Good morning, ladies and gentlemen, and welcome to the 1st quarter 2023 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 1 on your telephone. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star 0. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Okay, thank you, Brittany. Good morning, everyone, welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter ended March 31st, 2023. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you 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, thanks to everyone for joining us on today's call. After coming off our best year as a public company in 2022, we've had a tremendous start to 2023 with another exemplary 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 countercyclical and income streams, allowing us to consistently produce earnings that are well in excess of our dividend. This has allowed us to increase our dividend another 5% or $0.02 a share to $0.42, reflecting our 11th increase in the last 13 quarters or 40% growth over that time period, all while maintaining the lowest payout ratio in the industry, which was 68% for the first quarter.
Our performance continues to be head and shoulders above everyone else in our peer group, none of which have been able to increase their dividend at all in the last few years. In fact, several of our peers continue to cut their dividend in this market, while others are paying dividends of over 100% of their earnings. Additionally, and very significantly, we've grown our book value per share by 45% over the last three years from just under $9 a share to almost $13 a share, even with 11 dividend increases during that period. While many of our peer groups have not grown their book value at all despite cutting their dividends or best only keeping their dividends flat.
We still trade at similar dividend yields and price to book values as the rest of the space despite our unquestionable outperformance, which is why we strongly believe we're completely undervalued and there has never been a better time to make a significant investment in our company. As we discussed on our last earnings call, we have been laser focused over the last 18 months in preparing for what we felt would be a very challenging recessionary environment. Currently, we have all seen the negative press around the financial markets, banking industry, and real estate sector, which has created additional uncertainty and volatility in the market.
We are operating our business with expectation that this environment will persist for some time, and a result, we are very pleased on how well positioned we are as a firm to take advantage of what we believe will be accretive opportunities to grow on a premium yield on our capital. We have taken a patient and selective approach to new investments and have been heavily focused on preserving and building up a strong liquidity position. This has allowed us to accumulate approximately $900 million of cash and liquidity on hand, which again provides us with the unique ability to remain offensive. I have always said there are tremendous opportunities in down markets to make a significant return on your capital if properly positioned.
One of the best opportunities we have seen in recent months is the ability to repurchase our stock at significant discounts to book value and generate high double-digit returns on our capital. We repurchased approximately $37 million of stock at an average price of $10.53, which is a 17% discount to our book value and generates a current dividend yield of 16% and a yield of approximately 20% on our distributable earnings. This is a tremendous return on our capital and again is something we are able to take advantage of because how well positioned our firm is to be opportunistic in a volatile environment. We have also a best in class dedicated asset management team with tremendous expertise in loan workouts and debt restructuring, which is something that is a key part of our business model, extremely valuable and unique into our platform.
A lot of misinformation has been published lately about a group of loans totaling $229 million that we had in Houston, Texas. In order to exercise our remedies, we proceeded to foreclose on these assets, had one of the existing investors who was deeply committed to the project recapitalize and restructure the debt with the appropriate guarantees, putting our loans in a much more favorably protected position. We recorded no loss on the original debt. We recovered all the outstanding interest owed to us as part of the restructuring. This was an extraordinarily successful debt restructuring, which clearly demonstrates the incredible depth and experience of our asset management team. Unlike others in this space, we've been conducting ourselves as though we've been in a recession for the last four quarters.
Although we believe the bottom is near, we are well aware of the challenges that lie ahead. We feel we are doing an outstanding job in managing through this dislocation between our multifamily-centric portfolio, the quality and structure of our loans, our asset management skill set and tenured senior management team, and a track record of managing through multiple cycles, and the strength of our balance sheet and the versatility of our franchise. Before I talk about the first quarter results and the highlights, I want to take a few minutes to address the significant amount of false and misleading information that has been recently published about our company through a short seller report. The report is replete with factual misstatements, other patently false information, and innuendos that is cloaked in the form of opinion and a transparent attempt to mislead the investing public.
It is clear to us, and should be clear, equally clear to everyone who has been diligent in following the progress of our company for more than a decade, that the report was written by somebody who apparently neither understands our business, nor has a sense of appropriate accounting treatment for certain transactions, and who is motivated solely to profit on their short position through the dissemination of false and misleading information. While we'll not go through a back and forth on every false and misleading allegation by the so-called research company, it should be obvious to everyone at this point that the report is an attempt to capitalize on fear instead of rational thought. What is so ironic is that they took one of the most successfully restructured transaction in our history that was highly lucrative to our shareholders and to try to turn it into a negative.
Most importantly, we have reaffirmed with our auditors that all our accounting for the periods in question is correct, as evidenced by the filing of this morning of our first quarter 10-Q with no material changes. I urge our shareholders and the investment public to pay no attention to this noise. It's clearly coming from a biased source lacking in credibility. Instead of focusing on fundamentals of our business, our tremendous operating results, and the fact we are a leader in our space and continue to massively outperform our peers. Turning now to our first quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.62 per share, which is well in excess of our current dividend, representing a payout ratio of around 68%.
