Arbor Realty Trust, Inc. (NYSE:ABR) Q1 2026 Earnings Call Transcript

Arbor Realty Trust, Inc. (NYSE:ABR) Q1 2026 Earnings Call Transcript May 8, 2026

Arbor Realty Trust, Inc. misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.16.

Operator: Thank you for your continued patience. Your meeting will begin shortly. Good morning, ladies and gentlemen, and welcome to the First Quarter 2026 Arbor Realty Trust, Inc. 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. If you want to remove yourself from the queue, please press 2. Please be advised that today’s conference is being recorded. I would now like to turn the call over to your speaker today, Paula Eliano, Chief Financial Officer. Please go ahead.

Ivan Paul Kaufman: Thank you, Stephanie, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust, Inc. This morning, we will discuss the results for the quarter ended [inaudible]. Some of those short reports appear to have provoked investigative interest from regulators, as well as class actions and derivative claims from plaintiffs’ law firms. We have steadfastly maintained that these attacks and claims made against us were baseless and misleading. We are pleased to report in that regard that we believe any pending investigations that were initiated in the wake of the short reports have now been closed without any action against us. Additionally, and very recently, our motion to dismiss the class action lawsuit against us was granted and the claims dismissed without prejudice.

We have been very pleased with these developments. Although our management team never lost sight of our shareholders and their interests during this challenging period, we are happy to put this chapter behind us and focus on creating shareholder value free of these costly and unwarranted distractions. On our last earnings call, we discussed at length how we feel we are at the bottom of the cycle, have ring-fenced the majority of our nonperforming and subperforming loans, and are working exceedingly hard at accelerating the resolution of these loans into performing assets, which will allow us to start to build back our run rate of interest income for the future. This is our top priority, as these loans are having a tremendous drag on our earnings.

We also mentioned that if rates went down, the process would accelerate, and if rates increased, it would lead to a longer period of time needed to resolve these loans. Unfortunately, given the geopolitical landscape, the 5-year and 10-year have actually increased roughly 50 basis points in the first quarter, which is certainly pushing our timetable out a little bit. Despite these challenges, we continue to make progress in working through our assets, and again, we believe we have a clear line of sight on resolving a bulk of these assets over the next several quarters. We ended the first quarter with approximately $500 million in delinquent loans and around $500 million of REO assets for total nonperforming assets of roughly $1 billion. These numbers are down approximately $100 million from the last quarter, or a 9% reduction in risk.

Again, our goal is to continue to accelerate the resolution of our non-interest-earning assets and redeploy the capital into performing loans and grow our run rate of income. We had $200 million of resolutions, which is consistent with our goal of continuing to shrink our total delinquencies each quarter. Additionally, we have line of sight on roughly another $200 million to $300 million of delinquencies we expect to resolve in the second and third quarters, in addition to another $100 million we believe we have the potential to resolve by the end of the year. We also remain optimistic that we can reduce our REO assets to around $200 million to $300 million by the end of 2026, even adding an additional $100 million of REO assets over the next few quarters, which were already reflected in our delinquency numbers as of March 31, 2026.

We have been actively marketing several of these assets for sale, which will go a long way toward helping reduce the drag on earnings and increase our run rate of income for the future. As we discussed in detail last quarter, we continue to focus heavily on our legacy portfolio, which currently sits at approximately $5 billion. Approximately $500 million of these loans are delinquent, which we are working through very aggressively, and approximately $1.5 billion continue to perform in accordance with their original terms. The other $3 billion have modified to pay-and-accrue features, of which only half of these loans we are accruing the full rate of interest on. We continue to make progress in reducing the amount of accrued interest outstanding on certain loans by resetting the rates to today’s market spreads and requiring that the borrowers pay down a large portion of the outstanding accrued interest as part of the modified terms.

In fact, we are currently working on several loans totaling approximately $400 million that we think we can modify in the second and third quarters, which will result in receiving approximately $19 million in back accrued interest, reducing the loans’ outstanding accrued interest down to around $1.1 billion. This is a very effective strategy that will also put these loans in a much better position to cover our debt service from property operations and is resulting in improved terms from our line lenders. This, combined with having the proper guarantees and requiring the borrower to commit significant additional capital to support the deals, gives us comfort about how these loans will perform going forward and will greatly limit the potential risk of future losses.

