Ivan Kaufman; Chairman of the Board, President, Chief Executive Officer; Arbor Realty Trust Inc
Stephen Laws; Analyst; Raymond James Financial, Inc.
Rick Shane; Analyst; JPMorgan Chase & Co.
Jade Rahmani; Analyst; Keefe, Bruyette & Woods, Inc.
Good morning, ladies and gentlemen, and welcome to the third quarter 2024 Arbor Realty Trust earnings conference call. (Operator Instructions) Please be advised that today’s conference is being recorded. (Operator Instructions) I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Okay. Thank you, Jamie, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we’ll discuss the results for the quarter ended September 30, 2024. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.
Before we begin, I need to inform these statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives.
These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor’s expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today.
Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.
Thank you, Paul, and thanks to everyone for joining us on today’s call. As you can see from this morning’s press release, we had another strong quarter as we continue to effectively navigate through this challenging environment.
As we discussed in the past, we appropriately positioned the company to succeed in this market, and we are executing our business plan very effectively and in line with our expectations. We have a diversified business model with many countercyclical income streams are invested in the right asset class with the appropriate liability structures and are well-capitalized, which has allowed us to consistently outperform our peers in every major financial category over a long period of time and by a wide margin.
In fact, most of our peers have cut their dividends substantially, have experienced significant book value erosion and have generated a negative total shareholder return over the last five years. As we have stated many times, and as you can clearly see from the charts posted on our website, our results have been nothing short of remarkable and we are a consistent outperforming and leader in the space.
As we discussed on the last few calls, we expected the first two quarters of this year to be the most challenging part of the cycle. I also thought it could leak into the third and fourth quarters as well as rates remained higher for longer.
With the recent 50 basis point rate cut by the Fed and a significant drop in the tenure to a low of around [3.60], we began to see a much more positive outlook as a result of cap costs becoming far less expensive and borrowers being able to access 5 and 10 year fixed rate agency deals and buyers moving off the sidelines and becoming extremely active in the market.
However, there’s been a backdrop in the tenure again to [4.25], which has somewhat changed the tenor. And we now believe that the recovery will be a little bit slower and could lead to a challenging fourth quarter, which is consistent with our previous guidance.
We continue to do a very effective job of working through our portfolio by getting bars to recap their deals and purchase interest rate caps. In the third quarter, we modified another $1.2 billion of loans with $43 million of fresh equity committed to be injected into these deals from the sponsors.
This includes collect cash to purchase new interest rate caps, fund interest, and renovation reserves, bring past interest to current and pay down loan balance and where appropriate. We also continue to make progress in line with our previous guidance on the approximately $1 billion of loans that were passed due at June 30 by either modifying these loans for closing taking them into REO or bringing in new sponsorship either consensually or simultaneously with the foreclosure.
Last quarter, we discussed our plans for these loans, and we estimated that approximately 30% to 35% of the pool would be modified, another 30% to 35% would pay off and the remaining 30% would be taken back as REO. In the third quarter, we successfully modified $250 million of these loans or 23%, and we expect to modify another roughly 10% in the fourth quarter.
We also had one delinquent loan for $8 million payoff in full in the third quarter and we’re expecting another $300 million-plus of delinquencies to payoff over the next few quarters. Additionally, we took back as REO roughly $77 million of loans in the third quarter and are expecting to take back another $250 million-plus over the next few quarters.
This is strong progress in one quarter and has reduced to $1 billion in delinquencies we had at June 30, down to just over $700 million at September 30 or a 30% decrease. But as expected, we did experience additional delinquencies during the quarter of approximately $225 million, bringing our total delinquencies at September 30 to approximately $945 million, which is down 10% from a peak in the second quarter.
And while we anticipate having additional delinquencies in this environment, we believe our resolutions will exceed new defaults, resulting in a continued decline in our total delinquencies. It is also very important to distinguish between REOs we take back and bring in a new sponsorship to operate and assume debt and REOs we own and operate ourselves.
Of the $77 million of REOs we took back in Q3, $20 million, we successfully brought in new sponsors to operate and assume our debt. And $57 million, we now own and operate directly. We are working exceptionally hard in the resolving our delinquencies in accordance with our plan, which when achieved, will convert non-interest earning assets into income-producing investments that will be highly accretive to our future earnings.
This is a challenging demand and work, and I’m very pleased with the progress we are making in resolving our delinquencies in accordance with our objectives. We also continue to focus on maintaining adequate liquidity levels and the appropriate liability structures, which is critical to our success in this environment.