Clearly, with our extremely low payout ratio and multiple predictable recurring income streams, we are uniquely positioned as one of the only companies in our space with a very sustainable protected dividend, even in this challenging environment. In our balance sheet lending business, we continue to be very selective, focusing mainly on converting our bridge loans into agency product, allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams. In the first quarter, we had a tremendous success in this area with another $1 billion of balance sheet runoff, over $400 million of which was recaptured into new agency loan originations.
As a result, we're able to recoup $200 million of our invested capital and continue to build up our cash position to take advantage of the many opportunities we believe will exist in this downturn to generate outsized returns on our capital. This strategy is a critical part of our business model and is unique to our platform. We are both a top balance sheet lender and operate a very large agency business. In our GSE agency business, we had a strong first quarter originating $1.1 billion of loans capped off by a very strong March with over $530 million in originations.
With the current yield curve and a very little activity in the market for balance sheet lending, we are seeing a significant increase in our Agency pipeline, giving us confidence in our ability to continue to produce very strong Agency volumes going forward. Additionally, we have a strategic advantage in that we focus on workforce housing, part of the market, and have a large multifamily balance sheet loan book that naturally feeds our Agency business. In fact, we are one of the leading Agency lenders in the achievement of affordable housing goals, and a result, we continue to be viewed very favorably by the Agencies. Again, this Agency business offers a premium value as it requires limited capital, generates significant long-dated predictable income streams, and produces significant annual cash flow.
To this point, our $29 billion fee-based servicing portfolio, which grew 3% in the first quarter, generates approximately $117 million a year in recurring cash flow. We also see a significant increase in earnings on our escrows and cash balances as rates have risen considerably, which in fact is a natural hedge against interest rates. In fact, we are now earning approximately 4% on around $2.8 billion of balances, or roughly $100 million annually, which combined with our servicing income annuity, totals over $217 million of annual cash flow or over $1 a share.
This is in addition to the strong gain on sale margins we generate from our originations platform, and again, is something that is completely unique to our platform, providing a significant strategic advantage over our peers. We continue to grow our single-family rental business as we are one of the only remaining lenders in this space, allowing us to produce as much business as we want. We remain committed to the business that it offers three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term while producing significant long-term benefits by further diversifying our income streams and allowing us to continue to build our franchise. In summary, we are off to a fantastic start in 2023 with an exceptional first quarter that once again demonstrates our ability to generate strong earnings and dividends in all cycles.
We understand very well the challenges that lie ahead in this volatile market and feel that we are very well-positioned and the best-positioned company in our space to succeed in this cycle. Our earnings significantly exceed our dividend rate. We invested in the right asset class with very stable liability structures, highlighted by a significant amount of non-recourse, non-mark-to-market CLO debt with pricing that is well below the current market. We're also well capitalized with significant liquidity, which has put us in a unique position to take advantage of the many accretive opportunities that will exist in this environment. Again, with our best-in-class asset management capabilities and a seasoned executive team, we are very confident that when the smoke clears, we will continue to be the top-performing company in our space, significantly outperforming our peers.
I will now turn the call to Paul to take you through the financial results.
Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $122 million or $0.62 per share. These results translated into industry-high ROEs once again of approximately 20% for the first quarter, allowing us to increase our dividend to an annual run rate of $1.68 a share, reflecting a dividend to earnings payout ratio of around 68% on those first quarter earnings. Our first quarter results significantly beat our internal projections, largely due to approximately $16 million of income received from equity investments in the first quarter, which included a large equity kicker we had related to a loan payoff and a distribution from our Lexford investment.
We also experienced higher gain on sale income from increased sold loan volume, mainly due to a stronger origination volumes in the latter half of the quarter than we anticipated. We continue to see increased earnings on our floating rate loan book and our cash and escrow balances in the first quarter from higher interest rates. We also recorded an additional $20 million in CECL reserves on our balance sheet loan book during the quarter as a result of using more conservative assumptions in our model due to a decline in the macroeconomic outlook for commercial real estate. These reserves are general in nature and do not affect distributable earnings, as we have not experienced any realized losses this quarter. Our balance sheet loan book continues to perform well in this market, with no increases in defaults or delinquencies in the first quarter.
As Ivan mentioned earlier, we believe we are well positioned given our multifamily focus, strong liquidity position, and our best-in-class dedicated asset management team with tremendous experience giving us confidence in our ability to successfully manage through this cycle. In our GSE agency business, we had a strong first quarter with $1.1 billion in originations and $800 million in loan sales. The loan sale numbers were less than our fourth quarter sales, as we mentioned last quarter, due to a large portfolio deal that closed in December that also settled in the same month in order to help the agencies meet their affordable lending caps.
The margin on our first quarter sales was up substantially to 1.72% compared to 1.33% in the fourth quarter, again, mainly due to a large deal that closed in December of last year with a reduced margin and from a higher percentage of FHA loan sales in the first quarter that contained much higher margins. We also recorded $18.5 million of mortgage servicing rights income related to $1.5 billion of committed loans in the first quarter, representing an average MSR rate of around 1.23% compared to 1.12% last quarter, mainly due to reduced servicing fees on the large portfolio deal we closed in December.
Our fee-based servicing portfolio grew another 3% in the first quarter to approximately $29 billion at March 31st, with a weighted average servicing fee of 40 basis points and an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $117 million gross annually. We did see substantially less accelerated runoff in our agency loan book again in the first quarter due to market conditions, which has resulted in reduced prepayment fees. In the first quarter, we received $2 million in prepayment fees as compared to $6 million last quarter. Again, given the current rate environment, we're estimating that prepayment fees will continue to run around $2 million a quarter going forward.
