Arbor Realty Trust, Inc. (NYSE:ABR) Q1 2024 Earnings Call Transcript

Arbor Realty Trust, Inc. (NYSE:ABR) Q1 2024 Earnings Call Transcript May 3, 2024

Arbor Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen and welcome to the First Quarter 2024 Arbor Realty Trust Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today Paul Elenio, Chief Financial Officer. Please go ahead.

Paul Elenio: Okay. Thank you, James 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 March 31, 2024. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be doing forward-looking statements that are subject to risks and uncertainties including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on beliefs, assumptions and expectations of future performance taking into account information currently available to us.

Factors that could cause actual results to differ materially from Arbor’s expectations in these forward looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.

Ivan Kaufman: 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 very strong quarter, despite extremely challenging environment. Through our diversified business model with many countercyclical income streams, we once again generated distributable earnings in excess of our dividend with a payout ratio of around 90% from first quarter. This is clearly well above the performance from our peers, most of which are paying dividends out of capital or being forced to cut their dividend substantially. And just as importantly, in a time of tremendous stress, we’ve managed to maintain our book value of the last 15 months while recorded reserves for potential future losses, which clearly differentiates us from everyone else in our peer group, the vast majority of which have experienced significant book value erosion in this environment.

On the last call, we gave guidance that the first two quarters of this year would be the most challenging part of the cycle and we are a period of peak stress. We also mentioned that if rates stay higher for longer that dislocation could potentially leak into third and possibly even the fourth quarter as well. And given the recent backup in rates combined with the Fed somewhat more hawk at you on the timing of potential rate cuts in 2024, we believe this is a distinct possibility and is something we have been preparing for and reflected in a way we’re currently operating our business. As a result, we have been extremely active over the last four months and working through our balance sheet notebook. We’ve demonstrated tremendous patience and poise in dealing with the most recent wave of delinquencies.

Again, our goal is to maximize shareholder value and very often it’s not just the value of the collateral but the recourse provisions that we evaluate and determine how to approach each individual circumstance. The short-term nature of having a delinquent loan will not impact our decision-making process to achieve the correct economic result on a transaction. With this philosophy in mind, we had a tremendous amount of success in the first quarter, working through a substantial amount of our delinquencies and modifying these loans by getting bars to bring a significant amount of fresh equity to the table and recapitalizing their deals. As a result in the first quarter, we successfully modified 40 loans, total of $1.9 billion, which fresh capital being brought to the table in every one of these deals.

This includes cash to purchase the low interest rate caps, fund interest rate, renovation reserves, bring any past due loans current and pay down balances where appropriate. In fact bars objected approximately $45 million of new capital into these deals with $1.65 billion of these loans purchasing new interest rate caps. We have also been highly effective in refinancing deals for our agency business as well as leveraging our long-term standing relationships, many quality sponsors to step in and take over assets that are underperforming and assumed debt. This is a difficult and complicated work in an extremely challenging environment. And I can’t say enough about the efforts put forth by our entire organization successfully managing through this dislocation.

We’re very pleased with the success we have had to-date and expect to remain extremely busy over the next few months and steadfast now approach as we continue to manage through the back balance of this downturn. Clearly in this environment having adequate liquidity is paramount to our success. As a result, we have focused heavily on maintaining a very strong liquidity position. Currently we have approximately $1 billion of cash between $800 million of corporate cash and $600 million of cash in our CLOs that result in additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment, as it provides us with the flexibility needed to manage through this downturn and taking advantage of opportunities that will exist in this market to generate superior returns on our capital.

As you may recall a few months back, we allocated $150 million of our capital stock buyback to us through buyback stock, knowing full well that will be volatility in the market allow us to potentially repurchase our stock at discounts to book value and generate high double-digit returns on capital. In April, we repurchased approximately $11.4 million of stock at an average price of $12.19 with a 4% discount on book value and generating a current dividend yield of 14% and the yield of approximately 16% on distributable earnings. This is a tremendous return on capital and with around 138 million of remaining capital available for this strategy will continue to be opportunistic in our approach to buying back stock at a volatility process. We also continue to do an excellent job of deleveraging our balance sheet and reducing our exposure to our term debt.