Currently, we have approximately $600 million in cash and liquidity, providing us with the flexibility we needed to manage through the balance of this downturn and take advantage of the opportunities that exist in this market to generate formal terms on our capital.
One of these opportunities is our bridge lending platform. And I have said before, some of the best times — some of the best loans are made in the bottom of the cycle. We believe now is the appropriate time to start ramping up our bridge lending program again and take advantage of the opportunities that exist in the market to originate high-quality short-term bridge loans allowing us to generate strong level returns on our capital in the short run, while continuing to build up a significant pipeline of future agency deals, which is critical to our strategy.
We have also done an excellent job on deleveraging our balance sheet, reducing our exposure to short-term bank debt. We have approximately $2.9 billion in outstandings with our commercial banks, which is down from a peak of $4 billion, and we have 65% of the secured nets in non-mark-to-market, non-recourse low CLO vehicles.
Our CLOs are a major part of our business strategy, and they provide us with a tremendous strategic advantage in times of distress and dislocation due to the nature of the non-mark-to-market, non-recourse elements. In addition, they contributed significantly to providing a lower cost alternative for warehousing banks, which in times like this are fluctuating pricing and leverage points parameters.
In fact, one of the significant drivers of our income streams are our low-cost CLO vehicles as well as a fixed rate debt and equity instruments that make up a big part of our capital structure. We were very strategic in our approach to capitalizing our business with a substantial amount of low-cost, long-dated funding sources, which has allowed us to continue to generate outsized returns on our capital.
Another major component of our unique business model is our significant agency platform, which offers a premium value, as it requires limited capital and generates significant long-dated predictable income streams and produces considerable annual cash flow. In the third quarter, we produced $1.1 billion of agency originations, which was in line with our second quarter volumes.
In the third quarter, we also saw a big dip in the tenure to a range of [3.60 to 3.80], which immediately resulted in a massive increase in our agency pipeline to approximately $1.9 billion, which is one of the highest levels we have ever seen.
During that time frame, the agencies got significantly backed up by creating a delay of three to six weeks, which certainly affected the timing of our closures, which compounded by the recent backup in rates is solvable above 4% again.
As a result of these factors and given the magnitude of our pipeline, we are guiding our fourth quarter volumes to be in the range of $1.2 billion to $1.5 billion, which is very rate dependent. If rates stay at these levels, we are confident we can originate $1.2 billion in the fourth quarter, but if rates get meaningfully below 4%, again, we can produce the confident of our ranges for $1.5 billion.
We also continued to do an effective job at converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. In the third quarter, we generated $520 million of payoffs and $385 million or 74% of these loans being refinanced into fixed rate agency deals for the first nine months of this year, we captured over 60% or $1.1 billion of our balance sheet runoff into agency production.
And as I have said in the past, if interest rates continue to decline, we expect that this will become an even more meaningful part of our business going forward. Our fee-based servicing portfolio, which grew another 2% this quarter and 10% year over year compared to $3 billion, generates approximately $125 million a year in recurring cash flow.
We also generate significant earnings on our strong cash balances. In fact, we are earning 4.6% on around $2.3 billion of balances or roughly $120 million annually, which combined with our servicing income and annuity totals $235 million of annual gross cash earnings or $1.15 a share.
This is in addition to the strong gain on sale margins we generate from our origination’s platform. And it’s extremely important to emphasize that our agency business generates over 45% of our net revenues. The vast majority of which occurs before we even turn the lights on every day. This is completely unique to our platform.
We continue to do an excellent job in growing our single-family rental business. We had another strong quarter with $240 million of fundings and another $375 million of commitments signed up, which now brings our nine-month numbers to $1.1 billion, which is already right on top of the total we’ve produced for all of last year and brings our total commitment volume to $4.6 billion from this platform.
Additionally, we have a large pipeline and remain committed to doing this business that it offers us three turns on our capital through construction, bridge, and permanent lending opportunities and generate strong level of returns in the short term, while providing significant long-term benefits by further diversifying our income streams.
We also continue to make steady progress in our newly added construction lending business. This is a business we believe can produce a very accretive returns to our capital by generating 10% to 12% unlevered returns initially and mid to high level returns on our capital when we obtain leverage.
We closed our first deal in the third quarter for $47 million, and we continue to see growth in our pipeline with roughly $300 million under application and $200 million in LOIs and $600 million of additional deals in the current screening.
We believe this product is very appropriate for our platform, and it offers us three turns on our capital through construction, bridge, and permanent agency lending opportunities. And again, between our SOFR and construction lending products, we expect to be able to continue to grow our balance sheet loan book and generate strong returns on our capital, while very importantly, seeing a significant amount of our future agency production.