As Paul will discuss in more detail, we produced distributable earnings of $0.18 per share in the first quarter. Clearly, our earnings are being greatly affected by the significant drag of our non-interest-earning assets as well as from resetting legacy loans to today’s market rates. This is something we believe will improve in the next several quarters. We continue to make progress in resolving our legacy issues and growing our business volumes. Our first-quarter numbers were also affected, as we expected, by a normally slow start in the agency business from the seasonal nature of that platform, which was also impacted by the increase in rates. On our last call, we mentioned we would continue to evaluate our dividend policy based on how quickly we think we could resolve our delinquent loans and subperforming loans and reduce that drag on earnings.

With the recent increase in rates as well as the expectation that rates can continue to remain volatile, we are now predicting a slightly longer timeline in resolving these loans. As a result, the Board has decided to reset our quarterly dividend to $0.17 per share. We believe this is the dividend we will be able to cover from earnings for the rest of the year, with the potential for growth in the later part of the year and in 2027, as we work aggressively to reduce the earnings drag from our legacy assets and improve our run rate of interest income. We also believe it is very prudent in the current environment to retain our capital to fund the growth of the platform and to buy back stock where appropriate, which generates strong risk-adjusted returns on our investment.

Turning now to the production numbers for the first quarter in our different business lines. In our agency platform, we originated approximately $[inaudible] million in volume, in addition to our first CMBS brokerage transaction of $88 million, for total first-quarter volume of $795 million. These numbers were in line with our previous guidance, as we normally experience a lighter first quarter due to the seasonal nature of the business. Despite the challenging rate environment, we are seeing an influx of new opportunities that are increasing our current pipeline significantly. We are off to a good start for the second quarter with approximately $350 million of volume closed through May 2026, and we still feel we could produce similar volumes as last year with a strong second half of the year, which is obviously great for our platform.

In our balance sheet lending business, we originated $400 million of volume in the first quarter. This business continues to be incredibly competitive, and as a result, we are being highly selective and are focusing our attention on launching deals with high-quality sponsors. The bridge lending business is a very important part of our overall strategy as it generates strong levered returns on our capital in the short term while continuing to build up a pipeline of future agency deals. With the significant efficiencies we continue to see in the securitization market and with our line lenders, we are able to produce strong returns on our capital despite the competitive landscape. In fact, in the first quarter, we issued another CLO with very attractive pricing and terms.

We priced the deal at 1.73% over the index and 88% leverage with a 2.5-year replenishment feature. This was an incredible accomplishment, especially in light of the fact that we priced the deal during the height of the Iranian conflict. We continue to have access to this market and are a leader in this space, which allows us to finance our new originations with nonrecourse, non-mark-to-market debt to drive higher returns on our capital. In our single-family rental business, we experienced an unusually slow start to the year, which was primarily driven by the noise surrounding the housing bill being considered. This bill, in its current form, surprisingly does not have a full carve-out for the build-to-rent business as initially expected and definitely kept folks on the sidelines due to this uncertainty.

There has been a tremendous amount of talk lately that this bill will not get passed in its current form and that there will be serious considerations to building in the appropriate carve-outs for the build-to-rent business, including removing the for-sale provisions in year seven that currently exist in the proposed legislation. As a result, things are starting to loosen up as people believe this will occur, and we expect to see a real uptick in our new originations in this platform going forward. We originated approximately $125 million in the first quarter and expect we will see a significant increase in new volume numbers over the next few quarters. This is a great business as it offers us returns on our capital through construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term, providing significant long-term benefits by further diversifying our income stream.

In our construction lending business, we continue to see our share of high-quality deals with very experienced developers. We closed one deal for $113 million in the first quarter and are expected to close another $250 million in the second quarter. Our pipeline continues to grow each day, giving us comfort in our ability to hit our target of between $750 million and $1 billion of production in 2026. In summary, we are laser-focused on resolving our legacy book as quickly as possible, which will reduce the significant drag that these assets are having on our earnings. We believe we have a clear path to resolving the majority of these over the next several quarters, which will set us up nicely to build our earnings base heading into 2027. We also continue to focus on growing the many different verticals we have and generating strong returns on our capital that are being enhanced by the significant improvements in efficiencies we continue to create on the right side of our balance sheet.

