about reinvestment of CLOs. You mentioned a figure of 18%. Is that your estimated return on capital on reinvestment with fresh coupons going in?
Yeah. It's exactly that, Steve. What we're saying is because we have these low costs locked in CLOs at 163 over, and we all know where spreads have gone. You know, all the CLOs that are left have reinvestable periods. What we're doing is loans are running off. We're originating new loans at higher spreads and financing them through those vehicles with the replenishable capital. When we're doing that, we're getting greater than an 18% levered return on those new investments. That's exactly what's happening.
It's really meaningfully moving up the levered returns on our model, and I'm sure Ivan can comment, but very unique to our situation and the way we've structured our deals and the way we had the foresight prior to the market dislocation to go out and do two securitizations this year and really lock in those low costs.
Fantastic. The replenishment terms on the two that you just did this year, how many months or years do you have left on those two to reinvest?
Yeah. Let me give you some color. We have, you know, almost $10 billion of assets sitting in our CLOs with $8 billion of debt, roughly about 82% leverage. One of the vehicles comes out of replenishment period this month. If we exclude that vehicle, we have, we'll call it $7.5 billion of CLO debt, you know, and about $9.5 billion of CLO assets that are sitting in one, two, three, four, five, six, seven vehicles that still have replenishment. Of those seven vehicles, I would say about $2 billion of that debt comes out of replenishment in the middle to end of 2023. It's all staged. Another $5.5 billion of that debt doesn't come out of replenishment until middle to late of 2024.
We have lots of time and room on a lot of these vehicles, which is really helping our returns.
That's fantastic. Okay, thanks. One final quick question and turn over to the rest of the analysts. Ivan, I read that you did a deal in Brooklyn on 22 Chapel Street, leading up a recap. Commercial Observer had a feature on it. I was curious that because that property, I think, is in an Opportunity Zone. Can you just comment on the attractiveness of that type of property for a developer and also the opportunity for the lender, in terms of, I guess, in tax benefits to the developer and how defensible? When you look at that property, is it more likely to perform better in an economic slowdown in a recession than maybe some high-end properties that may not be absorbed as quickly?
I'm just curious about your thoughts about that property as both an investment and as a loan. Thank you.
Okay. I must say I'm not familiar with the details of that transaction, which is unusual. It must have been done in the normal course of business. You know, in general, you know, anything that's affordable, you know, there's just huge demand for that product. Anything in the New York area that's affordable, we don't, you know, we don't project any real rent increases because it's all regulated. You have very low occupancy changes. It's more like a utility. I am not familiar with that particular one.
Okay. Thank you both for your comments.
Thanks, Steve.
We'll take our next question from Steven Laws with Raymond James.
Hi. Good morning, Ivan and Paul. A very nice quarter and another dividend increase. Congratulations on that.
Thanks, Steve.
Yeah, wanted to quickly touch base. Paul, maybe a quick number, but repayment income. Can you talk about what you're seeing in repayments? I know you guys, like everyone, have been expecting to slow, but they've remained stubbornly high. Can you talk about, you know, early repayment income contributions for the quarter?
Yeah. In my prepared remarks, I had mentioned that we did see a fair amount of runoff in our Fannie Mae book this quarter again, that we've seen, as you know, Steve, over the last several quarters. That runoff was about $1 billion of transactions, and we had earned about $11 million in prepayment penalties. I think on the last quarter, I guided you that that should come down significantly. It was a little surprising to me that we had that much in prepayment penalties, and I've done some work on it, and it really has to do with the fact that the market is lagging, right? There's a little bit of a lag on, one, rates and two, on sales volume, and we did see a little bit more sales volume in the second quarter than maybe we expected.
