Earnings call transcript: Arbor Realty Trust Q3 2025 beats EPS forecast, stock dips

Arbor Realty Trust reported its Q3 2025 earnings, revealing an EPS of $0.35, a significant 50.54% above the forecast of $0.2325. Despite this earnings beat, the company’s revenue fell short of expectations, coming in at $112.43 million against a forecast of $154.86 million, a 27.4% miss. In reaction, Arbor’s stock declined by 13.03%, closing at $11.17 in pre-market trading, as investors weighed the earnings surprise against the revenue miss and increased delinquencies.

Key Takeaways

• Arbor Realty Trust’s EPS exceeded expectations by 50.54%.
• Revenue fell short by 27.4%, impacting investor sentiment.
• Stock price dropped by 13.03% in pre-market trading.
• Delinquencies increased to $750 million, raising concerns.
• Strong performance in agency and single-family rental originations.

Company Performance

Arbor Realty Trust demonstrated robust financial performance in Q3 2025, with distributable earnings of $73 million, bolstered by a $48 million gain from the Lexford portfolio sale. However, the company’s revenue miss and increased delinquencies overshadowed these achievements, reflecting challenges in maintaining interest income and managing delinquencies.

Financial Highlights

• Revenue: $112.43 million, below the forecast of $154.86 million.
• Earnings per share: $0.35, surpassing the forecast by 50.54%.
• All-in yield on investment portfolio: 7.27%, down from 7.86% in Q2.
• Net interest spreads: 0.55%, down from 0.98% in Q2.

Earnings vs. Forecast

Arbor Realty Trust’s EPS of $0.35 exceeded the forecasted $0.2325, resulting in a 50.54% surprise. Despite this, the revenue miss of 27.4% raised concerns about the company’s ability to meet market expectations, contributing to the negative stock reaction.

Market Reaction

Following the earnings report, Arbor’s stock fell by 13.03% to $11.17 in pre-market trading, despite the EPS beat. This decline suggests investor concerns over the revenue shortfall and increased delinquencies. The stock remains within its 52-week range of $8.43 to $15.76 but reflects broader market apprehensions.

Outlook & Guidance

Looking ahead, Arbor Realty Trust anticipates resolving legacy assets by Q2 2026 and expects improved earnings run rates. The company is targeting $1.5-2 billion in bridge production and single-family rental production for 2025, indicating a positive long-term outlook despite current challenges.

Executive Commentary

CEO Ivan Kaufman emphasized the company’s resilience, stating, "We are accomplishing all of these goals without a material change in our book value." He also noted, "We feel we now have some wind at our backs," highlighting optimism for future performance. However, Kaufman acknowledged the current cycle’s difficulties, saying, "We are at a very difficult point in the cycle. We’re prepared for it."

Risks and Challenges

• Revenue shortfall: The significant miss raises concerns about future revenue stability.
• Increased delinquencies: Rising delinquencies to $750 million could impact financial stability.
• Interest income reduction: A $34 million reduction in interest income highlights challenges in maintaining earnings.
• Competitive lending landscape: Intense competition may pressure margins.
• Market volatility: Fluctuating interest rates and economic conditions pose risks.

Q&A

During the earnings call, analysts questioned Arbor’s strategy for loan modifications and REO asset management. Concerns about the reduction in interest income were also addressed, highlighting investor focus on the company’s financial health and strategic direction.

Full transcript - Arbor Realty Trust (ABR) Q3 2025:

David, Conference Call Operator: Good morning, ladies and gentlemen, and welcome to the third quarter 2025 Arbor Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press the star and one on your telephone. If you would like to remove yourself from the question queue, please press star and two. Please be advised that today’s conference is being recorded. If you should need any operator assistance, please press star zero. I would now like to turn the call over to your speaker for today, Paul Elenio, Chief Financial Officer. Please go ahead, sir.

Paul Elenio, Chief Financial Officer, Arbor Realty Trust: Okay. Thank you, David. 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, 2025. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor’s expectations in these forward-looking statements are detailed in our SEC reports.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.

Ivan Kaufman, President and Chief Executive Officer, Arbor Realty Trust: Thank you, Paul, and thanks, everyone, for joining us on today’s call. As you can see from this morning’s press release, we had another active and productive quarter with some very significant accomplishments that are worth noting. First, we continued our strong progress of creating substantial efficiencies on the right side of our balance sheet with a new $1 billion CLO that we issued in the third quarter with tremendously accretive terms. This deal was priced at 182 over, contained 89% leverage, and a 30-month replenishment feature, and generated an additional $75 million of liquidity. The CLO securitization market is incredibly constructive, and we’re very pleased to be such a prolific multifamily originator and have a seasoned, well-recognized securitization platform, which allows us to consistently access the market and grow our platform.

With the pricing levels we are seeing in the market, which has only gotten tighter since our last deal, we’re able to compete very effectively in today’s extremely competitive market and generate strong level returns on our capital. We also successfully called one of our legacy CLOs in October, refinancing these assets within our current banking facilities, the bulk of which have replenishment features that allow us to substitute collateral as these loans run off. This was a great trade for us as the CLO was past its replenishment period and was deleveraging and becoming less efficient. After the unwind, we are now financing these assets with these loans at similar prices to the CLO we redeemed and very significantly were able to pick up another $90 million of liquidity through enhanced leverage.