We will continue to work exceedingly hard through the bottom of this cycle, and as always, we remain focused on maximizing shareholder value. I will now turn the call over to Paul to take you through the financial results.

Paul Anthony Elenio: Thank you, Ivan. In the first quarter, we produced distributable earnings of $37.4 million, or $0.18 per share, excluding one-time realized losses of $23 million in the resolution of certain delinquent and REO assets. On our last quarter earnings call, we guided to around $10 million of realized losses in Q1, all of which we had previously reserved for. We had some success resolving some loans ahead of schedule, resulting in an additional $13 million in losses in Q1. We will continue to do our best to give guidance on expected resolutions, although it is a very fluid process and often hard to predict the exact timing of these resolutions. Having said that, our best estimate is a range of approximately $15 million to $25 million of realized losses a quarter for the balance of the year that we will continue to reserve for as we receive more price discovery on these assets.

As Ivan mentioned, our first-quarter numbers were in line with our expectations, especially given the light first quarter we usually experience in our agency business. We also expect it will take a little longer to work through our legacy book given the current rate environment, which will likely keep our earnings in a similar range for the next few quarters before we start to see an increase in our run rate towards the end of the year as we reduce the drag on our earnings from our underperforming assets. This should put us in a position to start to show growth in our earnings in 2027 as we realize the full benefit of converting our delinquent assets into performing loans. With that said, the second and third quarters of this year are likely to be our low watermark and hover around $0.17 per share as we continue to reset certain subperforming loans to lower rates that will affect our earnings run rate for the next few quarters.

We do expect this number to grow in the fourth quarter with further upside potential in 2027 as we are working diligently to resolve nearly all of our nonperforming assets over the next several quarters. We are estimating the second quarter will actually come in around $0.15 per share, as there is roughly $0.02 per share of unusual drag from some inefficiencies related to our financing costs that are resulting in a temporary overlap of interest for a few months. This includes the $100 million ramp feature in our new CLO that we expect to be able to fully utilize by May 2026, and the timing of redrawing on our repo lines to pay off our 4.5% unsecured notes last week, as we used some of the proceeds from the December bond issuance to temporarily pay down higher-cost repo debt until the April notes came due.

Given the nonrecurring nature of this expense, combined with the expectation that we will resolve the bulk of our delinquent loans by the end of the year, we believe we will be able to start to grow our earnings in the fourth quarter, with additional upside expected in 2027 as well. In the first quarter, we recorded an additional $12 million of OREO impairments to properly mark these assets to where we think we can effectuate a sale. We have engaged brokers to sell the bulk of these OREO assets quickly and create interest-earning loans for the future. As Ivan mentioned, we are expecting to take back roughly another $100 million of assets as we work to the bottom of the cycle, $50 million to $75 million of which will likely happen by the end of the second quarter of 2026.

Most of these assets are already reflected in our delinquent numbers. Again, we are working very diligently to dispose of these assets quickly, with an estimated $100 million to $150 million of sales scheduled in the second quarter and another $200 million to $250 million expected in the third and fourth quarters. This should put our OREO assets between $250 million and $300 million by the end of 2026 and greatly improve our run rate of income for the future. We also booked another $9 million of specific reserves on our balance sheet loan book, for total OREO impairments and specific reserves of approximately $21.5 million in the first quarter. We expect to book similar levels of reserves and impairments over the next few quarters, which is consistent with our strategy of accelerating the resolution of problem loans as we look to mark certain loans that we are marketing for disposition to where we think we can execute a sale.

In our GSE agency business, we originated approximately $[inaudible] million in volume and had $671 million in loan sales in the first quarter. The margins on these loans were very healthy at 1.86% this quarter compared to 1.36% last quarter, which was mostly due to a shift in product mix and loan size, with some larger deals in Q4 that contained lower margins. We also recorded $10 million of mortgage servicing rights income related to $734 million of committed loans in the first quarter, representing an average MSR rate of 1.32%. Our fee-based servicing portfolio was approximately $36.3 billion at March 31, 2026, with a weighted average servicing fee of 35.5 basis points and an estimated remaining life of six years, continuing to generate a predictable annuity of income going forward of around $129 million gross annually.