The market has changed since then. We are expecting that to start to really slow down given where rates are. Maybe more importantly, it's very binary, right? Our Fannie Mae book has probably an average interest rate or coupon rate of about 4%. That doesn't mean we don't have 5% and 6% mortgages. We do. We have 3% and, you know, 3.5% mortgages that weigh to about 4%. Where rates are today, the five-, seven-, and 10-year above that, even though there's a lag, if loans were to repay today, and I guess, you know, in my mind, loan repayments will slow naturally given the environment, there really isn't much yield maintenance, if any, because it just goes away, right? Because the rates are exceeding the coupon rate.
It's a binary process. It hasn't happened yet because things are on a lag, but we do expect it to start. Having said that, we did have $200 million, $200+ million of runoff in our book in October, and we got about $3 million of prepayment fees already in October. I'm modeling maybe another $1 million for November and December, so maybe we'll get to $4 million-$5 million. I do think that after that it gets to a very small number. Maybe it's $1 million a month, maybe it's $0.5 million a month. I don't know, but it's not $11 million. On the flip side of that, what's happening when runoff slows and rates rise, our servicing portfolio is staying intact.
Of course, we love that because those servicing fees are long dated and it's an annuity, so we'd rather have the servicing. The other side, as we mentioned in our prepared remarks, is our escrow balances will stay elevated. Where rates are going, our escrow earnings are substantial. I mean, look at the numbers. That's a great hedge against rising rates, and I think that's how this plays out over the next few quarters.
That's helpful. Thanks very much for that, Paul. You know, Ivan, as you know, investors continue to do a lot of work on loans and portfolios and frankly, you know, looking into sponsor quality. Can you talk about the typical sponsors of your bridge loans? You know, how large they are, how well collateralized? Do you have any concentration among sponsor exposure with multiple loans to the same people? You know, maybe some metrics or general commentary around, you know, your typical borrower.
You know, we tend to have borrowers who do a significant number of transactions with us. We generally, you know, traffic in the $25 million to, say, $150 million loan range. It's not unusual to have a number of transactions with a specific sponsor, and there's a lot of tenure with us. We're not the lender who would typically do a one-off loan to garner a piece of business. We generally like to do loans with somebody who we think we're gonna have a long-term relationship. That speaks to the kind of operator we have. You know, we went through a period of time, and you could see it in the market, where a lot of sponsors, especially the big ones, are very syndicated.
We have a mixture of all types of borrowers, but typically, you know, we have the borrowers who, you know, a lot of family and friends' money. They do have some institutional money, but it varies. In reviewing our portfolio, in fact, I met with one of our top sponsors, where we have close to $1 billion of bridge loans with that sponsor this week. You know, I will tell you that, you know, they're well capitalized. They have good access to capital. They're on top of the details of their specific loans, and they have a good grasp on them. You know, they, I believe, at least the people we have, are generally really good operators who can execute very well. Execution is really critical.
More significantly, we have a good enough relationship with them is if they run into an issue, we like to be able to sit down with them and figure out how to manage that issue with them. So far to date, you know, in looking at our portfolio, you know, we're always ahead of schedule in terms of evaluating our assets and our sponsors. Our portfolio, knock on wood, is in great shape. It doesn't mean that we're immune to the complexities that exist in a rising interest rate environment and decreased real estate values, but it's how you manage your sponsors and how you have relationships. More importantly, the kind of structures you have in your loans. I spoke about it repeatedly over the last number of years, that we have a lot of structure in our loans.
It's not just the real estate. It's the provisions to keep our loans in order in terms of interest rate replenishments, rebalance requirements, and things of that nature. We don't just look at a real estate. We look at a sponsor. We look at the financial capability of the sponsor and the commitment of the sponsor. We put that all together in one potion, and that's how, with great asset management, we're able to keep our book in very good shape.
Appreciate the comment, Ivan and Paul. You guys have a great day.
Thanks, Steve.
We'll take our next question from Richard Shane with J.P. Morgan.