In our balance sheet lending operation, our $13.6 billion investment portfolio had an all-in yield of 8.83% at March 31st compared to 8.42% at December 31st, mainly due to increases in LIBOR and SOFR rates during the first quarter. The average balances in our core investments was $14.1 billion this quarter as compared to $14.8 billion last quarter due to runoff exceeding originations in the first quarter. The average yield on these assets increased to 8.94% from 7.91% last quarter, excluding $8 million in back interest collected on the repayment of a non-performing loan in the fourth quarter, mainly due to increases in SOFR and LIBOR rates and from more acceleration of fees in the first quarter.
Total debt on our core assets was approximately $12.6 billion at March 31st, with an all-in debt cost of approximately 6.97%, which was up from a debt cost of around 6.50% on December 31st, mainly due to increases in the benchmark index rates.
The average balance in our debt facilities was approximately $13 billion for the first quarter compared to $13.7 billion last quarter. The average cost of funds in our debt facilities was 6.69% for the first quarter compared to 5.80% for the fourth quarter, again, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets increased to 2.25% this quarter compared to 2.11% last quarter, excluding $8 million of defaulted interest we collected in the fourth quarter. Our overall spot net interest spreads were 1.86% at March 31st and 1.92% at December 31st.
Lastly, we believe it's important to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated recurring earnings in the future. As Ivan mentioned earlier, we have several diverse and countercyclical income streams that allow us to produce strong earnings in all cycles, the most significant of which is the value of our agency platform, which is capital light and generates very high ROEs through strong gain on sale margins, long-dated service and annuity income, and increased escrow balances that are on significantly more income in today's higher interest rate environment. Additionally, we're multifamily centric and have a substantial amount of non-mark-to-market, non-recourse CLO debt outstanding with pricing that is well below the current market.
We're also well capitalized with significant liquidity and have a best-in-class asset management and senior management team that have tremendous experience and expertise in operating through multiple cycles. We believe these features are unique to our platform, giving us confidence in our ability to continue to outperform our peers and deliver high quality and sustainable earnings and dividends 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. Brittany?
Thank you. As a reminder, to ask a question, please press the star and 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 the best sound quality. We'll take our first question from Steven DeLaney with JMP Securities. Your line is now open.
Thanks. Well, good morning. Congratulations on another strong quarter to start the year. Big news, Ivan, in the banking world, of course. I'm curious, given Signature Bank's presence in New York, if they were a material competitor to Arbor in any way, and how does the demise of that bank impact your opportunity set in New York going forward? Thank you.
Sure. That's a good question, and I think one of the things people are not focusing on. Many, many of these regional banks were strong competitors of ours. You know, they really took over a large part of the market. In particular, when rates rose, they were well below the market. Their model is an interesting model because they don't necessarily have their own originations. They get fed by brokers.
Hmm.
They build their portfolios based on being the lowest price. Very often, as we're seeing now, not just the lowest price, but having assets that are really non-saleable. Getting rid of a lot of these regional banks who lend improperly, right, by being below the market with relying on short-term deposits is something that we believe is very healthy for companies like ours, who maintain a huge amount of discipline. As we stated on our call and consistently do, we have a very matched asset and liability structure. Anybody can generate loans, right, when they don't match their assets and liabilities correctly.
Sure.
They underprice their loans. I think, like us, we have a tremendous origination set. We're very disciplined in the way we do our business. Eliminating these lenders, who don't even know how to originate, all they do is really take all the loans from brokers at the lowest price, I think will create a better landscape for us. It's going to be very clear, definitely in the interim, that being an agency lender with the ability to underwrite, sell, and securitize loans into the market with Fannie, Freddie, and FHA is just an invaluable tool, specifically in times of illiquidity like today.
Ivan, do you think that this is goes far beyond Signature and that there's a broader, mini banks, I guess, playing that game or playing that card and possibly the FDIC is gonna come down on them from a regulatory standpoint? Beyond just New York, are you expecting to see this, you know, broadly across the country with respect to the banks that do the broker-fed, lending model?
Yeah. I mean, it's huge. I mean, this is just the tip of the iceberg, but I believe the FDIC will keep these people afloat. I mean, what was amazing on the First Republic, when you saw that the government gave them $90 billion from their treasury to keep them alive. you know, anybody who has fixed rate loans, who originated fixed rate loans, you know, in the 3 s, and, you know, they're sitting with fixed rate loans in the 3 s. They're paying on deposits in the 4 s. They can't raise equity. To sell their assets is probably a 30% haircut. I would say that the Fed's gonna have to decide who stays and who doesn't stay.
There are other institutions that are much healthier because they have more floating rate loan books, they've been able to manage their book. They're under pressure with losing deposits, right? They're losing deposits, and yet they still have to fund up a lot of their assets that they put on their books. They're being grouped in a little bit unfairly. I believe to the extent, like PacWest, who has billions and billions and billions, that's just one of many. Of five-year loans in the 3 s. Anybody can do the math. A five-year loan in a 3 s, you know, when rates are 5.5 with a liquid piece of collateral, poorly underwritten, is worth $0.20, $0.30, $0.40. You know, that wipes out their regulatory capital.