We’re down to approximately $2.6 billion in outstanding with our commercial banks from a peak of around $4.2 billion and we have 72% of our secured indebtedness and non-mark-to-market, non-recourse, low-cost CLO vehicles. Our CLO vehicles are major part of our business strategy as they provide us with tremendous strategic advantage in terms of dislocation due to the nature of the non-mark-to-market, non-recourse elements. In addition, they contribute significantly, to providing a low-cost alternative to warehouse banks which in times like this have fluctuating pricing, leverage points and parameters. In fact one of the significant drivers of our income streams are low-cost CLO vehicles as well as a fixed rate debt and equity instruments we have that make up a big part of our capital structure.

We have a very strategic and approach to capitalizing on our business with a substantial amount of our low-cost, long-dated funding sources which has allowed us to continue to generate outsized returns on capital. Turning now to our first quarter performance, as Paul will discuss in more detail, we had a very strong first quarter producing distributable earnings of $0.48 per share, representing a payout ratio of around $0.90 clearly have the wherewithal to create a large cushion between our earnings and dividends over the last several years serving us very well in this dislocation and believe that this cushion combined with our diversified business model uniquely positions us as one of the only companies in this space with the ability to continue to provide a sustainable dividend.

In GSE Agency business, we had a relatively strong first quarter, despite interest rates remaining stubbornly high. We reached $850 million in the first quarter and our pipeline remains elevated. Traditionally first quarter production numbers are normally lower than the rest of the year and certainly the backup in rates has not helped this trend. Despite the current rate environment, we continue to maintain a large pipeline and we are not seeing significant fallout in this market while deals as just being pushed out further. We have also done a great job in converting our balance sheet loans at the agency product which has always been one of our key strategies and a significant differentiator from our peers. That’s also very important to emphasize that a significant portion of our business is in the workforce housing part of the market.

As you know, Fannie and Freddie have a very specific mandate to address our Workforce/Affordable housing needs, which is a major issue in the United States, making Arbor a great partner that continues to fulfill a very important mandate for the federal agencies as well as a social needs of society. And again the agency business of the premium values are requires limited capital and generate significant long-dated predictable income streams and produces significant annual cash flow. To this point, our $31 billion fee-based services portfolio, which grew 9% year-over-year generates approximately $122 million a year reoccurring cash flow. We also generate significant earnings on our escrow and cash balances which acts as a natural hedge against interest rates.

In fact we are now earning 5% on around $2.8 billion of balances, so roughly $140 million annually, which combined with our service fee income and annuity totals approximately $260 million of annual gross cash earnings or $1.25 a share. This is an addition to strong gain on sale margins we generate from our originations platform. And extremely important to emphasize that our agency business generates 40% of our net revenues, the vast majority of which occurs before we even turn on the lights each day. This is completely in the car platform is something we feel is not being fully reflected in our valuation. In balance sheet business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency products, allow us to do delever our balance sheet and produce significant long dated income streams.

In the first quarter, we produced another $540 million of balance sheet run off, $210 million or roughly 40% of which was recaptured into new agency loan originations. With today’s high interest rates we are chipping away at converting loans to agencies but if the tenure gets back to 4% again, it will become far more meaningful. And every quarter point drop in interest rates from there will accelerate this conversion process significantly. As we touched on the last quarter, we’re well-positioned to step back to the lending market and garner accretive opportunities continue to grow our platform. We believe that in these type of markets, you can originate some of the highest quality loans with attractive returns, which will allow us to grow our balance sheet and build up our pipeline of future agency deals.

In our single-family rental business, we’re off to a great start this year as we continue to be the leader and a lender of choice in the premium markets we traffic in. We have a very strong first quarter with $172 million of fundings and a lot of $412 million of commitments signed up. We also have a large pipeline or may committed to this business and it offer us returns on our capital through construction, bridge, and permanent lending opportunities and generate strong levels of returns in the short-term, while providing significant long-term benefits by further diversifying our income trends. We are also very excited about the opportunities we’re starting to see in our newly added construction lending business. This is a business we believe we can produce very accretive returns on our capital by generating 10% to 12% unlevered returns initially and eventually mid to high returns on our capital once we leverage this business.