Thanks, guys, for taking my question this morning. I apologize if this has been covered. We're bouncing around a little bit with the calls this morning. One of the things that we're starting to realize as we move through earnings season is that sponsor behavior is increasingly influenced by what I would describe as exogenous factors, how they're financed on the debt side, timing the maturities, type of financing. Within your portfolio, are you seeing that, and how do you manage that risk so that you don't sort of get defaults or credit issues related to structure versus the underlying fundamentals of the properties?
Okay. Let's first start by recognizing that we're multifamily-oriented with over 90% of our assets, maybe even higher on the multifamily side. Let's also realize that we're a senior lender primarily, and we're not doing, you know, preferred equity, mezzanine, and things of that nature. Those are big qualifiers, and we're also a cash flow lender, right? Those are the basic premises. The second is, as I've mentioned earlier, many lenders in this environment were very lax on their documentation, and very lax on their requirements in terms of, you know, sponsor recourse and responsibilities. We have been in this business longer than anybody at this point. We've been through multiple cycles. Our documentation relative to our loans and the liability of the sponsors is very straightforward, unlike other lenders.
On top of that, we have default rates in our loans typically at 24%, where other people have very mild default rates. I would say it's our experience in terms of how we document our loans, how we asset manage our loans that puts us in a primary position. We also have the experience and the capability to take back and manage any asset. We're not afraid to do that. We also have a deep pocket of sponsors who love to take on opportunities if there is a transition from an asset. We have the depth, we have the distribution, we have the experience, and we have the capital to manage these particular circumstances and the right asset class. That's what puts us in a great position.
It doesn't mean we won't have our issues with our sponsors, and we always do. It's just a matter of how you're able to manage them and where you have the leverage. Typically, when sponsors have no recourse and no liability, right, then they have the leverage. When we structure our loans, typically we have the leverage. More significantly, we're not looking to take their assets from them. If they run into an issue, remember, they have other assets. We're looking to work out a solution that's in the long term. Our view and our history is in multifamily. Every high is followed by another high, right? If you look at the charts, if you look at multifamily, if you look at rents, we're in a downturn with rising interest rates. We wanna help our borrowers position themselves to succeed in the long run.
There's one further factor which is very important to note. If you're a multifamily borrower, if you default, right, then you close down your borrowing abilities with the agencies. If you can't borrow from Fannie / Freddie, then you're basically out of business. If the borrower wants to step out of the industry by defaulting, that's a very tough choice. You know, they have to make decisions if they're gonna have difficulty, either bring more capital or either come to us for different capital solutions. That's it in a holistic sense, and that's how we manage our book. Also, first and foremost, asset management skills and capability. People are now scrambling to bring that to bear. We've been in this business. We've beefed up our asset management well ahead of our growth in our portfolio.
We're well positioned to manage our assets, not only look forward to where they're gonna be issues, work with our borrowers, sit down with them, and come up with solutions with them. That's a very important skill set to have. That's kinda how we view the market and why we're well positioned in the market to manage through this dislocation. We only think, you know, we're not at the bottom yet. You know, we're getting there. You know, we think first quarter, second quarter. We've already dealt with a lot of borrowers understanding where they may run into issues. We're ahead of the game. We're not playing catch up. We're on top of our assets. We're managing through solutions, and we're being proactive, and that's the way we manage our business.
Look, it's a very helpful response, and I appreciate the context. You know, I think one of the things that we're starting to think about and hear more about is both the recalibration of cap rates coincident with some deflation in terms of, or more pressure in terms of rents, and sponsors starting to run into issues where their pro forma rent increases are less likely to come through. That's the other thing we're just trying to understand as we go through all this. It sounds like you're approaching it exactly the same way.
Yeah. I think what's important to note on that, which is very relative, you've definitely had cap rates increase, you know, from, you know, let's say four to five as a general number. During that period of time, going back 15 months ago and 18 months ago, you've also have rents increased by 15%-18%. To a large extent, you've had the rent increases, you know, kinda catch up a little bit and offset the change in cap rates. You're right, we do not expect under any circumstances to be that kind of rent growth going forward at all. We've been that way for quite some time. We've been, you know, our outlook starting about nine to 12 months ago was exactly that.