You can't raise capital when you're in that situation, when you're losing deposits, you have a run. I think the Fed has done a reasonable job in, you know, at least providing lines. I would love to see the disclosed amount of the lines that were provided to all these regionals and all these local banks. That would tell you the significance of the run on deposits and how much the Fed is propping these people up. When your asset values are so significantly less and you're really insolvent, you know, on a mark-to-market basis because you went ahead and you originated fixed rate loans with short-term liability costs, and you have an inverted yield curve, you're in tough shape. I believe this will continue.
A lot will do with what the Fed does, and with rates elevated on the short term and the cost of deposits being so high, this problem is not going away. Of course what you'll see is for those people who are borrowing from the Fed, I don't know what rate they're borrowing, but you'll have negative earnings to some extent because your assets, you know, are earning less than, you know, your cost to fund them. This is a real issue, but more importantly, it's a real long-term issue. It doesn't seem fair in a sense that we just got through the great financial crisis such a short time ago, and we're actually doing the exact same thing just under a different, you know, a different mantra.
Some reason the system never learns, and we're back where we were, and if the Fed didn't step in, it would be worse than the great financial crisis. You have a total eradication of the banking system. I think we'll manage through this. I think there'll be others, and there'll be winners and losers and mergers. But unfortunately, I think the result will be, you know, the big four or five or six banks are just gonna get bigger. It's gonna really affect, to your first question, the competitive landscaping for lenders like us, who I think will have more flexibility, because we won't be competing unfairly against government-sponsored banks who get to operate in really an inappropriate way. We're optimistic that'll be great for companies like ourselves.
Thank you so much for that. It was a much more substantial response than I expected. Thank you. Thank you. I'm gonna pass on my other couple questions. I know there are other analysts on the line, but appreciate the conversation.
Thank you, and thanks for your support, Steve. You've been a great friend to the company.
You're welcome. Thanks, Steve.
We will take our next question from Stephen Laws with Raymond James.
Hey, Steve. Hi. Good morning. Surprising on the dividend increase and, you know, I guess along those lines, you know, I don't know how much credit you're getting for it, probably very little, but can you talk about how you think about allocating capital, you know, between buying more stock, or something else in your capital stack or new investments, you know, attractive opportunities you talked about? I enjoyed the response to Steve's question a second ago. You know, maybe how you think about the trade-off there with your use of cash?
First of all, we bought back $37 million out of $50 million. When you go into a blackout period like we are, it's programmatic, so we sort set, you know, different ranges. We don't have the ability to have discretion. I would love to have bought back more, but the stock never got into the last range that we wanted in order to buy that back. It's funny because my only regret, and I told Paul, you know, we were so quick to do that, and they didn't do a $100 million share buyback and only $50 million. Our intentions would be probably to go back to the board and increase that level, and if the market continues to improperly value us, then we certainly will continue to buy stock at these levels, especially when we're out of the blackout period.
We have significantly more capital. We will increase that once once the dust settles here, go back to the board to try and increase more. It's just a tremendous way to get a return on our investment. It's a tremendous way to increase our book value. We like it at these levels. We're, as I said, we're a little frustrated we couldn't get it all used. You know, you have to balance things. There's so many different aspects of our business. While, you know, we would love to buy back and use all our capital for that, we run a business, we run a franchise, and the idea is to build our business in these great opportunistic time and build long-term relationships and reoccurring revenue.
When we can get mid-to-high teens on our loan portfolio, and investing it, garner clients, and also produce multiple turns on our capital by getting elongated servicing, that's extraordinarily compelling. We balance all the different things. In addition, as you know, we really can't access capital. It's really to Paul's testament and the company's testament that we did our debt offering last year, even despite the negative environment. We're one of the only firms who not only access the debt markets and sometimes the equity markets and different instruments, but do it in a very efficient and appropriate way. We're sitting on a great deal of cash. We're seeing great opportunities. As I mentioned on the call, the single-family business, which we've been talking about for years, is an amazing business.
It's funny, we competed against a lot of regional banks, and the regional banks were crazily priced, but we still garnered a decent amount. Now we're extraordinarily well positioned for that business. It's a great business, and we are a leader in it. We're using our capital extraordinarily well. We'll continue to build that business. The bridge lending business we don't feel is a good time right now because, you know, on where SOFR is to be lending at 9%, roughly on a situation, doesn't make a lot of sense when people are buying five and 5.5 assets that have cap costs. We'll look at the yield curve, we'll look at the opportunities, we'll look at what cap rates are, and we'll look to see how we can build our franchise in the long term.
Yes, we would like to go to board and increase that buyback. We think if the market continues to be irrational and clearly, as we all can see, that we're totally improperly valued, and that's okay. That's just opportunity for all of us as long as we're patient. We are not short term. You've been following us. We are never short term in our thinking, and that's why we're so well positioned, because when everybody was doing loans at the top of the market, we were pulling back and pulling back heavily. When everybody was using short-term leverage, we were very heavily into our CLOs in the market. We think this dislocation will create extraordinary long-term value. We're good stewards of management of capital, and we think these are extraordinary times to build long-term value.