In summary, we had another productive quarter, and we are working very hard to manage through the balance of this dislocation. We feel we have done an excellent job in working through our loan book and in getting bars to recap their deals with fresh equity as well as bringing in quality sponsors to manage underperforming assets and working through our nonperforming loans.
We realize that although the market backdrop is improving, there is still a lot of work to be done to manage through this environment. And we believe we are well-positioned to execute our business plan and continue to outperform our peers. I will now turn the call over to Paul to take you through the financial results.
Paul Elenio
Okay. Thank you, Ivan. We had another strong quarter, producing distributable earnings of $88 million or $0.43 per share, which translated into ROEs of approximately 14% for the third quarter. As Ivan mentioned, we modified another 24 loans in the third quarter, totaling $1.2 billion.
Approximately $710 million of those loans, we require borrowers to invest additional capital to recap their deals with us providing some form of temporary rate release through paying accrual feature. The pay rates were modified an average to approximately 6% with 2.5% of the residual interest due being deferred into maturity. $240 million of these loans were delinquent last quarter and are now current in accordance with their modified terms.
Our total delinquencies are down 10% to $945 million at September 30, compared to $1.05 billion at June 30. These delinquencies are made up of two buckets, loans that are greater than 60 days past due and loans that are less than 60 days past due that we’re not recording interest income on unless we believe the cash will be received.
The 60-plus day delinquent loans or nonperforming loans were approximately $625 million this quarter compared to $676 million last quarter due to approximately $152 million of modifications, $77 million of loans taken back as REO, which was partially offset by $110 million of loans progressing from less than 60 days delinquent to greater than 60 days past due and $68 million of additional defaulted loans during the quarter.
The second bucket, consisting of loans that are less than 60 days past due, also came down to $319 million this quarter from $368 million last quarter, due to $88 million of modifications, $110 million of loans progressing to greater than 60 days past due, an $8 million payoff, which was partially offset by approximately $157 million of new delinquencies during the quarter.
And while we’re making good progress in resolving these delinquencies in accordance with our objectives that we discussed earlier, at the same time, we do anticipate that there could be new delinquencies in this environment. As Ivan mentioned in accordance with our plans of resolving certain delinquencies, we have started to take back real estate in the third quarter and we expect to take back more over the next few quarters.
The process of taking control and working to improve these assets and create more of a current income stream takes time, which, as I mentioned on our last call, will likely result in a low watermark for net interest income over the next couple of quarters until we have worked through this portfolio.
This is what we expected and is consistent with our previous guidance that this would be the period of peak stress at the bottom of the cycle. In line with our strategy of taking back REO assets, we decided to break out our REO assets into a separate line item this quarter, which was previously included in other assets on our balance sheet.
As Ivan discussed earlier, we took back approximately $77 million in assets in Q3, $57 million of which we currently own and operate, which was accounted for as REO, and roughly $20 million that we had brought in new sponsorship to run and assume our debt, which was accounted for as a sale and a new loan in the third quarter.
The other roughly $78 million in REO on our balance sheet at 9/30, with deals taken back in previous years that were included in other assets in the past. We also continue to build our CECL reserves given the current environment, record an additional $16 million in reserves in our balance sheet loan book in the third quarter.
It’s important to continue to emphasize that despite booking approximately $162 million in seasonal reserves across our platform in the last 18 months, $132 million of which were in our balance sheet business, we were still able to maintain our book value. This performance is well above our peers, the vast majority of which have experienced significant book value erosion in this market.
Additionally, we are one of the only companies in our space that has seen significant book value appreciation over the last five years, with 28% growth in that time period versus our peers whose book values have declined on average approximately 22%.
In our agency business, we had a solid second quarter with $1.1 billion in originations and loan sales. The margins on our loan sales was up to 1.67% for the third quarter from 1.54% last quarter. We also recorded $13.2 million of mortgage servicing rights income related to $1.1 billion of committed loans in the third quarter, representing an average MSR rate of around 1.25%.
Our fee-based servicing portfolio also grew to approximately $33 billion at September 30, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $125 million gross annually.
And this income stream, combined with our earnings on escrows and gain on sale margins represents over 45% of our net revenues. In our balance sheet lending operation, our $11.6 billion investment portfolio and an all-in yield of 8.16% at September 30, compared to 8.60% at June 30, mainly due to a decrease in SOFR during the quarter.