One of the more significant accomplishments we had this quarter was the realization of a $48 million gain from the sale of a portion of the assets in the Lexford portfolio. If you recall, our equity investment in this portfolio was the focus of the first short seller report, which claimed that this was a fraudulent transaction and that we were misleading our shareholders as to the value of these assets. In fact, the reality was exactly the opposite. This was by far one of the best restructurings we have ever accomplished. Including the large gain we recorded this quarter, this investment has generated over $100 million of income over its lifespan, the return of $67 million of preferred equity on top of us receiving all of our invested capital back.

There is still a portfolio of assets that we expect to be able to liquidate in the near future. We are also very successful at selling our interest in the legacy asset that we expect to close at the end of business today. This transaction will generate approximately $7 million of additional income in the fourth quarter, which combined with the gain from the Lexford transaction totals $55 million of income that was generated from two of our legacy investments. This gives us a tremendous amount of flexibility to be very aggressive in addressing our legacy issues. Our goal is to resolve these non-interest earning assets, which are creating a tremendous drag on earnings, as quickly as possible. We believe it will take until the second quarter of next year to accomplish our goals.

When completed, we will have effectively resolved a significant amount of our troubled assets and set up with a much better improved run rate of income, which will go a long way towards increasing our earnings and being able to grow our dividend again sometime in 2026. Very importantly, we will have accomplished all of this with a very minimal impact on our book value, which is something no one else can say in our space. As I mentioned on our last call, the prolonged elevated rate environment has put certain borrowers in a position where they are running out of steam and are having difficulty raising additional equity to continue to manage their assets. As we have stated before, we believe that the third and fourth quarter of this year will be the bottom of the cycle.

We are working very hard to quickly work through our loan book and redeploy our capital into performing assets and improve our run rate of income for the future. Certainly, with the two recent interest rate cuts and the likelihood that we could potentially see one more cut this year, we are starting to feel more optimistic about the rate environment moving forward, which we believe will provide some much-needed relief for our borrowers. This positive trend gives us some wind at our backs for the first time in a while. As this trend continues, we believe we will be able to meaningfully grow our origination volumes and start to move more assets off our balance sheet, which will increase our earnings run rate and position us well for the future.

As I mentioned earlier, we’ve taken an aggressive approach to resolving our legacy assets through a myriad of different strategies, including modifying loans, taking back assets as REOs to own and operate, and bringing in new sponsors to take over assets and assume our debt and create a more current income stream. We continue to examine all loans that are showing signs of distress and are accelerating the process of taking control of the real estate and working quickly towards an accredited resolution. This has resulted in a temporary spike in our delinquencies. We look to expedite the resolution process of these loans, the number of which we have targeted to take back as REO and flip to new sponsors. This will take a few quarters to complete, and in the interim, we’ll temporarily reduce our net interest spreads until we complete the resolution process.

However, when the smoke clears, we will have cleaned up the vast majority of our legacy book and create a more stable and growing run rate of income in the future. Turning now to our third quarter performance, as Paul will discuss in more detail, our quarterly results included the large gains in the Lexford investment, as I mentioned earlier. This provides us with a unique ability to be able to be very aggressive in accelerating the resolution of our problem loans without materially impacting our book value. The timing of these resolutions will take place over the next few quarters, which creates some lumpiness in our quarterly earnings going forward. However, we are committed to continue to pay our current quarterly dividend for the balance of the year.

If we accomplish our goals effectively, we’ll be able to improve our earnings run rate and put us in a good position to consider an increase in our dividend again sometime in 2026. I can’t stress this enough. We are accomplishing all of these goals without a material change in our book value, unlike the rest of our peers who have experienced significant book value deterioration. As I mentioned in our last call, the balance sheet lending business is incredibly competitive right now. There is a tremendous appetite for deals and a significant amount of capital out there chasing each transaction. As a result, we are being highly selective and have closed about $400 million in the third quarter, putting us around $850 million of volume for the first nine months of the year.

The guidance we gave at the beginning of the year of $1.5 to $2 billion of bridge production for 2025 was reflective of our views that the market would become overheated. As a result, we dialed back our production numbers for 2025 to a more conservative level. We do have some large, high-quality deals in our pipeline, and we think we are likely to close by year-end, which gives us comfort that we may be able to come in with our original guidance despite the extremely competitive landscape. The bridge lending business is an important part of our overall strategy as it generates strong leverage returns on our capital in the short term while continuing to build up a pipeline of future agency deals.

With the significant efficiencies we are seeing in the securitization market, we’re able to continue to produce strong leverage returns on our capital despite this extremely competitive landscape. In the agency business, we had a tremendous third quarter originating $2 billion of loans, which is the second highest production quarter in our history. We had a very strong October originating $750 million, which puts our 10-month volume numbers at $4.2 billion, making us very comfortable that we’ll easily surpass our origination guidance of $3.5 to $4 billion and the best year’s production number of $4.5 billion as well. This is a tremendous accomplishment, especially given the rate environment which we were in for the better part of the year. This is a tremendous testament to the value of our franchise and the resiliency of our originations network with a loyal borrower base that we have cultivated over the many years.