Great. Appreciate those comments. A quick follow-up, if I may. Paul, you mentioned your prepared remarks that gain on sale margins, I think, improved in the late part of the quarter. Can you talk about, you know, are those still looking, you know, having redone it from earlier this year through this, second quarter to date?
Yeah, I think it's a great question, Steve. Thanks. Yeah, we did see a nice pop in our gain on sale margin. Some of that, as I said in my prepared remarks, had to do with we had some large portfolio deals we did at the end of last quarter with, like, a one-point margin. It was dragging that margin down a little bit in the fourth quarter, and we had more FHA sales this quarter, which obviously that's a three, four-point business, as you know. We are seeing a trend of some strong margins here on our April product. I think we closed $425 million of agency product in April. Off to a really good second quarter start.
As we talked about, our pipeline is building as the agencies are kind of the only game in town right now with the yield curve where it is, and the balance sheet business not really attractive for everyone and a lot of players, not in the market today. We are seeing really solid margins. I always guide to, like, a 1.35%-1.50%-ish range. Yeah, I think we'll be in that range, maybe towards the middle to the top of that range, but margins are holding strong.
Fantastic. Appreciate the color. Thanks again, this one.
We will take our next question from Crispin Love with Piper Sandler. Your line is now open.
Thanks. Good morning, Ivan and Paul. My first one's on credit. I'm just curious if you'd be able to share some of the underlying credit stats for the CLOs structured loan book and the Fannie loss share, and just curious how they're faring and expectations over the near to intermediate term.
Yeah. Ivan, you want me to take some of that?
Yeah, go ahead.
Yeah, sure. As you saw, Crispin, we were, you know, certainly more conservative this quarter with our CECL reserves. As you know, those CECL reserves don't really translate always into realized losses. We've got some specific reserves against some balance sheet assets that we've had for a while, some legacy assets. We've not seen a significant amount of stress, a little bit of stress. We've had a little bit of a migration of some loans from past watch to special mention. Again, special mention is not a category that means to us that we're going to have a loss or there's going to be a default imminent. It's just changes in where, you know, maybe values have gone or where interest rates have gone. Overall, I think the balance sheet book is holding up well in this market.
We do expect the market to be challenging over the next few quarters. As Ivan said, we think the bottom's near, but it'll take time to rebound. It's been performing well. We've put some CECL reserves away, but we're not seeing really a lot of stress on the balance sheet side and on the CLO side as well. On the agency side, we do have, you know, as you know, a loss share component with Fannie Mae. We saw a little bit of a tick up in delinquencies this quarter, but not significant. Things move in and out all the time. We've put $2 million more in specific reserves on our books this quarter related to our agency book. For the most part, things are pretty, you know, pretty stable.
We haven't seen a tremendous move, negatively on the credit of either side of our portfolio, both the balance sheet or the agency. Ivan, would you say that's accurate?
I would say that's accurate. The one thing that we have seen, which is worth noting because I think it's transitory and will work itself out. We're still seeing, in some of the jurisdictions, you know, people having a tough time evicting their tenants really, really long. You would think with COVID, it's all behind us. It's not. You're seeing economic occupancy a lot lower, which is putting a lot of stress on our borrowers because they don't have the income to support their debt service, and they're coming out of pocket, which, you know, they should and they will. That's causing some of our 30 and 60-day delinquencies on the agency sides to pop up.
We think that, you know, we're 50%, 60% through and we're in the back end of that as the court systems are loosening up. There are some jurisdictions, who are just not moving quickly, and it's not fair to the landlords. To allow tenants to stay in their property for years and not pay rent and not be able to evict them. That has caused a little bit of a tick-up in delinquencies. Borrowers are holding on. They're committed to their assets. They're struggling, but they're getting there. I think the worst is over on that. I think that, we will turn the corner on those kind of things. People don't really talk about that, but we see it front and center.
We see it in certain specific geographic locations, and we see it if a borrower has five or six or eight or 10 properties across his portfolio, he's dealing with that. That'll work itself out over time because the value is still in the real estate. The operator is a good real estate. They've dipped into their pocket a good deal, and they're looking to solve those problems. They're solvable over time. We're working with a lot of these borrowers to get through some of those issues.
Great. I appreciate all the detail there. Just looking at the income statement for the quarter, I know that the income from equity affiliates was elevated in the quarter at $14 million. I think, Paul, you alluded to some of this in your prepared remarks, but can you just expand on that a little bit deeper and what were some of the key drivers that drove that increase in the quarter?
Sure. As Crispin, as I mentioned in my prepared remarks, we had two components that drove that line item to be higher than it has been in the past. One of them was we got a distribution from our Lexford investment, and that happens. You know, we'll get that sometimes quarterly, sometimes biannually. It depends on the performance of that investment, and that's our share of that. That was about just under $5 million. The other $11 million was an equity kicker that we had on a preferred equity loan that we had built into the document many, many years ago. I don't know that we have any of those left, but that's a legacy type structure we had when we were doing preferred equity years ago.