The average balance on core investments was $11.8 billion this quarter compared to $12.2 billion last quarter due to one-off exceeding originations in the second and third quarters. The average yield on these assets increased slightly to 9.04% from 9% last quarter, mainly due to slightly more back interest collected in the third quarter than the second quarter from third quarter modifications, which was partially offset by some new non-accrual loans in the third quarter.
Total debt on our core assets decreased to approximately $10 billion at September 30 from $10.3 billion at June 30, mostly due to paying down CLO debt with cash in those vehicles in the third quarter. The all-in cost of debt was down to approximately 7.18% at 9/30 versus 7.53% at 6/30, mostly due to a reduction in SOFR.
The average balance on our debt facilities was down to approximately $10 billion for the third quarter compared to $10.8 billion last quarter, mainly due to the unwind of CLO 15 that occurred late in the second quarter combined with paydowns in our CLO vehicles from runoff in the third quarter.
The average cost of funds in our debt facilities was up slightly to 7.58% for the third quarter from 7.54% for the second quarter. Our overall net interest spreads in our core assets was flat for both the second and third quarter at 1.46%.
And our overall spot net interest spreads were down to 0.98% at September 30 from 1.07% at June 30, mostly due to less CLO debt outstanding, which has a lower cost of funds from paydowns during the quarter. We also continue to improve our financing sources, adding a new banking relationship with a $400 million warehouse facility that we closed in the third quarter.
And lastly, but very significantly, as we continue to shrink our balance sheet loan book, we have delevered our business 25% over the last 18 months to a leverage ratio of 3:1 from a peak of around 4:1. Equally as important, our leverage consists of around 65% non-recourse, non-mark-to-market CLO debt with pricing that is still well 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 over to the operator to take any questions you may at this time. Jamie?
Operator
(Operator Instructions) Steve DeLaney, Citizens JMP.
Steve DeLaney
Thanks for the helpful additional details on your NPLs and loan loss in the press release. That’s very helpful. I was wondering, you’ve obviously built CECL reserves. I think Paul said whatever it was $180 million over the last 18 months. One thing that’s not in your release, I guess we could find it in the reconciliation of your loss reserve.
Could you comment about the actual amount of realized losses that you’ve taken this year and as you work through the whole process, do you think about it that way, Ivan, that there’s paper, reserves, but at some point, in time, there’s a real loss. And that’s kind of what I’m getting at, if you could give us some idea of what the real losses look like compared to the loss reserves.
Paul Elenio
Sure. So Steve, thanks for the question. It’s Paul. So we haven’t really had really any realized losses during the year. I think we had maybe a $1.5 million realized loss and last quarter or the first quarter, I forget, on small loan that we took back. But for the most part, some of the REO we took back during the quarter, we had some reserves on, and we took those back at fair value.
So until we dispose of those REO assets, we don’t have a gain or a loss. So we’ve not seen any real significant realized losses, or any material realized losses. As you know, the $162 million that I guided to on the call that we booked in CECL reserves, $132 million in our balance sheet is already reflected in our book value. But as you said, it hasn’t been realized.
And it may — we don’t know how much, if any, will be realized. And it takes time to work through those assets and dispose of them. But at this juncture, we just haven’t had any significant realized losses at this point.
Steve DeLaney
Got it. That’s helpful to understand. And just we noted in the press release, the $100 million three-year note issue at 9%. Could you comment on the purpose and use of proceeds. Just on the surface, it looks like expensive capital. Just curious what your thought process was with that.
Ivan Kaufman
Well, we felt it was appropriate price capital for what it is. It’s a three-year capital. We didn’t want to go out to a long time. And certainly, is accretive relative to where our dividend was, and it was an easy piece of capital to put in place. We’re also seeing some pretty good opportunities in the mid-teens returns. So we thought it was probably priced given where we were in the cycle, and it was also important for us to not go out five or seven years to go out three years and not be too short. So it’s just an easy piece of capital to put in place.
Paul Elenio
Yes. And Steve, I’ll just add to that. I think that was our thought process is we don’t really have any pending maturities coming up on any of our unsecured debt other than a convert that’s coming due end of 2025, which is easily replaceable. But Ivan’s view is correct. I mean as we said in our commentary today, we’re starting to ramp back up our bridge lending opportunities. We have the SFR business that funds over time.
We have our construction business. We’re starting to see real solid opportunities to the market to get mid-teens returns. So we looked at that as still cheaper capital than common. And in our view, that’s accretive capital cost.