We continue to do an excellent job in growing our single-family rental business. We originated approximately $150 million of new business in the third quarter and another $200 million in October, bringing our 10-month numbers to $1.2 billion. We also have a strong pipeline, giving us comfort that we were able to meet our internal guidance of between $1.5 to $2 billion of production for 2025. This is a great business as it offers us free turns on our capital through construction, bridging, and permanent lending opportunities and generates strong leverage returns in the short term while providing us significant long-term benefits by further diversifying our income streams.

With the enhanced efficiencies that we’re seeing in our securitization market and in our bank lines, we are generating mid to high teens returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up this business. In our construction lending business, we are having great success in growing out this platform with a real influx of new opportunities that we’re seeing to do large loans on high-quality assets with very experienced developers. In the third quarter, we closed $145 million of deals and another $65 million in October, bringing our 10-month numbers to around $500 million.

We also have a very large pipeline with roughly $185 million on application and another $675 million of additional applications outstanding and $900 million of deals we are currently screening, giving us comfort that we can up our guidance for the year from an initial $250 to $500 million to $750 million to $1 billion for 2025. Additionally, and very significantly, the size of our current pipeline gives us real visibility into how we will be starting our 2026, which by all indications, we expect will produce meaningful growth over 2025 numbers. Between our agency business, bridge lending program, single-family rental, and construction platform, plus our mezzanine preferred equity business, we expect to originate between $8.5 and $9 billion in volume this year, which was a very difficult environment for the vast majority of the year.

We are starting to feel environment, which we believe will lead to more robust origination volumes in the future. In summary, we had a very active and productive quarter with many notable accomplishments. Clearly, the outlook for the interest rate environment has significantly improved from where it was in the beginning of the year, and we are feeling more optimistic as a result. We feel we now have some wind at our backs that will allow us to continue to grow our origination volumes and generate strong returns on our capital from the significant improvements and efficiencies we have created on the right side of our balance sheet.

We also feel that the gains we have generated from our legacy investments put us in a great position to accelerate the resolution of our legacy book and create a much-improved run rate of income going forward without materially affecting our book value. These improvements, coupled with the growth we are expecting in our originations platform, will go a long way in allowing us to achieve our goals by being able to grow our earnings and dividends in the near future. I will now turn over the call to Paul to take you through our financial results. Thank you, Ivan. In the third quarter, we produced distributable earnings of $73 million or $0.35 per share.

As Ivan mentioned, a portion of these earnings were associated with the large gain we recorded this quarter from the Lexford investment, which will partially offset some of the accelerated losses and reduced interest income we will experience temporarily from the resolution of some of our problem loans over the next few quarters. As discussed earlier, the resolution of these loans will likely occur over several months, which will cause our quarterly earnings to fluctuate during that time period. We will do our best to give as much forward guidance as we can as it relates to any realized losses we will incur as we continue to make progress in resolving the bulk of our legacy book.

As to the income Ivan mentioned that we will generate in the fourth quarter from the sale of our legacy asset, this is related to a land development deal that we’ve had on our books since 2006 called Homewood. We had $128 million of loans on this asset that were written down to $50 million many years ago, again, on an asset that was originated prior to the great financial crisis. We sold the note for $59 million, which should result in a $9 million reserve reversal and a $1 million distributable earnings charge in the fourth quarter. Additionally, some of these loans were in our TRFs as they were not considered good REO assets. As a result, we will receive a $20 million tax deduction in the fourth quarter, which will reduce our tax expense by approximately $7.5 million and increase distributable earnings.

With respect to accrued interest on modified loans, in the third quarter, we reversed approximately $18 million of previously accrued interest, the majority of which were related to new delinquencies during the quarter, which, as we discussed earlier, is reflective of where we believe we are in the cycle. This adjustment, combined with $6 million in back interest collected on a loan payoff in July, which we referred to on our last call, has resulted in us reducing the total accrued interest on modified loans by $13 million.

This quarter, even after accruing an additional $11 million in interest on modified loans that are performing in accordance with their terms, we have also started the process of accelerating the resolution of problem assets by reworking some of our loans at lower interest rates in an effort to create a higher run rate of future earnings going forward on loans that were likely to default in the near future. This resulted in a reduction in interest income of approximately $8 million this quarter and will affect interest income going forward by about $4 million a quarter. As stated earlier, we have taken an aggressive approach in dealing with our troubled assets. As a result, our delinquencies have risen this quarter to $750 million at September 30 compared to $529 million at June 30. This peak stress reflects where we are in the cycle.

We are working very hard to take control of these assets quickly and rework these loans with higher quality sponsors and provide a more consistent run rate of income going forward. In fact, in October, we took back $110 million of these assets as REO, expecting another $40 million to be foreclosed on in November and December. We’re working very hard at bringing in new sponsors to take over assets and assume our debt over the next few quarters, which will create a longer-term benefit of creating a more predictable run rate of income. This will come with the short-term temporary effect of reducing interest income, as I mentioned earlier, as we accelerate the process. This strategy will also result in a quicker ramp-up in our REO book as we look to accelerate the process of bringing in new sponsors to take over the real estate and assume our debt.