In our balance sheet lending operation, our investment portfolio was approximately $12 billion at March 31, 2026, with an all-in yield on that portfolio of 7.03%, compared to 7.08% at December 31, 2025. This was mainly due to resetting rates on certain legacy loans and from the slight decline in SOFR. The average balance in our core investments was approximately $12.04 billion this quarter compared to $11.84 billion last quarter, reflecting the full effect of our fourth-quarter growth. The average yield on these assets increased to 7.5% from 7.38% last quarter, mainly due to significantly more back interest and default interest collected in Q1 on loan resolutions, which was partially offset by a decline in SOFR in the first quarter. Total debt on our core assets was approximately $10.7 billion at March 31, 2026.

The all-in cost of debt was approximately 6.4% at March 31, 2026, versus 6.45% at December 31, 2025, mainly due to a reduction in SOFR along with a lower rate on our new CLO issuance in March 2026. The average balance on our debt facilities was approximately $10.4 billion for the first quarter compared to $10.1 billion in the fourth quarter, mainly due to funding our fourth-quarter growth and from a full quarter of the new unsecured debt issued in December 2025. The average cost of funds in our debt facilities was 6.52% in the first quarter, down from 6.66% for the fourth quarter, excluding interest expense from leveraging our OREO assets, the debt balance of which is separately stated in our balance sheet and therefore not included in our total debt on core assets.

This decrease is mostly due to a reduction in SOFR, which was partially offset by the unsecured debt we issued in December 2025. Our overall spot net interest spreads were flat at 0.63% at both March 31, 2026, and December 31, 2025. In summary, we continue to make steady progress in resolving our delinquencies and are extremely focused on completing the process as quickly as possible, which will significantly reduce the drag on our earnings. This, combined with growing our origination platforms, will go a long way toward allowing us to increase our run rate of income in 2027. That completes our prepared remarks for this morning. I will now turn it back to the operator.

Q&A Session

Operator: We will now open the call for questions. We will take our first question from Jade Rahmani with KBW. Please go ahead. Your line is open.

Jade Joseph Rahmani: Thank you very much. Could you comment on the outlook for SFR originations picking up and also if you can give any color on the types of borrowers that you are dealing with, the number of properties they hold, what their intended hold period is, and how the financing terms from counterparties are changing the cap rates and return profile of that business?

Ivan Paul Kaufman: Can you repeat the first part of that question? It did not come clearly.

Jade Joseph Rahmani: Yes, sorry about that. Could you comment on the outlook for the single-family-for-rent originations business? If you could provide some color on the types of borrowers you are dealing with, whether they are institutional or whether they are smaller, the number of properties they hold and their hold period, and about your comments regarding the housing legislation and how that is changing that business?

Ivan Paul Kaufman: Sure. Let me respond to that thought first. Let us talk about the legislation because I think the business got frozen a little bit initially with the concern and the fear. But the consensus now, a very strong consensus, is those prohibitions that were put into that bill restricting closing the sale are not going to be put in the bill. As a result, we have seen real momentum over the last couple of weeks in that business. We already have approximately $200 million and we expect to exceed approximately $300 million for the quarter. So we are back in line and back in pace. Enthusiasm is back in the business. Most of the people we are dealing with—many of their investors are institution-based. A lot of them have anywhere between five and thirty assets.

That seems to be the typical profile of what we are dealing with. Some have high-net-worth families, but a lot of them are institution-based. As for cap rates, returns, and how we are seeing the financing side of that business, the credit markets are extremely aggressive right now, and the cap rates are very aggressive. It is a very well-liked business. We think there is a lot of momentum in the business. So it is still viewed very favorably. Anything that is completed and goes to a bridge loan is priced extraordinarily competitively, and the agencies—Fannie and Freddie—as well as the CMBS market love this product.