We have started to see a nice increase in our pipeline of potential deals with roughly $200 million under application and another $300 million in annualized and a significant number of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us returns on our capital through construction, bridge, and permanent agency lending opportunities. In summary, we had a very productive first quarter and we are working exceptionally hard to manage through the balance of this dislocation. We understand very well as challenges that lie ahead. I feel we are very well-positioned. Our earnings exceeded our dividend run rate. We are 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 car market.

We’re also well-capitalized with significant liquidity and has best-in-class asset management function and seasoned executive team giving us confidence in our ability to manage through the cycle and continue to be the top performer company in our space. I’ll now turn the call over to Paul and take you through the financial results.

Paul Elenio: Okay. Thank you, Ivan. As Ivan mentioned we had another very strong quarter producing distributable earnings of $97 million or $0.47 per share and $0.48 per share excluding a $1.6 million realized loss on a previously reserved for non-performing loan that paid off with slight discount in the first quarter. These results translated into our leads of approximately 15% for the first quarter and resulted in a dividend payout ratio of around 90%. As Ivan mentioned, we successfully modified 40 loans in the first quarter totaling $1.9 billion all of which have borrowers invested additional capital as part of the modification terms. On $1.1 billion of these loans, we required borrowers to invest additional capital to recap their deals with us providing some form of temporary rate relief to obtain full feature.

The pay rates are modified at an average to approximately 7% with only around 2% of the residual interest being confirmed. A subset of these loans totaling $713 million made up the vast majority of our less than 60 day delinquencies at December 31, which we received, all pass to interest owned on these loans importance of the modified terms. Last quarter we disclosed two pools of loans that were relevant in total delinquencies in our balance sheet loan book. Our 60-plus day delinquencies and loan that was less than 60 days past due that we were only reporting interest income on to the extent cash was received. The 60-plus day delinquent loans are non-performing loans were approximately $275 million last quarter and the less than 60 days past due loans were $957 million.

Our non-performing loan numbers are now $465 million this quarter due to approximately $175 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, and roughly $50 million of net new additions for the quarter. The less than 60 days past due loans or our non-accrual loans came down to $489 million this quarter mostly due to $713 million of loans being successfully modified as I mentioned earlier inline with $175 million of loans moving to 60 plus days delinquent, which was partially offset by approximately $420 million of new loans this quarter that we did not accrue interest on. So in summary, our total delinquencies are down 23% from $1.23 billion last quarter to $954 million this quarter, which is significant progress again deliver tremendous success we had in modifying resolving loans and continued strong collection efforts.

And while we expect to continue to make considerable progress in resolving these delinquencies at the same time, we do anticipate that there will be new delinquencies in this challenging environment. We also continue to build our CECL reserves recording an additional $18 million on our balance sheet loan book in the first quarter. We feel it’s very important to emphasize that despite booking approximately $108 million CECL reserves across our platform in the last 15 months, $88 million which was in our balance sheet business. We still grew our book value per share 1% to $12.64 a share at $3.31 2024 from $12.53 a share at $12.31 2022 which is well above the performance of our peers. The vast majority of which have experienced significant book value erosion in this market.

Additionally, we are one of the only companies in our space that has seen significant book value appreciation over the last five years with 36% growth during that time period versus our peers whose book values have declined an average of approximately 18%. And our agency business we had a solid first quarter with $850 million in originations and $1.1 billion of loan sales. The margin on these loan sales came in at 1.54% this quarter compared to 1.32% last quarter mainly due to some larger deals in the fourth quarter that carry lower margins. We also recorded $10.2 million of mortgage servicing rights income related to $775 million of committed loans in the first quarter representing an average MSR rate of around 1.31% compared to 1.55% last quarter mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter which contain higher servicing fees.