In the third quarter, we took back $122 million of new REO assets, putting our REO book at $470 million at September 30. As I mentioned earlier, we’re expecting to take back another roughly $150 million of loans in the fourth quarter. We are working hard to dispose of some of these assets very quickly, which should keep us in the range that we previously guided to of between $400 million to $600 million of REO assets that we will own and operate. In the third quarter, we recorded an additional $20 million of net loan loss reserves on our balance sheet loan book, $15.5 million of which were specific reserves, with the remaining $4.5 million being general CECL reserves.

The additional specific reserves that we recorded this quarter are 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. This could result in roughly $15 million to $20 million of realized losses next quarter if we’re successful at liquidating all these assets quickly, which will be partially offset by the $7 million of income we generated from the sale of the Homewood assets. This will very importantly allow us to increase our run rate of income going forward and create a more predictable earnings stream. In our agency business, we had an outstanding third quarter, as Ivan mentioned, with $2 billion in originations and $2 billion in loan sales, which generated $10 million more in gain on sale income this quarter.

The margins on this business were 1.15%, which are down from prior quarter due to some large off-market portfolio deals we were able to capture, which contained lower margins and smaller servicing fees. We also recorded $15.5 million in mortgage servicing rights income related to $2 billion of committed loans in the third quarter, representing an average MSR rate of around 100.78%, which again reflects the larger deals we closed this quarter with lower servicing fees. Our fee-based servicing portfolio grew 4% this quarter to approximately $35.2 billion at September 30 on record third-quarter originations. This portfolio has a weighted average servicing fee of 36.2 basis points and an estimated remaining life of around six years and will continue to generate a predictable annuity of income going forward of around $127 million gross annually.

In our balance sheet lending operation, our investment portfolio grew to $11.67 billion at September 30 from originations outpacing runoff for the third straight quarter. Our all-in yield in this portfolio was 7.27% at September 30 compared to 7.86% at June 30, mainly due to stopping the accrual of PIC interest on certain loans, modifying some loans with rate reductions, new third-quarter delinquencies, and a reduction in SOFR. As mentioned earlier, we do expect this run rate to improve meaningfully over the next few quarters as we look to accelerate the resolution of our delinquencies. The average balance in our core investment was $11.76 billion this quarter compared to $11.53 billion last quarter from growth in the portfolio.

The average yield in these assets decreased to 6.95% from 7.95% last quarter, mainly due to the significant non-recurring adjustments I spoke about earlier, including reversing accrued interest and lower rates on modified loans, combined with the additional delinquencies we experienced in the third quarter. Total debt on our core assets was approximately $9.9 billion at September 30. The all-in cost of debt was approximately 6.72% at 9/30 versus 6.88% at 6/30, mainly due to a reduction in SOFR. The average balance in our debt facilities was approximately $10 billion for the third quarter, mainly due to funding our third-quarter growth and the addition of our new senior notes in July.

The average cost of funds on our debt facilities was 6.88% in the third quarter compared to 6.87% for the second quarter, excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet and therefore not included in our total debt on core assets. Our overall spot net interest spreads were 0.55% at September 30 compared to 0.98% at June 30 from stopping accrued interest on certain loans and from new delinquencies and modifications at lower rates. We estimate that this new run rate will temporarily reduce our quarterly earnings by $0.05 to $0.06 a share that, again, we believe we will be able to improve upon meaningfully as we resolve our troubled assets over the next few quarters.

In summary, we’re very pleased to have produced significant gains from a few of our legacy investments, which will put us in a good position to be able to accelerate the resolution of our legacy book. This will take us some time to complete, and in the interim, we will experience some fluctuations in our quarterly earnings. When completed, we will resolve the lion’s share of our legacy assets and build up a more predictable and growing run rate of income for the future, which will complement the growth in the origination platforms that we’re expecting from the improved rate environment and go a long way towards helping us achieve our goal of growing our earnings and dividends in the future. That completes our prepared remarks for this morning. I’ll now turn it back to the operator to take any questions you may have at this time. David? Thank you.

As a reminder, to ask a question, please press the star and one on your telephone. To withdraw your question, you can press star and two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We’ll take our first question from Steve Delaney with Citizens JMP Securities. Please go ahead. Your line is open. Good morning, everyone. Thank you for taking the question. Thank you for a very detailed layout. You guys have your hands full and kind of a multi-front war, but you seem to understand the game plan very well.

As I’m trying to understand it, it seems to me that you have three steps as you’re looking at your portfolio: to modify what you can where you have a viable partner and a property, if not to foreclose, and then obviously to eventually move those foreclosed properties to a sale. I guess in terms of, let’s start with the loan mods. Can you look at the portfolio now and guess or give us an estimate of what inning we’re in in terms of the loans that are left in the portfolio that are performing, have not needed to be modified? Do you have a sense for how stable those properties and those loans might be over the next 6 to 12 months, or do you have concerns that there could be slippage in that?