Jade Joseph Rahmani: Great, and that is really good to hear in terms of the resiliency of that asset class. Just turning to the outlook on credit, I think you touched on it that the 5-year and 10-year move this year is kind of slowing the pace of resolution. My main question would be if there are any new delinquencies or new defaults you would expect as a result of where the 5-year and 10-year are. I imagine that there is at least some cohort of borrowers that have been kind of on the fence as to what they are going to do, and the outlook for rates makes a huge difference in their consideration. So if you could just comment on how the 5-year/10-year move this year has affected the credit outlook?

Ivan Paul Kaufman: I think it is very clear from management’s standpoint that we have taken a look at the change in the rate environment. In the fourth quarter, we clearly had a drop in rates and there was a lot of liquidity flowing into the sector and a lot of enthusiasm. Now, with the Iran situation and rising rates, and with the view that rates will remain a little bit higher, we have adjusted our philosophy. We are getting ahead of where we think the market is, and that is why we adjusted our dividend to reflect a more difficult environment. We do not want to be sitting here in the second and third quarters making the adjustments. We think that this rate environment is going to slow the resolution, it is going to slow liquidity into the sector, and it is going to slow where these resolutions go.

In fact, as Paul has guided in his comments, we are expecting to continue to have reserves going in the second, third, and fourth quarters, and it is reflective of where this new environment is. So we have made the adjustments. I am not sure everybody else has, but we do think that this new rate environment is going to affect the balance of the year, and that is what we are reflecting in our comments.

Jade Joseph Rahmani: Thanks for taking the questions.

Operator: Thank you. We will take our next question from Citizens Capital Markets. Please go ahead. Your line is open.

Analyst: Hey, guys. Thanks for taking the questions. I was having some connection issues, so apologies if you already hit on some of this. Looking at originations in the bridge portfolio, average loan size looks to be about $128 million versus $38 million in the fourth quarter. I think Ivan touched on this a little bit, but was this more opportunistic, or are you intentionally moving up the loan-size spectrum and should we expect to see more of this going forward?

Ivan Paul Kaufman: I think it is a great question. We are definitely going into a larger loan size, but the market is extremely competitive. It is to the point where, on each individual loan, you have to make certain credit decisions in order to bring those loans on. So we have chosen to go to larger sponsors and larger deals and be more selective in that sense, to put more management attention on each and every loan that we do, and the larger loans give us the ability to do that.

Analyst: Got it. That makes a lot of sense. And then, I guess, gain-on-sale margin stepped up quite a bit in the quarter to 1.86% from 1.36%. Can you just remind me if there was a large deal in 4Q numbers, or is something else driving that dynamic?

Ivan Paul Kaufman: That is exactly right. A couple of things happened. If you go back and look at our margins—look at 3Q, 4Q, and even 2Q of last year—if you look at 1Q and 2Q of last year, the margins were actually very strong. A 1.86% margin is very healthy. We did approximately 1.75% in the first quarter of last year and approximately 1.70% in the second quarter of last year. In the third and fourth quarter, you saw that dip to approximately 1.15% and 1.36%. In the third and fourth quarter, we had some really large off-market deals that we were able to get over the line, and we also had a lot more Freddie Mac business in the fourth quarter, which is a different type of business. In the first quarter, we had a lot more Fannie Mae business and a lot more smaller deal size, so we were able to extract the higher margin.

It all depends on what is in our pipeline. We do have a lot of large deals in our pipeline that we are working through. Our pipeline is growing each and every day, so you could see that number dip a little bit in the second quarter and the third quarter depending on deal size. It is deal size and mix, and to your point, the fourth quarter did have some really large deals in it.

Analyst: Got it. That makes a lot of sense. Appreciate you guys taking the questions this morning.

Operator: Thank you. We will take our next question from Richard Barry Shane with JPMorgan. Please go ahead. Your line is open.

Richard Barry Shane: Hey, guys. Thanks for taking my questions this morning. A couple of different things. In prior calls, you had talked about some fairly substantial capital investments in REO properties. I am curious how much you have spent life-to-date in terms of that CapEx and what you expect going forward, given your sort of expectations for additional REO?