Our fee-based servicing portfolio also grew to approximately $31.1 billion in March 31 with a weighted average servicing fee of 39 basis points and estimated remaining life of around eight years. This portfolio will continue to generate a predictable annuity of income going forward of around $122 million gross annually. And this income stream combined with earnings on our escrow and gain on sale margins represent 40% of our net revenues. And our balance sheet, lending operation are $12.25 billion investment portfolio had an all-in yield of 8.81% at March 31 compared to 8.9% at December 31, due to a combination of an increase in non-performing loans and some new loans that did not make their full payment as of March 31 that we decided not to accrue for, which was partially offset by modifications in the first quarter on the vast majority of our less than 60-day past due loans from last quarter.

The average balance in our core investments was $12.5 billion this quarter compared to $13 billion last quarter due to runoff exceeding originations in the fourth and first quarters. The average yield on these assets increased to 9.44% from 9.31% last quarter due to the successful modification of the bulk of our pass-through loans, allowing us to collect a majority of the back interest owned on our fourth quarter delinquencies, which was partially offset by an increase in non-performing loans and some new non-accrual loans in the first quarter. Total debt on our core assets decreased to approximately $11.1 billion at March 31 from $11.6 billion at December 31. The oil in cost of debt was flat at approximately 7.45% at both 12/31 and 3/31. The average balance on our debt facilities was approximately $11.4 million for the first quarter, compared to $11.8 billion last quarter.

The average cost of funds in our debt facilities was basically flat at 7.5% for the first quarter, compared to 7.48% for the fourth quarter. Our overall net interest spreads in our core assets increased 1.94% to 1.94% this quarter, compared to 1.83% last quarter, again from the successful modification of the majority of our past due loans from last quarter. And overall spot net interest spreads were down to 1.37% at March 31, and from 1.53% at December 31, mostly due to an increase in non-performing loans during the quarter. Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 20% over the last 15 months to a leverage ratio of 3.2:1 from a peak of around 4.0:1. Equally as important, our leverage consists of around 72% non-recourse, non-mark-to-market CLO debt with pricing that is below the current market, providing strong levered returns on our capital.

That completes our prepared remarks for this morning. And I’ll now turn it back to the operator to take any questions you may have at this time. James?

See also 10 Best Trucking Stocks to Buy and 23 Most Profitable Stocks of the Last 12 Months.

Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question today from Steve DeLaney with Citizens JMP.

Steve DeLaney : Good morning and thank you. Great effort on the modifications in the first quarter. I just want to be clear, and Paul, appreciate that paragraph, I believe that, that is new. But 39 loans, $108 billion in UPB. Do we understand that in each of those cases, the borrowers put additional capital into the transactions?

Paul Elenio : That’s correct. The fact we disclosed in the prepared remarks in Ivan’s section that of the $1.9 billion that we modified every single one of those deals require borrowers to bring capital to the table and the capital that was injected in those deals was $45 million.

Ivan Kaufman: Steve, I want to give — I want to shed a little light on that because you can go back to my early script, I think, about three or four quarters ago, when people were talking about how complex and difficult the market was. And I think I gave a perspective that, in general, borrowers are going to have to contribute about 3% of capital to the table and that capital is generally going to be used to buy interest rate caps, and that’s the differential to where rates are in this elevated environment and where a normal pay rate would be in the high 4s and low 5s. So that’s kind of reflective of the capital that’s needed to buy caps or right-size assets. So that’s the approximate level on an annual basis of the recapitalization that’s needed in this currently elevated interest rate environment.

Steve DeLaney : Appreciate that, Ivan. And further, we understand that 23 of the 39 are now on pay and accrue, is that well, they will pay some and then you agree to just accrue some portion of the cash payment required. Is that correct?

Paul Elenio: That is correct. And as I said in my commentary Steve, those loans were floating rate loans from anywhere from 3.25 over the 4.25 so those guys are paying 8.5% after 9.5% and when modified the deals, we modified it to a pay of about 7% it was less than 2% being deferred. And so, we’ve got we’re — getting a really strong period on those deals.