I guess, are you down to solid borrowers with improving market conditions or this triage process? I’m trying to get a sense for how many additional potential loan mods might come up in the next couple of quarters. Thanks. I apologize for that long-winded question. I’m trying to express what I was getting at. Sure. Let me walk through from a macro standpoint where we are. In terms of what inning we’re in, it also depends on what market we’re in. Different markets react a little differently. Generally, when we do a modification, people are bringing capital to the table. Remember, this is a prolonged period of time that people have had to continue to bring capital to the table with the elevated interest rates. It’s one thing when you bring capital to the table and rates remain elevated, and you keep on having to bring capital to the table.

Most modifications have a duration to them. If rates remain elevated and the market doesn’t recover, they have to bring more capital to the table, or there is a future modification potentially that will happen if the asset doesn’t improve. Where we become very aggressive is if the asset’s not improving because the people are not managing effectively or don’t have the capital to maintain that asset. That’s where we become extraordinarily aggressive. We don’t want a deteriorating asset, and that’s where we stepped up our efforts. We’re at a different point in the cycle, and we also view that these assets with the right amount of capital and the right amount of management, they will stabilize. That’s why you see a little bit of a peak. There are certain markets that have been extraordinarily hard hit and kind of been whiplashed.

I would say markets like San Antonio, like Houston. Those are markets that, under the prior administration, the migrant situation really took over these assets and really negatively impacted these assets. There are quite a few of them, and we’re not the only one who’s had these happen to our assets. It’s across the board. Of course, with the change in administration, that began to change, and we got control back of those assets. Unfortunately, with the new administration and what we’ve seen is they’ve had massive ICE raids and an emptying of properties that were perhaps 88% or 90% occupied, and they’re stripping down 20% to 25%. That’s why we’ve seen a little bit of an acceleration on our part now in Houston and in those markets that are going to take control over those assets and restabilize those. That’s a little unique to those markets.

What we are seeing, which is of great interest, is when we do take back assets, where in the past, maybe we had one or two people who were interested in buying these assets, we probably have three or four people. The appetite for these assets is growing and growing. With the drop in rates and a little bit of return to liquidity, we’re seeing some real strength. We’re also seeing a lot of benefit right now to good management. If you have good management and you have the right CapEx to improve your units, where we’ve had a lot of economic issues in terms of economic collections on some of these assets, we’re seeing if these assets are run correctly, they’ll fill up, and they’ll be the right paying tenants. That’s why we’re stepping in as well.

The peak in our delinquencies is reflective of our attitude that some of these assets are better in our hands or even transitioning to new people. Paul mentioned we have about $750 million of delinquencies. We have resolution in clear sight that within the next 45 days, about $500 million of those will be resolved either through recapitalization of modifications or finding new borrowers and stepping into those deals. We are being aggressive. We’re very optimistic that we’ll get through those. We do expect one more wave in the fourth quarter, which we’re prepared for as we’re taking an aggressive approach to try and resolve the majority of these legacy issues. We’re hopeful that by the end of the fourth quarter, we would have really addressed each and every one of these, transitioning ones out of ownership that’s not doing a good job.

Towards my comments, by the end of the first quarter, we should be in a real position to change our run rate and get these either resolved, income producing, or disposed of appropriately. I want to point out that there are two aspects that we focus on, maybe a little different than everybody else, which are important to note. We focus not only on our dividend, which of course has outperformed everybody else, and our guidance was to maintain our dividend for the year, which we believe is just a little lumpy right now. More significantly, Steve, if you look at the company’s performance, we really have a growth in book value of 23% over the last five years, and everybody else has declined 27%. There’s a 50% change in book value relative to us and everybody else.

We’re managing through this with a nominal change in book value, while maintaining a tremendous dividend. I think that is where we’re looking at as business operators, to manage both of those items. It’s a long-winded response, but it wasn’t an easy question. I know it wasn’t an easy question. We do note the stability in the book value because we’ve seen some big drops in some of your peers with additional five rated loans. Just to wrap it up, and I really appreciate that thoughtful response, it seems like to me we’re one to two quarters away from having the problem loans on your books as REO.

The first step is to get it into REO, and it seems like certainly by mid-2026, you’re going to be in a very active REO sales process as far as to finish the loan mod, take back what you have to take back, and in 2026, hopefully sell a lot of real estate. I want to point this out, and I think this is important because we’re a little different than everybody else. We have a very diversified business with a lot of skill sets. If you take a look at the Lexford transaction, which was something everybody said, "Oh my God, you’re taking that back." We had $67 million of preferred equity on that portfolio.

Not only did I get back my $67 million, not only do we make hundreds of millions of dollars on these and get a good income stream going forward, we took assets that were in the mid-80s, low 80s in occupancy, improved these assets, got them in a great position, had a great asset, and now look at the impact. We’re creating another $50 million. We still have assets on our books. We have to be guided as good operators as producing what we need to produce. We have very diversified income streams. Yeah, we can generate gains, and we can have the patience to have the right kind of gains.