As rates went up, we started to look at exit cap rates, and we started to really take a look at that. If we are going into a recession, you're not gonna see that kind of rent growth. We're not expecting rent growth, right? If you're flat to up a little bit, that's fine. We are expecting in a recession, different than everybody else, we're gonna expect some economic vacancy because people can't pay their bills and pay them on time. You also have a record number of units being delivered on the multifamily side, so you're gonna see some concessions on the new product coming on board. All those are the headwinds that we're facing. You can't ignore them, and you gotta manage through them. We're prepared for that, and that's our outlook.
Appreciate the answer. Thanks, Ivan.
Okay.
We'll take our next question from Jade Rahmani with KBW.
Thank you very much. Just wanted to confirm, are you expecting a flattish trend in transaction volumes for Arbor, both on the GSE side and the bridge lending side?
I think on the GSE side, all has to do with, you know, two factors, where the 10-year is and where cap rates go to. If cap rates adjust appropriately and people could buy opportunities, and the 10-year in a reasonable level on the yield curve, I think you'll see, you know, some decent purchase activity. We'll see that. I would say going forward next year, I think we'll be in the range of what we did this year, maybe a little down. In terms of bridge activity, I think that's gonna be dictated by where we see the bottom, when we wanna get aggressive. I think that it may be the first quarter, it may be the second quarter.
When we are close to the bottom, we will get extremely aggressive at that point in time. It's either gonna be in the first quarter or the second quarter. We're not sure when. We'll resume a fairly active level. It also depends on where SOFR is because, you know, depending on where SOFR is and where people have to borrow will dictate where the bridge is. We do think there's gonna be an extraordinary amount of opportunity to provide recapitalization capital of very attractive returns, and we're working on that very effectively. We think we can recap borrowers and get, you know, adjusted returns of between 15% to 20%, which would be a good use of our capital, and also could position people back into the agency business if that works well.
I think a little patience right now. We've been really patient the last six months. We're continue to be patient through the first quarter and wait till where we feel the market has really adjusted. We think the market will over-correct. We think a lot of the data that we're seeing is lagging, and there'll be a point in time where we can get real aggressive. It's not right now.
Hey, Jade, it's Paul. To Ivan's comments, which are, you know, on the longer term side, which is great. Just to help you with your model a little bit, as we had mentioned in our prepared remarks, we did $250 million in October in the agency business. We did $1.1 billion the third quarter. We still think we can come in similarly. Maybe it's $950 million, maybe it's $1 billion. I don't know where it comes in, but we're not thinking it's gonna be materially different, just on the short term. In the balance sheet business, I think we did October was a little bit lighter. I think we did $50 million of bridge, and we did another $50 million or $60 million in fundings on our SFR business.
We had about $180 million runoff in October, of which we recaptured into agency 50% of that runoff, which was great. That's our model. I think we're projecting, and we talked about in our commentary, that we're looking right now, at least in the short term, to match our runoff with new originations. We are expecting that to be flat in the portfolio for the fourth quarter, whether that's $400 million, $500 million, $600 million in new volume, we're not sure yet. We think the runoff's gonna be equal to the originations, at least in the short term.
Thank you. I was wondering also if you're seeing any opportunities in M&A in the commercial mortgage REIT space? Thanks.
I think there will be. I think there's gonna be a liquidity squeeze. I think people got really aggressive on their originations, even late in the cycle. When we were backing off nine months ago, people were thinking that was an opportunity to gain market share, and I think that was a real mistake. I think a lot of people have never managed CLOs before, don't have asset management skills, and I think there could be some real opportunities. We're in a period now of capitulation on cap rate changes and values and rent growth. It's interesting that we spoke about it on this call. We've been speaking about it for nine months. Everybody's been looking at us like we're nuts. I definitely think we've had a different view than everybody else.
There's a bit of a cap catch up, so I think that will occur. I think there's gonna be plenty of trouble with the people who have been extraordinarily aggressive the last nine months.