Steve DeLaney: That’s great color. Thank you, Paul. And just a quick follow-up for my second question, Ivan, the new construction loan product. Strategically, obviously, credit is higher and given the CRE market uncertainties that are out there. But we hear banks are really pulling back broadly on commercial real estate. I work for a bank in each state. Is that opportunity largely being created void that with banks pulling back and companies like Arbor are going to have to step in and provide capital for CRE and multifamily construction loans.

Ivan Kaufman: Yes. Without a doubt, I mean, the landscape for regional banks is not good I mean we saw a another regional failure last week. This – failures on the commercial real estate book that exists in the banks are significantly troubled and I don’t think there’s much activity going on. So we’ve created a program to step in and fill that void. Our single-family both the rent business exploring into some other regionals, we’re doing that. And the dual construction lending activity is an okay business. Now it’s a decent business – there’s a lot of work a lot of labor. What makes the most attractive for us is, we said in my comments, is that free charge on capital, the construction lending life which is a decent level business, but when you talk about the labor and everything else that goes along with that.

I’m not sure, I would love that business. But when you add the fact that you could do a stabilized bridge loan and then ultimately do agency loan that’s an extraordinarily exciting business for our platform.

Steve DeLaney: Great progress, throughout the year. And thank you both for your comments

Ivan Kaufman: Thank you, Steve.

Operator: Our next question will come from Stephen Laws with Raymond James.

Q – Stephen Laws: Good morning. I appreciate the comments in the details you’ve already provided. Paul, I wanted to touch base on net interest income sorry, interest income, pretty big lift. Can you talk about the mix there as far as, I think you mentioned in your prepared remarks, some of that was the recovery and so some were interest from delinquent loans from Q4 so how much of that is taken calm and how much of that is possibly fees on modifications? How do we think about the mix of interest income?

Paul Elenio: Yes. So there’s a mix as you laid out Stephen and I think that it’s really important to talk about the success we had in the first quarter, on a substantial amount of what I’ll call the non-accrual loans, we disclosed last quarter. So to just give you some color. We had $957 million of loans that were less than 60 days past due to the last quarter that did not accrue all the interest to the extent that they made some payments and not the full payment, we elected to be conservative and not put that interest income. That interest income — did not work on those loans was $12 million. During the quarter, we modified and 712 million of those 977 million of loans and we’ve got $10 million in bank interest. So the first quarter was listed by $10 million of back interest that was collected on loans that we did not previously accrue.

And then that was offset by the fact, that we have a new brokerage loans $489 million of non-accrual loans and some more non-performing loans that net of the payments they made this quarter was around another $8 million or $9 million, we didn’t accrue. So the way I look at net interest income for the quarter is, we had a list of around $10 million to $11 million from payments back. We had a little bit of the drag of about$8 million on new loans and then that was offset by the fact that the portfolio shrank a little bit and acceleration fees was a little bit lighter this quarter I think by $5 million. That’s how you get into a flat number. And I think the way I look at it going forward is that, we just keep rolling. We keep rolling these loans and we keep working through them.

So now we have a new list of loans that we’re working through now and it will take us some time but we’re optimistic we’ll be able to get through a bulk, bulk of these loans and get a successful outcome on those. So it’s a little bit choppy, I understand, but that’s what happened. So we did have a lot of success this quarter in getting defaulted loans or delinquent loans from the prior quarter to be completely paid back when we modified it. It was a condition of our mod, you got to bring your own current. And so they brought all their loans current.

Stephen Laws: Great. Really that’s helpful color. And you guys mentioned a couple of times in the prepared remarks about the dividend and earnings covering. Can you talk about cash earnings, maybe now that you’ve got some deferred interest and PIK income? How do you think about cash earnings versus distributable versus the dividend level as we kind of move over the balance of the year, which Ivan, I know you mentioned given this rate environment, we still have a little bit of work to do over the next couple of quarters.