What we will do is we’ll look at the REOs and see, is it quicker to dispose of them now at the right levels, or do we need to give them a little TLC and get them like other people? Thank you so much for the caller item. Okay. We’ll take our next question from Jade Rahmani with KBW. Please go ahead. Your line is open. Thanks very much. The $18 million accrued interest reversal that was booked in the quarter, does that mean that the current level of interest income for the third quarter is a reasonable baseline to use? It was $208 million. Reflects most recent interest rates as well as interest rates on modified loans. I think it sounds like you expect originations potentially to drive either a flat to slightly higher portfolio in four Qs.

Do you have any comments on the run rate of interest income? Yes. Hey, Jade, it’s Paul. It’s a good question. The answer is no to the first part. Let me give you some guidance. As I laid out in my prepared remarks, we did see, as Ivan mentioned, some elevated defaults this quarter, given where we are in the cycle and how aggressive we’re being to be able to resolve things quickly and take back assets before they deteriorate. We did reverse $18 million of accrued interest, mostly related to delinquent loans and loans we remodified. On a run rate, that’s a one-time adjustment in my mind. On a run rate, that’s going to cost us $4 million going forward because we reversed interest as of June 30th that we had accrued of $18 million, but we’re losing interest on those accruals going forward of about $4 million.

The $18 million is one-time. The $4 million is recurring. Additionally, we had modified loans during the quarter. Some we had to remodify where we gave additional relief. Due to the structure of some of those mods, it cost us $8 million for the quarter in interest, but it’s only going to cost us $4 million going forward on the rate reduction. We have $4 million going forward in a run rate reduction from stopping PIK interest on certain loans. We have $4 million in reduction from lower interest rates on mods. On the new delinquencies right now, I want to go through this, that would affect the run rate going forward by $8 million. If you add up those three numbers, that’s $16 million in reduced interest income on a run rate going forward. However, that’s before we resolve anything.

We’ve already agreed to, on $225 million loans, we’ve already agreed to reposition and sell with new interest rates of like SOFR plus 250 for the most part. That’s picking us up $3 million in the fourth quarter alone. Before we even get into the items that Ivan mentioned, getting our $750 million down even further to like $250 million, some of that will happen at the end of the quarter. It won’t impact the fourth quarter as much, but it’ll impact the run rate in the first quarter going forward. The long answer is interest income went down by about $34 million this quarter, roughly due to $18 million of reversed accrued interest, another $4 million from stopping the accrued interest, $8 million from modified loans, and $5 million from delinquencies.

That $34 million was offset by about $7 or $8 million in back interest and fees we collected, and about $5 million in growth in our portfolio for a reduction in interest income of $22 million. I see the reduction of interest income going forward starting at $16 million for the reasons I talked about, the $4 million of PIK, the $4 million of mods, and the $8 million of delinquencies. We’ve already improved that by $3 million on loans we know we’ve executed. Now I’m down to $13 million of a reduced interest income going forward. That’s my $0.05 to $0.06 I was referring to. However, having said that, that $3 million that we improved already in the fourth quarter was just the fourth quarter impact, and those were done like mid-quarter. The first quarter will be impacted by $5 million instead of $3 million.

That brings that $13 million down to $11 million. Everything Ivan talked about we’re working on will likely bring it down further. We look at this as the third quarter got hit by some reversals and some elevated delinquencies. The fourth quarter will be hit, but by a lot less. The first quarter and second quarter should see drastic improvements to our run rate to get us back to where we were and then above. Hey, Jade, I want to make one comment. Paul mentioned that we reduced our spread on the loan to 250. I want to be very clear that the market spreads today on new originations are 225 to 275. Some of the relief that we’re giving is really reflective of where the market is and adjusting the borrowers down to today’s market and giving them consideration for where lending spreads are.

While we’re seeing spreads come in a little bit, it’s really reflective of the current market spread. It’s not really a discounted spread to the market. Thanks for that. That’s helpful. I’ll have to go through the numbers in more detail after this. On interest expense, similar question. It went in the wrong direction despite the positive developments on financing. Were there any one-time items in interest expense causing it to be elevated for the structured business at that $176.2 million for the third quarter? Yeah. Jade, there was a couple of things. One, interest income, you saw it went down by $22 million. I just laid out all the pieces for you there. The other side of it is interest expense went up about $10 million. $5 million of that, some of that is growth in our portfolio, right?

I had $6 or $7 million of income from growth in my portfolio. Then I had debt increase, obviously, as I leveraged the growth of that portfolio. We also issued the $500 million of senior bonds in early July. That full effect was in the third quarter as we laid out in our last quarter for our run rate. Also, we had a little bit of double interest in the third quarter, which won’t repeat because we paid off our converts in August, but we issued the senior bonds in July. We weren’t allowed to pay our converts off until August. We had like a one-month of double interest on those two bonds that will go away. The big reason the interest expense is up is because we issued $500 million of senior bonds to grow our portfolio. Got it. That’s clear. Lastly, if I could.