We had an equity kicker in there that if certain things happened or transpired and there was a certain amount of proceeds from a sale, we would get a piece of that. To our surprise, the borrower did a great job of selling his asset for a significant dollar amount, significantly more than maybe we had expected, and that equity kicker became viable. We ended up with 22% of the excess proceeds from the sale after certain waterfalls happened and certain debt repayments. We got paid back our preferred equity, all our interest, and we ended up with an $11 million equity kicker. I can't tell you that we have many or any of those left.
You know, they're left over from the days when they were enhancing your yield on a, on a potentially enhancing your IRR on a preferred equity instrument. That's just an example of the things we've done over the years and the value we create, and that's something that, you know, came in real positive in the first quarter.
Yeah. Well, Paul, what's worth noting on that is it's really a form of interest because when we do a PE loan, we take less of a coupon upon return-
Right
in a trade-off for a little bit of a higher return down the road. What you're seeing with some of these equity characteristics is really just an accumulation of interest that we forego on a front, which we really believe that would be better down the road. You know, while it may be a little bulky, it really is representation of a level of interest that we forgone for that number of years. We do that from time to time, where we believe that the opportunities will be greater on a return basis to take a kicker than current interest. It's also more conservative.
You know, it's almost like a pay and accrue, but, you know, sometimes we just say, "Listen, we're just happy with taking an equity kicker down the road, and diversifying our income streams," which is the benefit that we did here. It does happen from time to time with the firm, and we've always had a history of doing these things.
Thanks, Ivan and Paul. I appreciate you both taking my questions.
We will take our next question from Rick Shane with JP Morgan.
Thanks, guys, for taking my questions. First of all, a topic we've been raising, throughout earnings season is related to repurchases. So, want to acknowledge the commitment to buying back shares, in the context of what's going on in the market. That said, we've had a number of questions, and I think it's a very fair point related to interest rate caps and extensions on loans. If you guys could just walk through a little bit, given the impact of higher rates on borrowers, the magnitude or the coverage your borrowers have in terms of interest rate caps, and if you could provide some information in terms of the tenor of those caps versus the tenor of the fully extended, structured portfolio.
Sure. First of all, everything's on a case-by-case basis. What's unique about all the relative called lenders, which we compete a bit consistently, is we have a lot of structure on our loans, it's just not making the real estate loan with no responsibility to the borrower. In many cases, you know, there's an obligation by the borrower to buy interest rate caps, to refund the interest and do things of that nature. It's been actually a great opportunity for us because, you know, six months ago, nine months ago with the inverted yield curve, the cost of caps and the negative carry.
We've had a lot of people say, "Okay, it doesn't really pay to pay 9% or 8% to buy a cap and have negative carry." They've elected to actually pay down their loans and convert themselves into agency loans, which, you know, in today's market, you can borrow between 4.75%-5.5%. That's been very effective for us. We do monitor very closely any caps that are expiring, and we work with the borrowers to either put new caps on or to figure out alternatives in order to make sure that they're in a good position. There's no one specific answer to that because it's case by case. Management works at it very intensively, and I actually am very involved in that as well. We deal with that.
Many of our borrowers have multiple loans with us. It's carefully crafted for each situation. So far, we've been extraordinarily effective, month by month, quarter by quarter in managing, all these upcoming issues and getting them repositioned appropriately. That's the general answer. It's hard to get specific in our book, and we don't disclose all the specifics. So far, we've done an outstanding job. We're batting 1,000% even in the most difficult market. I think my outlook is worth talking about a little bit because so far we've been spot on in terms of where the market is. We believe we're already halfway through this debacle.
We believe it's been already at least nine months to 11 months of real difficult times, rising short-term interest rates, extraordinarily high borrowing costs, which is fueled by an inverted yield curve. You know, when SOFR goes up from 25 basis points to 5.25%, that's extraordinary, right? We believe that the real work here is getting through the next nine months. We've gotten through the first nine months extraordinarily successfully. You have nine re months to go. It's our thought process that after that period of time, you know, short-term rates will come down.
With this inverted yield curve, every time we see a drop in the 10-year, we see a tremendous number of our borrowers say, "Okay, let's lock in." You know, every time the 10-year hits 3.30, you know, 3.10, 3.25, and it drops a little bit, people are just saying, "Okay, let's convert from a variable rate loan with negative carry, and let's put a little bit more equity into a capital call. Recap the transaction and convert it to a fixed rate." This yield curve has been really beneficial for us, even though it put a lot of stress on our asset management group. All in all, it's worked in our favor.
Ivan, that raises a really interesting point, which is that when I compare your results for the quarter versus our expectations, one of the things that stands out is that the repayments on the structured portfolio remain substantially higher than we would have anticipated. I think our expectation is that borrowers would have delayed the financing into the fixed rate markets because of the long-term and lockouts on those loans. Is this a purely borrower-driven activity where they're looking at saying, "Hey, let's just get this locked in. It might not be great economically. We're gonna lock in long-term financing costs, but let's move on." or are there incentives that you're able to structure in the deals in order to basically move from make and hold to moving them off the balance sheet?
It's a good question. The reason we're able to do it is we're extraordinarily proactive. We look ahead a year. We look at all loans that, you know, have expiring rate caps, have negative carry that are under stress. Our originators are working with our portfolio refinance group and re-underwriting all the loans, getting them in position, get them in front of the agencies. When the market drops, these people are ready to go. I just want to let you know, the agencies are very backed up. They're the only game in town, they're gonna be very busy. The key is to look at your portfolio, look down the road, and see at what levels they can be in a good position and get ready to lock them.