Ivan Kaufman
Yeah. And I think in my prepared remarks, our SFR and construction lending business, that’s mid to high teens returns that we put in place and keep in mind that, that’s going to fund up substantially next year, right? It’s in place. It’s lower fund in the beginning. That will ramp up, and we’ll get to leverage that up. But having 9% capital and that’s mid-teens returns and knowing it’s going to be in place and not having to put too much on and doing a small deal is very appropriate for us.
Operator
Stephen Laws, Raymond James.
Stephen Laws
I want to follow-up on Steve’s question there on the capital. You mentioned the construction opportunities. Ivan, you mentioned in your prepared remarks, some of the best loans over the years have been done at kind of this point in the cycle as far as the bridge loans.
Can you talk about how that pipeline builds into next year? And as you need more capital, how much more unsecured debt are you comfortable raising without equity? Or were you look at hitting the — tapping the ATM a little bit? Curious to get your thoughts on how you’ll raise capital to fund the growth opportunities.
Ivan Kaufman
Okay. I’m going to meander a little bit because we made a very strategic decision to put our effort into the build-to-rent or SFR business and construction business for a couple of reasons. Number one, the spreads have been very outsized, and there wasn’t a lot of competition as regional banks really got dried up, and we really become a dominant lender in that space.
We were lending in the, I would say, [3.50 to 4.50] spread. And we were able to get a lot of commitments knowing that would be something that would be funding up in 2025. So it was a good way to look at our business.
We opted not to jump into — and it’s also a very low loan-to-value business. I think our average loan-to-value on that like 65% or 60%, I thought that the bridge lending on multi was a little too aggressive at that juncture and it was higher loan to value.
And I wasn’t as comfortable, and we had the optionality of really putting our capital into that space, which we did. I will tell you with clarity that spreads have tightened over the last 60 to 90 days by 75 basis points. So we have embedded value in that pipeline. Now what’s really happened in the marketplace is that the securitization market has come rolling back.
And maybe a year ago, you really couldn’t get an effect of securitization done. The CLO markets are not as tight as they were in the heyday. They’re not that far off, maybe they’re (inaudible) out. So there’s a lot of efficiencies that have been drawn.
And I think ramping up right now on the bridge lending platform, especially with cap costs coming down and securitization costs coming down, and we like that business. About a year ago, spreads were in the [4 to 4.50, capitals were fortune]. And I don’t like to make — chasing that business, so I stepped away from it. Now you’re seeing spreads in [2.75 to 1.25] range with CLO leverage being — coming in 75 basis points to where it was, and those deals make more sense.
So we’ll be looking to really get more effective on that side of the business. I think the securitization market will be much more efficient and we’ll be able to tap that in the first quarter, which will be very effective in the way we leverage our balance sheet.
Now we’ve got to manage all of this where the interest rates are because, as I mentioned in my prepared remarks, interest rates have a lot to do with our runoff and we’ll manage our runoff and our liquidity on a moment to moment basis based on where rates are.
We could see if rates come back down at 375 basis points, we can see an accelerated runoff on our balance sheet, which generates enormous cash. So we’ll pay attention to all those factors, and we’ll tap the different avenues to increase our liquidity as needed, where appropriate based on how all those other features toggle.
Paul Elenio
Yes. And Steve, to add to that, our whole approach on capital has been exactly what Ivan laid out. I think we’ve proven over time as big inside owners, we’ve been tremendously with the capital. So we’re sitting on a nice amount of liquidity. We tapped a three-year debt instrument, we thought it was appropriate and accretive.
As Ivan said, we manage based on interest rates. If we’re going to see a lot of runoff, we’re going to generate capital. If we see tremendous opportunities on the bridge side, the construction, the SFR, we’ll look to access liquidity in the ways we always have, which is a barbell approach between equity and debt. And right now, we’re pretty lowly leveraged. So we like our spot.
A lot depends on interest rates, but we’ll continue approach the capital markets like we always have and really focus on not being diluted.
Ivan Kaufman
Yeah. And just to jump back into one other item. Not only are the NPLs important for us to manage through from an interest standpoint, if you have $1 billion of noninterest earning asset value, you can do the math as we return that back into capital, but the leverage on those assets is much lower. So we’ll generate a lot of cash as we resolve that as well. So we’ll keep our eye on the path to resolutions.
Stephen Laws
Paul, I know in your prepared remarks, you mentioned kind of a little troughing on the earnings here in this quarter, next quarter kind of near term. As we look back half of next year. Is it fair to assume we’re going to get a decent amount of earnings lift between the NPL resolutions, recycling capital and then resolutions on the REO assets as well. Is that the right way to think about earnings kind of ramping next year?