Paul Elenio: Yeah. So let me give you some color on a couple of things you pointed on and then Ivan can probably give more global color is you asked the question, we did modify $1.9 billion of loans during the quarter, $1.1 billion of them, we gave some form of rate relief. That rate relief for the quarter would have accrued to about $4 million. But what we do here at Arbor and I can get in more detail, is we spend a lot of time going through each individual asset and each individual mod in determining whether we think that deferred interest is going to be collectible. And it’s done on a case-by-case basis sometimes we’re more conservative on deals than maybe others would be. So that $4 million of accrued interest, we only accrued $2.5 million for the quarter.

So we did not accrue $1.5 million. So that’s the — that’s what hit the first quarter on those PIK assets. But I’ll say, listen, it’s — there’s a myriad of different things that go into distributable going to GAAP, going to cash, for instance. So there’s $2.5 million in earnings that is being accrued. But there was $10 million or $11 million that came in from last quarter that we weren’t accruing. In addition to that, we booked specific reserves on our agency book of another $2.9 million. If you look at our definition of distributable, because those loans are normally going through the foreclosure process with the agencies, we take that as a distributable loss even though the cash hasn’t been sent out. So we feel good about our cash position.

If you look at our cash flow from operations, you see it’s very strong. We certainly feel we have plenty of cash to cover our dividend. And so there’s a mix of different things that go in and out of the numbers, but that’s kind of a flavor, Steve, if that helps you.

Stephen Laws: Yeah, that’s great. And one final one, if I can sneak it in. Can you talk about the CLO, how many loans did you buy out during the quarter? And then the $600 million of sale of liquidity, how do you intend to use that? And can you put modified loans into the CLOs or how we use that flexibility? Thank you.

Paul Elenio: So I’ll give you the buyout numbers, and then I’ll let Ivan talk about the strategy and the CLO vehicles. So in the buyout numbers for the quarter, as you may remember from our last quarter disclosure, we told you we bought $90 million of loans out of our CLOs in February. So that’s part of the first quarter numbers. Those loans where we worked and re-banked elsewhere. We bought another $15 million on loan out in March and that loan has been banked at one of our warehouse facilities. And then in April, we bought another 120 million out of total purchases through April from January to April were $223 million, but only $20 million of those loans haven’t been reworked and re-banked in April, the $120 million we bought out, $100 million was one deal, and that deal in early April was recapped with a significant amount of capital brought to the table.

I think it was $10 million to $15 million. Our loan was re-cut and paid down to $95 million. So we have $100 million loan. It’s now a $95 million loan performing at SOFR plus 300, and we have a whole host of new equity in there with new sponsors that recap that deal. So the $223 million we repurchased out of CLOs since January to today, only $20 million of those loans haven’t been reworked and relevered and we’re working on those now. I’ll let Ivan give the color on the strategy in the vehicles.

Ivan Kaufman: Listen, we’re very sensitive to the cash we have in our CLOs and utilizing those vehicles because they’re low-cost vehicles, and we work extremely hard in producing new loans fill up mandate or taking loans that are currently on our balance sheet that fit those parameters. So it’s our job to maximize the value of those. We’ve done a pretty good job we feel relatively comfortable that based on our pipeline of new opportunities and existing opportunities that we’ll be able to effectively utilize that cash in the vehicle but make no mistake about it. It’s a business objective of ours and that really adds to our income stream by leveraging off the low-cost vehicles that are in place.

Q – Stephen Laws: I appreciate the comments this morning. Thank you.

Paul Elenio: Thanks Steve.

Operator: Our next question will come from Brian Violino with Wedbush Securities.

Brian Violino: Great. Good morning. Thanks for taking my question. It sounds like you anticipate that the loan loss allowance is going to continue to increase in some form in the near-term. Just wondering can you give some thoughts on expectations for where the reserve might go from here and any dynamics of our modifications could impact your CECL reserve and going forward? Thanks.

Paul Elenio: So, let me just give a little overview and I covered it in my comments. In this elevated interest rate environment, we expect if it stays this way that you’ll see a consistency in the next few quarters as we’ve seen in the first quarter. We’ve talked historically over the last several earnings calls that the first and second quarter would be the toughest. Clearly the first quarter showed a little greater stress than the fourth quarter. Now we expect the consistency flowing into the second and if rates stay elevated, I mean clearly the news that came out and the drop in a 10 year. And a change today, there’s a lot of optimism already and any dropped, as I mentioned in my comments, will have the significant impact and it just doesn’t impact the ability to convert off our balance sheet.