If you react today to say you wanna take advantage of something, but your loans are not in a position, your borrower is not in a position, you can't execute. This is all about execution. This is all about the skill set to know how to help the borrower put themselves into a better position. There's also a tremendous mentality right now with our borrowers, which we're working with them, is don't have any problems. You have problems, you can't participate in today's market. Remember, if you default on a loan, you know, you can't borrow from Fannie Mae and Freddie Mac so easily anymore. Once you default on a loan and you can't borrow from Fannie and Freddie, you might as well get out of the industry.
What we're doing is saying, "Listen, you know, you may need to put another 5% or 10% into the loan, you know, to go fixed rate. Let's get in that position. Live to fight another day. Stabilize your assets, this way you can go out in the market and take advantage of good opportunities. You'll still get a good return. Convince your investors to, or yourself to put a little bit more in." We do have some tools that other people don't. We're willing to put some preferred, some mezz with the right returns. We're one of the only approved agency lenders that are allowed to put mezzanine over our own book, and we've been doing that from time to time to help our borrowers get to where they need to go.
We have a lot of tools, but it's really the management and looking forward and repositioning these borrowers. Remember, when things happen like this, your borrowers are like a deer in headlights. They don't even know what's going on. They don't believe it. They don't believe in the changes. We do. We've been through the cycles. We understand the market, and we understand different levels of execution. We really work to get ahead of the curve and get everybody in a position. If one crazy day the banks are failing and the ten year drops from 360 to 320, and at 320 it works, we can lock in a lot of borrowers, and we've really helped them reposition their portfolio into a better circumstance.
Got it. I agree with you. It's hard to look at a building, look at the land, see the lights on, see the people going in and out, and view it as changing in value, based on numbers on a spreadsheet.
We are in an adjustment period. It's slow. You know, cap rates have gone up considerably to, you know, high 3 s, low 4 s, and now you're in the 4.75%-5.5% range. That's been a significant movement. You know, depending on interest rates will dictate whether there's movement. Obviously, even at these levels, as you've been reading, you know, there are very few sales right now. It's still hard to buy a five cap asset, you know, when you got to put on 5.5% financing, right? That's still negative leverage, and you can't borrow short term. Either cap rates are going to continue to move or interest rates are going to change. You know, clearly there's a little bit of a lock on sales right now.
Of course, you have the backdrop. As we all know, the banks have a lot of assets which the FDIC has to spit out and how that's going to affect, you know, what's going to be done with the invested capital in the market.
Got it. Thank you very much.
Thanks, Rick.
We'll take our next question from Jason Sabshon with KBW. Your line is open.
For taking my question. One for Jay. you know, given all the recent stress that banks have come on about repo and do you expect margin calls in some senses?
Listen, there's always an issue and concern of margin calls. You know, we manage that, you know, very good. We have great counterparties with a big history with them. Knock on wood, so far we've been, you know, in really good shape. We have a lot of our assets in CLOs. We constantly have capability in those CLOs, which are non-mark-to-market. We have a smaller fraction of our book in those lines. We have diversified lines with good partners. I forgot how many lines we have. We probably have 10 different lines from 10 different institutions. So it's something we always plan for, something we always keep a level of capital available for. Knock on wood, it's been fairly good and nothing material. We're in communication consistently.
We don't see any major concerns. You know, there's always something that is, you know, part of our liquidity and capital plan to handle those prospective margin calls.
One more. For that vintage of multifamily originations, late 2021 complete, you know, on competition was rates were at the lows. Are you guys thinking about, you know, potential ups from that particular vintage?
Yeah, I think you got a little cut off there, Paul. Could you hear the comment?
Yeah, I couldn't. Jason, your phone is cutting in and out. Can you try to ask the question again?
I was just saying, you know, for that late 2021, early 2022, when competition was high and rates were a lot lower, are you guys thinking about any, more from that vintage?
I think that it's loan specific, case specific, and sponsor specific. There are many situations where, you know, on the flip side, people bought assets, and they didn't execute their plan, and they didn't get the increase in the rents that they wanted to. On the other side, there are many sponsors who executed their plans very well and did an extraordinary job. We look at the entire portfolio very, very carefully. Then, you know, then you have a lot of people who bought long-dated caps with low rates and, you know, can hang in there a lot more. Each one is a case by case. We have a good sized portfolio. We manage it very carefully. And you know, we are front and center. We go quarter to quarter.
We have an outlook for everything in the next 12 months, we're managing extraordinarily well. You know, certainly, you know, the lowest cap rates were in that vintage. We did back off the market probably six months earlier than everybody else as we felt the market was getting irrational. Where the market was really getting irrational, which is where we don't really deviate, is on structure on your loans. People were lending without structure. If you're just looking at the real estate, where a lot of these institutions have problems, if the real estate has gone down and the borrowers have no level of recourse or responsibility, those are your greatest risks. That's not something that we really changed our standards on. We're known for having proper structure.