Paul Elenio
I think that’s correct. But let’s go over it in pieces. I think you’ve got to look at things a little bit longer term in one or two quarters, right? That’s what we talked about. So we’re at the bottom. I’ve guided to a low watermark on interest income because, as Ivan said in his prepared remarks, we’re doing a great job of resolving our delinquencies, but we do expect new ones to pop up.
Our goal is that our resolutions will exceed the new delinquencies and we’ll continue to — continue to have our total delinquencies come down, hopefully, in a similar fashion as they did in this quarter. Obviously, SOFR, where SOFR goes obviously affects the model as well, as you know.
But I think over a longer period of time, a longer outlook, that’s correct, that — as rates move in favor and we were able to resolve our NPLs and our agency business originations go up, all those things move in our favor, right? There’s some things that move against you. Short term, when rates come down and there’s things that move with you, as the cycle progresses.
So I think, I look at it and Ivan looks at it as a more long-term view and in a more long-term view, we think over the next 10 to 12 months, we start to really see a lift from those nonperforming loans getting resolved as long as we don’t have significant additional delinquencies. We see a lift from rates being more cooperative and watching our origination business, our SFR business, our bridge business, but it’s over a longer period of time, Steve.
Stephen Laws
Right. Well, appreciate the comments this morning, and you guys have done great to kind of managing through a pretty difficult environment to last year. And we’ll show the successes you’ve had managing through that. So I appreciate the comments.
Operator
Rick Shane, JPMorgan.
Rick Shane
Just a couple of things. Ivan, you talked a little bit about the backlog associated with the agency business. And given the run rate through July, which I think last quarter you guys had said was about $360 million. We were surprised not to see an acceleration there. I’m curious how this actually works from a pipeline perspective? Do your borrowers lock rates?
So is this just a deferral or if they didn’t hit that window where rates were below 4% for two months, which you sort of signaled as the big number. Is that basically lost opportunity until the next time we see rates tick lower?
Ivan Kaufman
Okay. I think it’s a great question, and I’m intimately involved in it because it’s a little bit of a new quirk that the agencies would be sold backlogged. And normally, things would move much quicker. When agencies don’t turn around your loans, you can’t rate lock them, right?
So there was a period of time where you were eager to rate lock these loans, they work well, but you couldn’t get in position that cost us roughly in my estimation, $200 million to $300 million worth of loans that if rate locking would have closed.
Now unfortunately, rates moved against us. So as long as that would work at 4% or 3.75% don’t work today, okay? So the question is, are they lost? Are they not lost? We have $1.8 billion pipeline roughly. And then you have normal fallout.
We gave a range based on where interest rates are and where they could be, and our range is $1.25 billion to $1.5 billion. So that number of $250 million to $300 million, what I mentioned earlier, which is interest rate sensitive is the toggle feature of loans that are in the pipeline that if rates come down, will close. So we think if freight stay [4.25, 4.20], we’ll hit the $1.2 billion for the quarter.
The [$1.250 billion if rates migrate down to 4, 3.90, 3.80, that $300 million], which was previously on the drawing board with those rates, which don’t make sense because borrowers have to put cash back in. Those will only happen if rates come down. So that’s how we look at it.
Rick Shane
Great. It’s very helpful context. I appreciate that. Just pivoting quickly to distributable income. Paul, when we look at that number and think about the mods and the loans that are picking. I am assuming with the way you report numbers that PIK income is included in distributable. And I apologize, I’m bouncing around a lot this morning. If you mentioned this. How much PIK income was there that was reported that is non-cash in the third quarter?
Paul Elenio
Sure. Good question, Rick. And you’re right. We are including the PIK interest on the mods in distributable earnings because I think there’s a high probability of collecting it and its timing. To answer your question, for the third quarter, there was $15 million of PIK interest in our numbers. But I want to break that number out to you to give you a little context.
So of the $15 million that was PIK interest for the quarter, $3 million was related to a group of assets we modified in a prior year that we have substantial guarantees from the equity behind that we feel very, very strong we’re going to collect.
On top of that, another $2 million of that was mezzanine PE, which is part of our mezzanine PE product, whenever we’re doing mezzanine PE and we’re doing it behind agency, that always has a pick feature to it.
That’s just normal cost. So you have to pay, and you have an accrual. The rest of it, which is about $10 million was related to mods that happened in the first and second and third quarter of this year, with $4 million coming from our third quarter mods and $2 million coming from our second quarter mods and $4 million coming from our first quarter models. That’s the breakout of the numbers for the third quarter, if that’s helpful to you.