Ivan Paul Kaufman: Sure, Rick. I think we look at it a couple of different ways. We break down the REO book. As I said in my commentary, we have been in the process recently of engaging brokers and really trying to find people that are interested in these assets, that are experts in that particular market with that particular asset. We are doing a really nice job, I think, of getting a significant amount of bids. There is certainly more capital out there now chasing deals, so we have seen a real influx of opportunities to dispose of the assets quicker, which is why we are guiding to getting our REO book down to roughly $250 million to $300 million. I would say that from a CapEx perspective, there are certain assets that we expect to hold on to.

There is a subset of assets within that $250 million to $300 million that we expect to hold on to a little longer and stabilize, and we are feeding those assets with CapEx. In the quarter, I think we put about $8 million to $10 million of CapEx into certain assets. As for life-to-date, we can follow up with precise numbers, but that gives you a sense of the recent pace.

Richard Barry Shane: I appreciate you referencing the comment about working with the brokers. That is actually what precipitated my question. I am curious if there is a little bit of a change in strategy here, which, instead of investing and trying to potentially optimize outcome on a longer timeline, you are taking a first-loss, best-loss approach here and accelerating the disposals.

Ivan Paul Kaufman: A lot of it is loan-specific. If we feel we can get to market with an asset fairly quickly without putting CapEx in, we will do it. Early on, there were certain assets that really required CapEx to put them in a better position, so it is really an asset-specific situation. That said, we are leaning toward, as you referenced, resolving assets on an accelerated basis at our mark if we can. We have had a few of those this quarter as part of that $23 million of realized losses, and we continue to push that way. It is asset-specific, but we are definitely leaning toward quicker resolutions where appropriate.

Richard Barry Shane: Got it. Okay. That actually relates to something that someone pinged me about, which is during the quarter, you sold a property for $25 million and provided a $24.5 million bridge loan, which seems like a fairly aggressive financing structure. As you are resolving the REO, is part of the intention to provide financing for those transactions? Is that type of advance rate going to be typical of how you are approaching things, and how should we think about that from a credit perspective?

Ivan Paul Kaufman: Once again, it is asset-specific, but a lot has to do with loss structures as well. While it may be a high advance rate, there are capital commitments and guarantees that are required on those loans from the people who are stepping into those transactions. We will look at our recoveries and our returns fitted on each particular case. Many times these are sponsors we have done a lot of business with, with strong balance sheets, and while we may give them a high level of leverage going in to create a very seamless process, their commitment to maintain that asset with the right guarantees—CapEx, interest guarantees—helps to offset that high leverage.

Richard Barry Shane: Got it. Okay. Last question. If we think about dividend policy going forward—again, you have clearly trued the dividend up to distributable earnings. I know different commercial mortgage REITs talk about distributable earnings ex realized losses. I am curious, as we are looking at our models, what do you think we should use as the guidepost for the dividend? Is it distributable earnings, or is there something else? I want to make sure we are looking at the right metrics so that we catch any inflections either up or down going forward.

Ivan Paul Kaufman: Good question. We clearly look at it as distributable earnings excluding the one-time realized losses that we have already provided for and that have already reduced book value. That is how we look at it—what are we earning from a cash perspective. In this quarter, we put up $0.18 excluding the losses. What we have guided to is a bit of a low watermark in the second and third quarters.

Richard Barry Shane: Absent the $0.02 one-time drag, that probably puts me at $0.15 for the second quarter.

Ivan Paul Kaufman: We are really at $0.17 if you add that back in Q2 and $0.17 in Q3. Then what we have guided to is, if we can execute our business strategy very effectively—which we are laser-focused on—and really start to turn a lot of these nonperforming assets into performing assets, we will start to see growth in the fourth quarter in that distributable earnings number. So we have set the dividend where we think we can earn it for the rest of the year, and we have set it to where we think distributable earnings will be, excluding those one-time losses.

Richard Barry Shane: Got it. Okay. Thank you, guys.

Operator: Thank you. We will take our next question from Raymond James. Please go ahead. Your line is open.

Analyst: Roughly 40% of your loan portfolio is in Texas and Florida, where there is quite a bit of housing supply across multifamily, SFR, and single-family housing. Can you please provide some updated commentary on what you are seeing on the ground in those geographies?