GHC Credit has been pretty benign. I don’t know if you follow Greystone, which is owned in joint venture by a series services company, but it looks like they had a big spike in credit loss provisions in their agency multifamily business. Now I’m seeing Arbor’s results, and the provision was for risk sharing $8 million, double what it was last quarter and higher than the recent run rate. Can you comment on what drove the increase, if there were any loan putbacks, any cases of fraud, or if it’s just broader credit deterioration? Is that something that’ll be a headwind going forward? Yeah. I think if you look at Fannie Mae and if you look at all of their numbers, we’re in the peak part of that delinquency. You run that at very low delinquency, and then at times like right now, it increases a little bit.

Like all lenders who had a little bit of a portfolio in New York City, you’ve had some distress on the rent control and rent stabilization. Not material, but it does move the needle a little bit. We’re all working through a change in the economic climate, which shows across the board delinquencies at the agencies. It’s just where we are in the cycle. Yeah, Jade. Given Ivan’s commentary, what we said with everything else, we think peak stress is Q3, Q4, leak into Q1 a little bit. We are expecting, I guess, similar reserves for Q4, maybe a little bit less than Q1, given where we are. It’s just based on where the peak stress is. Okay. Thank you. We’ll take our next question from Rick Shane with J.P. Morgan. Please go ahead. Your line is open. Thanks for taking my questions this morning. Excuse me.

First, if we could talk a little bit about Homewood and the sale there. It looks, based on the disclosures, that you’re selling that property basically at the reserve value, maybe a slight uptick versus the reserve value. The original carrying value of the loans was $112 million. I’m curious if there is some realized or, excuse me, the original cost basis is well above that because there’s a $71 million reserve. Is there going to be a realized loss in the quarter that we need to think about in terms of distributable income? Yeah. So, hey, Rick, it’s Paul. Great question. I’m glad you asked it, and I’ll give a lot of color on it. We did have, between all the Homewood pieces, about $128 million of UPV on the loans. We wrote it down to $50 million by taking almost $80 million reserves many, many years ago.

All but $10 million of those reserves that brought it to a net carry of $50 million were taken way before COVID when AFFO and FFO reflected reserves as realized losses. The only portion that has not been brought into. AFFO, FFO, which has been superseded by distributable earnings, was $10 million of reserves we took around the time of COVID. As you pointed out, we have a carry value of $50 million. We sold it for $59 million. When the accounting gets done, we believe what’s going to happen is we’re going to have a reversal of a reserve of $9 million, right? Because we have more reserve than we sold it for. We’ll have a distributable earnings hit of $1 million because technically the distributable earnings carrying value is $60 million, and we sold it for $59 million.

We’ll have only a $1 million realized loss, we believe, on that sale because all the other reserves had already been taken through AFFO and FFO before we went to distributable earnings because this is an asset that goes way before the great financial crisis, as you know. We’re going to pick up $7.5 million of real GAAP income and distributable income and book value growth from the savings on the tax side because a lot of these loans were in our TRS, and we are a tax-paying entity in the TRS, and we get to save the taxes on that. Got it. Okay. That makes sense. Thank you for walking me down GAAP accounting memory lane. I did not actually remember that. That’s very helpful. The other thing is that contractually, that was a loan that had about a 10% coupon. You did not accrue interest on that.

Is there any accrual reversal associated with that, or should we just look at this as you sold a loan that was effectively generating a 0% interest rate and there was no cash flow associated with that? There’s no nuance there. Yeah. There’s a couple of nuances we should talk about. You’re exactly right per our disclosures, which you read correctly. This loan had an accrual rate for many, many years, but when it was struggling, we did not accrue any of that interest. None of that interest is accrued in my books. There’s no reversal of interest. In this deal, as Ivan will point out, we are providing a little bit of seller financing, and we are ending up with a performing loan now at 10%.

Not only are we going from a loan that was zero, we’re getting about $6 million or $7 million of cash in the door. We’re saving $7.5 million in taxes with an offset of about $1 million distributable earnings hit. We have a $53 million loan that’s going to earn 10% now and be current. We took an asset that was earning zero. We created some cash. We created some income, GAAP, and distributable. We have a performing asset going forward that’s adding to our run rate. Got it. Was that loan unlevered on your balance sheet? Yes. Okay. Thank you for that. That’s really helpful. The other thing I’d just like to talk about is when we look at the income from REO, property income fell 20+% sequentially, and property operating expenses went up modestly. That’s despite the fact that there is more REO.

Trying to understand what is going on there and would like to understand potentially the implications for lower cash flows in terms of recovery values. Sure. I’m going to let Ivan talk globally about the REOs. Let me give you some numbers, and then he’s going to go into where the market is. You have to remember, some of the loans we’re taking back as REO, we’re taking them back because we want to make sure that we don’t see significant deterioration. Some of them are coming back, and we’ve been emptying parts of the building. Their occupancies are super low, probably 40% occupancy. Now our job is to go in there, do what we need to do to manage these assets and get the occupancies up. Right now, some of those assets are, as you said, throwing off negative NOI.