Rick Shane
It’s very helpful. And I’m scanning the second quarter transcript as you were speaking, that $15 million, I can’t find the number in the transcript at the moment. Is that comparable to, I think, you said $9 million last quarter.
Paul Elenio
I think it was about $10 million last quarter. That’s right. So it’s just up a little bit because — it’s up a little bit because the first quarter mods — I’m sorry, the second quarter mods are fully in the third quarter now because some of them were modded mid-quarter, and then you’ve got your third quarter mods, and then those third quarter mods will have a bigger impact in the fourth quarter if they were modified late in the third quarter. So you’re correct. It was about $10 million, now it’s $15 million, and then we’ll see where it goes going forward.
Rick Shane
Great.
Paul Elenio
In addition to that, though, I just want to point out, Rick, that there was — there are a certain amount of loans that we have modded with a paying accrual that we’ve chosen not to book the accrual and not track the accrual. And that’s $2 million dollars that’s owed to us that’s not in these numbers as kind of an offset if we get it.
Rick Shane
Okay. Great. And actually, Paul, you’re going to regret keeping talking because I will ask one last question that occurred to me. Please remind me your policy on REO. Do you — when you — and we’ve noticed this differs company to company, do you realize any loss when you take property REO?
Paul Elenio
So it depends on what the value is. So the way REO works in the accounting world is you take back an asset. The time you take back the asset, you have to do an appraisal and you have to allocate the value between land and building. And if you’re carrying the loan at x and the appraisal comes in at y, then you either have a gain or a loss for accounting on your REO. But for us, that gain, or loss is not a realized loss until you dispose of the REO asset or gain.
Operator
Jade Rahmani, KBW.
Jade Rahmani
And really great to get all those answers to pick very helpful. I know investors have a lot of questions about that. Wanted to ask on cash flow performance. It dipped in the third quarter. If we exclude timing of agency originations and loan sales, operating cash flow was $68 million, down from $94 million last quarter. I know there’s some seasonality.
Again, this excludes timing related to the agency business, but it is below the dividend. Typically, you do have a pickup in the fourth quarter. So can you just talk to the cash flow operations outlook? And if the dividend you expect to be sustained?
Paul Elenio
Sure. Let’s talk about the cash flow. I don’t have the numbers you have in front of you, Jade. I think you’re doing it on a quarterly basis. The Q, which was filed this morning, has a nine-month cash flow of $415 million cash from operations. If you adjust for the timing of the held of sale loans and adjust for the timing of the changes in other assets and other liabilities. It’s at $328 million. The dividend for the nine months would have been $265 million.
So we cover. There are dips and there are increases, obviously it depends on cash collection. There are certain loans that are — pay historically late and you get those cash in the subsequent quarter. But we do feel like we have adequate cash flow for many, many sources to cover the dividend.
Jade Rahmani
Great to hear. Regarding liquidity, how much liquidity do you expect to use of the $600 million to take back the $250 million REO that you mentioned you expected? And also, I assume there’ll be further modifications.
Ivan Kaufman
Yeah. I think that we’re in the thick of it now. And as I mentioned that a lot of these NPLs are very lowly levered relative to the rest of the business we’ve done, which has impacted our cash. But it’s going to be a turning event. There are many loans that we have REO, we have slated borrowers for.
And once have a slated borrower, you can re-lever those loans up. There are a lot of loans we’re seeing dispositions on, and that’s pure cash. So at the moment, I think that it will be somewhat consistent with what we’ve done. And I think where we are is a pretty good outlook based on being in the bottom of the cycle.
Jade Rahmani
I also wanted to ask about loan putbacks from the GSEs. I think one of your competitors has had put back and another made some disclosure. But I don’t believe there’s been any disclosure from Arbor. Have you experienced any of that?
Ivan Kaufman
No.
Paul Elenio
No, we have not.
Jade Rahmani
And lastly, just because investors ask about it, is there any comment or update you could provide regarding the DOJ inquiry that was reported?
Ivan Kaufman
No, we’ve covered everything in our prepared remarks before. As we said, we don’t comment on that.
Operator
Crispin Love, Piper Sandler.
Crispin Love
Ivan, you mentioned in the prepared remarks that now could be the time to start ramping up the bridge lending program. So just looking at this quarter, originations were down to around [$15 million] or so, which have come down in this environment, which completely makes sense.
But they were $100 million in early 2023 and significantly higher than that previously. So curious on what you’re seeing right now, how the demand is from borrowers right now and just how some of those conversations are going and how you might expect originations to trend down the bridge side?