Thank you.
Thanks, Jade.
Again, if you would like to ask a question, please press star one. That is star one, if you would like to ask a question. We'll take our next question from Crispin Love with Piper Sandler.
Thanks. Good morning, everyone. I think you telegraphed last quarter you pulled back meaningfully in bridge multifamily originations this quarter. Was that primarily just your conscious decision there, or was there a drop-off in demand as well from borrowers, just given forward cap rates and debt costs currently for borrowers?
It was a conscious decision for a multitude of reasons. Number one, we had a significant pipeline earlier in the year that we actually didn't close because it required an adjustment to valuations based on the change in marketplace. That was, you know, an unusual thing that occurred. We had garnered a significant pipeline, and the change in interest rates did not reflect the change in values. That was immediate. That was a conscious underwriting decision. The borrowers didn't like it, but numbers don't lie. Facts are facts. We had a lot of fallout in our existing pipeline. We were very aggressive in changing our underwriting grids and our pricing to reflect the market.
We stepped out of the market based on where we saw the market and where our competitors saw the market. Those were two factors. The third was an eye towards liquidity. We were very conscious of maintaining our liquidity and managing our liquidity and not putting out more money, not knowing where the market was going. That really led our direction. In addition, you have to look at the way our company is structured. At this point in time with these low liability structures that are in place, when we have runoff and we can replace it with existing inventory, it's better leverage on our capital. We don't have the necessity to go out right now, especially when cost of capital is higher.
If you take all those factors, it was a, you know, strategic direction of the company to be exactly where we are today.
Great. Thanks, Ivan. That makes sense. Just one on credit quality. Credit quality looks to be really stable in the quarter. Effectively no change in non-performing loans or the allowance. Can you just speak a little bit to the credit outlook from your point of view? If you're starting to see any issues, whether it be in bridge multifamily space or elsewhere away from your portfolio, just especially considering your comments earlier, Ivan, that you believe that we're in the middle of a recession right now.
Yeah. I think there's gonna be stress in the system, and I think people are gonna have access to capital to pay for higher debt costs and potentially to put new caps in place when the old caps expire. I think there's a lot of benefit right now for existing caps in place. I had mentioned I met with a borrower who we have close to $1 billion of loans. He has strike prices on his caps between 50 and 150 basis points. So he's well protected, right? So there's a lot of that protection out there. When that protection wears off, either people are gonna have to, you know, put lower caps in place, attract capital to buy lower caps, or somehow convert to fixed rates which are lower carrying costs and bring more equity to the table.
That's gonna be the point in time when borrowers have to reposition and access other equity. The equity checks could be between, you know, 5%-20% of the capital structure and be put in a priority position. That's gonna be the point in time, and it's gonna happen. It could happen a year from now. All will depend on where the yield curve is at that point in time or where we are in the cycle. There's a little time for that. It'll leak in gradually. You know, I think that's where the stress will be. We put a very aggressive campaign in place when the Treasury started going over 2% to convert a lot of our floating rate book into some agency loans and fixed rate business.
We were fairly effective with that, and the borrowers are very thankful for that. I think we will look at, you know, where Treasuries go, if there's a dip in Treasuries, how to convert some of our portfolio, and manage it day by day based on where the yield curve comes and the access to liquidity that our borrowers have.
Thanks. I appreciate you taking my questions and congrats on a great quarter here.
Thanks. Thanks.
It appears that we have no further questions at this time. I will now turn the program back over to Ivan Kaufman for any additional or closing remarks.
Well, let me conclude by thanking everybody for their participation. Once again, it was a remarkable quarter. You know, we do expect stress in the system, but the company has multiple different revenue streams that act differently in different environments. We're very pleased to have delivered the kind of results we have. Everybody have a great weekend and have a great day. Take care. Take care everyone. Take care.
That concludes today's teleconference. Thank you for your participation. You may now disconnect.