We're known for having loans that if the real estate itself has some issues, that we're not just dependent on the real estate. It puts us in a different set of circumstances than most of our peers.
Um,
We will take our next question from Lee Cooperman with Omega Family Office. Your line is now open.
Good morning. First, I'd like to just congratulate you. You know, I've been involved with the company for many, many years. I think you have a well-deserved shout-out for how you positioned the company through this whole period. I know that a year ago, you were very cautious, a little ahead of your time, but you turned out to be 100% right, and I congratulate you. I also want to add, you know, I've been doing this for about 60 years, and I've never seen a situation where a short report came out where I couldn't find a phone number of the firm, no internet address, and no name of the firm. This guy is an idiot, and the SEC should be looking into him. I don't know if it's a him or a her, but it's totally bogus.
I think they talked about a large mobile home portfolio of loans that bother them. If I'm correct, you don't have a $1 loan to mobile homes. This is bogus and crap like this should not allowed to take place. I'm glad to see you repurchasing stock. Given your track record, you're smarter than me. I'm just curious, what do you think we're worth? I look at our payout ratio. I look at our return equity. It seemed to me that if our stock yields at 8% or 9%, it would not be unreasonable. That would put it at 20. Buying back stock at these prices seems very reasonable, very intelligent. Do you have a view of value that's motivating your decision to buy back stock?
Well, listen. As I mentioned earlier, we would buy back a lot more, but we have to ration our capital and use it, you know, strategically. We bought back. As I said, we'll probably go back to the Board and increase that buyback. If the market becomes dislocated, as it currently is, we'll use part of our capital to do that, as well as continue to build our franchise. Lee, I just wanna say, we go back 30 years. You were an investor in one of my original public companies in 1992. You've been, you know, a strong, not the easiest shareholder because you're always vocal. A good friend of the company and, you know, has given us a lot of good perspectives, especially on the buyback side of the coin.
In terms of valuation, listen, we've grown our book. We continue to grow our book. It's been amazing to see our book grow 45% three years. We've increased our dividend now 11 times, right? It's really 12. We missed last quarter because I was very conservative. This was a little bit of a catch-up. Our payout ratio is 70%. Extraordinary low, there's room there if we want. I look at things in the long run. You know, for me, you know, obviously I'm the largest shareholder in the company, these moves don't even faze me. They're just great opportunities to create value. If you take our dividend rate and you take what we typically trade in terms of a dividend to price, and you apply a conservative number like an eight.
You know, we've traded between 7% and 8%. Just take 8%, right, as a dividend yield that the market usually pays for in a stable market. Take our dividend. You guys can do the math. I mean, Paul, what's the math on that?
It's a 21. It's a $21 price, that math. I think, Ivan, what I would add to that is, you know, the piece of this is, we have a very large capital-light agency business. Lots of companies that are not in our space that have those types of businesses trade on a PE, don't trade on a price to book or a dividend yield. We understand we're in the mortgage REIT space and you've got some level you have to trade with. Clearly we think that the value of that platform is much in excess of just trading on a price to book. Even if you just did a price to book at an 8% dividend yield, you're at $21. We've probably traded between seven and eight, like you said, Ivan.
Clearly, just to price us the way others get priced in the space, which we think is unfair, it's a $21 price.
Yeah. you know what's incredible to me in the way people are misevaluating all the companies. I say either valuing us, you know, improperly or the value in the other company is improperly. These companies are posting huge CECL reserves and huge actual losses, right? It's very easy to make interest spread on risky assets and book current earnings. When the bottom line is that the assets you're in are losing money, you should really reevaluate. Maybe they're priced improperly. Maybe we're priced okay for now for this dislocation. The losses they're taking on their office sector, and all the other sectors they're in, they're massive. you know, if they wanted to say, "Okay, it's too bad. We're, you know, it's a sign of the market.
It's this, it's that." We should be rewarded for extraordinary discipline in sticking to the multifamily industry and not getting out of our expertise and our experience and having an asset class that even if it does suffer, the losses are not huge. They're manageable, right? I think that either the companies in our space, in our peer group, either they should be valued lower or we should be valued higher. Not the same. It makes no sense to me whatsoever. We also have a diversified operating platform. Before we even open the door between our servicing and our actual balances, we have tremendous income streams. Their income stream is one income stream. It's based on the loans they put on their books, how they borrow, and how those loans perform.
It's a monoline business, which in these kind of times with those kind of assets are very, very scary. I think the whole industry is looped by that fear. Either we outperform them, or they really hit a level that's really reflective of their asset quality.
I give you a well-deserved shout-out, and I'm comfortable being in your hands, and the stock looks very undervalued to me. Thank you very much. Appreciate your response.
Thank you, Lee your performance.
Thanks,Lee
We have reached our allotted time for questions. I will now turn the program back over to Ivan for any additional or closing remarks.
Okay. Well, thank you, everybody, for your time. We're very pleased and patient to wait for this call to really address some of the negative sentiment that existed in the market and the dislocation. We hope by the information that was delivered by the call, most importantly our performance, it gets our shareholders in a comfortable position. That yes, we are sound, we are fundamental, we have great management and a great track record. I look forward to your continued participation and trust in the company and management. Everybody, have a great day, have a great weekend, and thank you once again.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.