Ivan Kaufman
So I think what we’re looking at to some degree is a lot of the loans with construction loans, which you’re getting the CLOs and lease-up. We kind of like that business and that’s where we’re putting a lot of our attention. I mean, the math didn’t work for me before when spreads were [4 over 4.50 and SOFR was a 5.25] and people have to buy caps and their costs were enormous.
Spreads, we just did a bunch of loans at [2.75] over. And SOFR was lower and cap cost was substantially lower. So I think we closed about $80 million, and we have another [200] in the pipeline. So I would say that I’d like to see about $300 million to $400 million closed on the bridge lending side between now and year-end and then ramp up that pipeline. We’re also going to continue to do the build-to-rent, the construction lending. So you have to look at it in its totality.
In addition, we are putting a lot of money out on the pref and mezz. And that’s been a 14% business, and that’s been a very attractive business. So we have a lot of flexibility here in terms of where we want to put our capital. But with the securitization market returning and with rates on the short end going down, we think that will be more viable.
Crispin Love
All right. I just want to make sure I got that. Did you say that you — you’d expect $300 million to $400 million of bridge originations between now and year-end?
Ivan Kaufman
About $300 million is what we’re expecting.
Paul Elenio
Yeah. We did $84 million in October, as Ivan referenced. And then we had $240 million of fundings in the third quarter from our SFR business, which as we had in our prepared remarks, our committed volume is very, very high. So we’ve got $1.8 billion outstanding on our balance sheet in that business, and that continues to fund up.
So we do expect that to ramp up. And plus we did $84 million already. And hopefully, we’ll do $200 million more by the end of the year. That’s kind of the way we’re looking at it in the different product lines. On top of that, as Ivan said, we’re active in the construction lending side. We did our first deal of $47 million this quarter. Again, that funds over time. So it will take time to fund, but we could have a few more committed volumes closed by the end of the year on that.
Ivan Kaufman
Yeah. I think it will be impacted if you see short-term rates come down 50 basis points. I think that business will see a lot of growth in the first quarter could be very substantial if that moves in the right direction.
Crispin Love
Great. I appreciate all that color. And then just one last question for me. Just curious on your confidence in the current dividend level. You’ve been covering it with DE. DE has softened a little bit. So it seems like there could be some near-term pressure there, but kind of more confident as you look out from 10 to 12 months, as you said. So I’m just curious on how you and the Board are feeling about the current $0.43 dividend in the environment right now.
Ivan Kaufman
So we have a pretty diversified business and a very resilient business. And there are a lot of things that go up and down in our business. Clearly, if rates come down a little bit on the 10-year side, you’ll see a dramatic growth in the agency business, which produced a substantial amount of revenue.
On the other side, we’ll see a little bit of decline on our escrow balances. So they kind of offset each other. If rates do come down, I think you’ll see the NPLs resolutions really decline, and that will be a great contributor to the way our future income comes.
So those are the kind of factors that we’ll look at very strong. So there’s going to be some offsets, some benefits and some negatives. So I think we’re in a pretty good position based on where rates are today. But if rates continue to decline, I think you can see a little bit more optimism on those numbers, even though there will be a decline on interest-earning escrows.
Now also keep in mind the securitization market has come rolling back, and there’ll be a lot of efficiencies on our borrowing costs if we do decide to issue in the beginning of next year. I mean we’re paying on our warehousing lines, probably [2.50 over to 2.75 over]. I think the securitization market, we could see 50 basis points to 75 basis points of improvement on our borrowing cost and better leverage. So those are the kind of things that we’re evaluating and looking at.
Paul Elenio
And Chris, it’s Paul. I haven’t laid out all the macro different scenarios of what goes up and what goes down, and I’ve talked about this in the past. Times never perfect, right? Some things may go down earlier, and stuff goes up. But the way we look at it, the way the company and the Board looks at the dividend is, if you look at it more of the long-term, you don’t look at one or two quarters at the bottom of the cycle. So we’re confident we have things that will offset. It could be over a period of time, but we’re really confident where we are today that over a longer period of time that’s sustainable.
Operator
And ladies and gentlemen, that will conclude today’s question-and-answer session. I’d like to turn the floor back over to Ivan Kaufman for any additional or closing comments.
Ivan Kaufman
I just want to thank everybody for their participation. It’s definitely been a very challenging time for us and most people in the industry. I think we’ve outperformed our peers, and I really appreciate your support and your commitment for the company. Thank you, everybody.
Operator
Once again, ladies and gentlemen, that will conclude today’s call. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.