Ivan Paul Kaufman: What we are really seeing is being at the bottom of the market. Over the last 24 months, there has been an extreme amount of softness that we are seeing firming month by month. I think some of the issues that we faced in the Texas market and in the Florida market in particular, and also in the Atlanta market—issues with immigration and the issue with the eviction/ICE rates—have really had a negative impact on the portfolio and accelerated some of the delinquencies. We have had assets that were 90% occupied see periods where occupancy dropped to 75% overnight. Over the last 12 months, I think the eviction dynamics had a negative impact in those markets. That is getting behind us at this point, and we are seeing a reset of rental rates and occupancy rates.

We also saw, for a period of time, real slowness and issues with respect to the credit of our tenants and the inability to remove nonpaying tenants from occupancy. That has changed; the court system has sped up, and the software and discipline that have been put in place to catch fraud and put the right tenant base in place have improved dramatically as well. The other thing we are seeing is that we are accelerating our efforts in terms of assets that are not performing properly. We are requiring management changes and/or taking control of these assets. It is generally the case when assets are cash-starved that they get poorly managed. We have taken very aggressive steps to make those corrections. That is reflected a little bit in our forecast because we are taking control of those assets either directly or indirectly.

During that period of time, we are going to have a little bit of a drag on our earnings while we are doing it, but we are seeing the benefit of our efforts by seeing a real stabilization in these assets and a growth back in occupancy and operating income.

Analyst: Great. Thank you.

Operator: Thank you. We will take our next question from Jade Rahmani with KBW. Go ahead. Your line is open.

Jade Joseph Rahmani: Thank you. I wanted to ask you about the CECL reserve or the credit loss reserve. It currently stands at $131 million, which is 1.1% of the portfolio. You said you expect realized losses of about $15 million to $25 million a quarter for the next three quarters, so that is up to about $70 million. Assuming that comes out of CECL, there would be a remaining $60 million of CECL, which is 0.6% of the portfolio. So, I think the question is if you are going to be taking additional CECL reserves in future quarters, and if there is a normalized CECL reserve ratio that should be on this portfolio. You mentioned that there is about $1 billion of nonperforming assets including REO and nonaccruals.

Ivan Paul Kaufman: Sure. Jade, I think you cannot look at it just on the nonperforming assets and the delinquencies. You have to look at it with the REO assets as well. Yes, we have approximately $130 million of CECL on the balance sheet loan book and approximately $481 million of delinquency on the balance sheet loan book. We also have approximately $520 million of REO assets, on which we took another $12.5 million of impairment this quarter, up from $20.5 million the prior quarter. Before those loans were transferred to REO, we had booked CECL reserves on those, so there is about $85 million of reserves effectively sitting in the REO book. That REO book has been written down by about $85 million. You have to take that $85 million and the $130 million and divide it over the REO plus delinquency book, which puts your ratio more around 1.7% to 1.8%.

That is probably the right ratio. To your second question: yes, we have guided to $15 million to $25 million in realized losses going forward, but not all of those will be delinquencies; some of those will be REO. You have to look at those buckets together—that is how we look at it. We are also guiding that in this market—given the interest rate environment and given the fact that we have engaged brokers and are getting more price discovery on assets—it is hard to sit here and tell you exactly what the numbers will be, but based on recent experience, we think that range is appropriate. As for the portfolio yield you referenced—6.49% weighted average cash pay rate or current pay rate—yes, 6.49% is the pay rate, but another roughly 25 basis points of that is origination and exit fees that we accrete over time, so that is cash, and then approximately $25 million is PIK.

On PIK, during the quarter we booked just about $5 million of PIK interest on our bridge loans. We have about $2 million of PIK interest on our mezzanine and preferred equity—standard for those products. On the bridge business, the PIK for the quarter was down to $5 million; a year ago it was about $18 million. SOFR has dropped, we worked out a lot of loans and reset them at current rates, and the PIK has been paid or recovered and does not continue going forward. As we work these loans out, they will not be PIK. I think that $5 million a quarter on balance sheet loans goes down to probably around $4 million a quarter.

Jade Joseph Rahmani: Okay, great. Thanks for the color.

Operator: I am showing no additional questions at this time. I would like to now turn the conference back to you, Ivan Kaufman, for any additional or closing remarks.

Ivan Paul Kaufman: Thank you, everybody, for your participation today, and have a great weekend.

Operator: Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.