It’s an optimism in the market and returned to liquidity and the ability of people are recapped their deals. So, everything will have to do with interest rates. But if they stay in the range that we’ve seen in the first quarter, we expect the next few quarters to be pretty consistent with the first quarter.

Ivan Kaufman: I’d agree with that Brian. That’s how we’re looking at it. So reserves will be, obviously, based on where the macro environment goes. And if interest rates stay elevated, we could see some additional reserves kind of in line what we’ve seen. But it’ll all be based on what we see over the next couple of quarters.

Brian Violino: Great. Thanks for taking my question.

Operator: Our next question will come from Jade Rahmani with KBW.

Jade Rahmani: Thank you very much. Taking a step back for a moment, would you say and I would say, you’ve been ahead of the curve in expecting no credit issues. Would you say credit performance to-date is in line better or worse than what you’d have expected, compared to say, what you thought in the fall? And maybe if you could think about certain aspects such as the borrower asks wherewithal liquidity in the multifamily space, which is very strong underlying property level cash flow, and finally, evaluations cap rates. How would you think about where things are tracking?

Ivan Kaufman: Yes. It sounds like you are going to be a college professor not quite equipped for that, but I’ll give you a little bit of a few in terms of the things that impacted us that we couldn’t anticipate. I think COVID had a huge impact on the market that one couldn’t anticipate and the impacts really were — the tendency that was able to be subsidized in their rent payments and not pay rents for many years and then all of sudden start to pay — have to pay rents. So I think it was a higher level of delinquencies that were anticipated. Nobody quite understood that somebody elevated occupancies and rent increases were a result of government subsidies, and people artificially being able to stay at this but really not have the income streams.

And then the combination and some of the jurisdictions of the court systems not affecting people and having a lot of economic vacancy, which we really historically haven’t had. Those have been not anticipated issues and those have created elevated delinquencies. And if you combine that with elevated short-term interest rates, those are complexities that occurred. In addition, you’ve had a lot of elevated insurance costs in a lot of areas. In Southeast areas like that nobody anticipated insurance costs going up to those categories. So those were unanticipated issues that occurred. I think the other thing that we’ve experienced and I think we’ve covered a little bit on the call. I think there’s a lot of elevated for the industry to the brokerage industry, which has now been dealt with through the agencies.

So they were a lot of elevated purchase prices and things of that nature. So those are currently unanticipated things that occurred in the market that have created additional stress beyond what we anticipated. And that’s kind of my overall comment as some of the things that we didn’t anticipate and that we’re dealing with that created additional stress.

Jade Rahmani: And in terms of the future outlook, you say, you would expect this quarter, next quarter to be peak stress and less elevated interest rate if possible that extend into the third quarter and fourth, but in terms of the actual credit outcomes losses that you’re taking seat to reserves, what do you think can make that worse? Or would you say you’re expecting it to be the next few quarters to be pretty similar to what happened this quarter?

Ivan Kaufman: I can only tell you how we feel based on our current book and how we’re working through loans and borrow problems in this interest rate environment. The interest rate environment has a lot to deal with if the ways for people to recap their loans clearly of short-term rates go down by 1 point and 1.5 to 3 points I mentioned earlier becomes 1 point, 1.5 point and a level of optimism to resolve people phones and the ability to attract capital becomes very simple. If short-term rates were 3% and 5.25, people wouldn’t happen to be recapping their loans. They have to cash flow from their loans or the marginal. At this level people have to bring 3 points to the table to buy interest rate caps to bring up to a neutral cash level. So that’s why we’re talking about as things exist today.

Jade Rahmani: Thank you. And just lastly on cash flow from operations, something I look at closely and clearly, the servicing portfolio as well as the GSE business overall, helps support the cash flow. I did that then in the first quarter and I think usually there’s use of working capital dividends cost about 400 million per quarter. Do you expect cash flow from operations to match the dividend on a full-year basis?