I think it was about $3 million for the quarter in the third quarter. That spiked up because we took some more assets back, and we’re getting our hands around those assets. We are taking back more REO. I have it probably projecting around the same number despite bringing more REO back. That number will improve quickly. I’ll let Ivan talk about it as we get in there and we rework these assets. You’re going to see occupancy go up a lot. When it does, that NOI will turn positive at some point. Correct, Ivan? Yeah. I think, Rick, you’re hitting on something very important. When we take back REOs that need a lot of work, we will empty those buildings out, do the work, and get the occupancy up. When the occupancy gets up, we’re going to sell those assets. You’ll see a little bit of a spike.

You’ll see them all go down. As they get released up, those will be disposed of, and then new ones will come in. Expect that to go up and down. We track that. We track the occupancy. We track the CapEx. We’ve had a few on our books that we’ve actually stripped down to zero. We have all the units, and now they’re going to start to lease up very quickly. We’re targeting those which were deeply damaged to dispose of in the third quarter of. Next year. Right now, they’re going from zero, and they’re gaining like 10% to 20% in occupancy. When they get to 70%, 75%, we’ll look to dispose of those. It’s going to be very lumpy, but the philosophy is strip them down, take the pain, and then move them on. That’s very helpful to understand what’s going on.

Just one last housekeeping question associated with it. It sounds like when you were doing this, you’re obviously making significant investments in the properties. Are you capitalizing those investments, or are you expensing them? Yeah. Most of the time, if you’re making improvements to the real estate, you’re capitalizing them. It’s increasing your basis. Most of the work is done to improve the asset’s value. Correct. That’s it for me. Thank you, guys. We’ll take our next question from Crispin Love with Piper Sandler. Please go ahead. Your line is open. Thank you. Good morning. I appreciate taking my questions. Paul, just based on your comments on an earlier question on interest income, there was a lot there, so I just want to make sure I’m thinking about it correctly.

It seems that you’re confident that the third quarter is the trough in NII, just given the one-time hits being larger than the go-forward impacts. Is that accurate, or at least prior to potential forward stress that could impact that run rate? Yeah, I think that’s accurate. The way we look at it is we do expect we’ll have some more delinquencies, but we’re going to resolve a lot more than we’re going to have new. We think this is probably peak. There were some one-time adjustments and reversals of the accrued interest I mentioned on some delinquencies that we accelerated. Yes, we expect this to be—we do not expect the fourth quarter to have the same run rate as the third quarter.

In fact, if you looked at numbers that we gave in the press release today, and I spoke about in my commentary, Crispin, we’re showing a spot rate of 7.27% going forward as of 9/30. That’s an all-in yield on our $11.7 billion book. It was 7.86% spot rate as of June 30th. If you do the math, that’s $16 million. What I’m telling you is net interest income came down $22 million after growth, but it really came down $34 million for all the adjustments I laid out. Now we’re saying it’s going to spot go down $16 million, but that spot has already been improved by $3 million, as I mentioned, on loans we’ve already worked out and sold. Now I’m down to $13 million. Yes, new ones will come on.

As Ivan mentioned, real-time conversations, which aren’t in my numbers, we’re resolving a lot more of this $750 million than we originally planned we’d do quickly. By the end of the fourth quarter, I hope to have a lot more of that resolved, and that run rate will improve drastically in the first and second quarter of next year. That is why when we laid out our commentary, we said it’ll take us to probably around the second quarter of next year to accomplish our goals. When we accomplish all of those goals, our run rate will be back up, plus the growth in our portfolio from the improved environment and our origination platforms. We’ll start to see that turn. Great. Thank you. Just on the $48 million gain on the Lexford portfolio, can you give a little bit more detail on that transaction?

How long has that been in process, and who was the buyer there? It’s an asset that we took back from the great financial crisis, and we’ve been managing that and holding it. We made a decision based on where we are in the cycle that it would be good to monetize those gains, especially in light of the criticism that we got that they were really degraded and caused a lot of short interest in the short reports as bad transactions. I wanted to be very clear that they were good transactions. Not only were they good, they were substantial profitability. As an operator, we felt by creating those gains, it would give us a lot of flexibility in trying to manage our business and accelerate these legacy issues. Keep in mind, we still have a good portion of those assets left, as I said in my script.

We just thought it was good timing. It spoke about the credibility of our performance on those assets, and it really negated some of the accusations that had been thrown at us with clarity. That’s kind of the reason we did it. In terms of the buyers, we don’t really disclose. We have very heavy interest. We had five buyers for them. It was a very competitive process. It was a good portfolio. We had a great experience with the buyer. It’s a public record. I’m not really exposed to who they are, but they were well bid. There’s a deep audience for that portfolio, as well as for the balance of the portfolio that we have. Okay. Great. Just a final question. You mentioned the $48 million gain, but you did talk about in the prepared marks, I believe, an additional $7 million you expect to come through.

Should that come through in income from equity affiliates as well? No, that $7 million, Crispin, was referred to the Homewood transaction. What we said is that we got a $48 million gain. What we said in our prepared remarks is we had a $48 million gain from Lexford. We still have a portfolio of assets that we’ll look to dispose of in the near future. Whatever comes out of that, comes out of that when it happens. In addition to that, in October, which should close today, we’re closing on the sale of the Homewood note, which will generate about $6.5 million, $7 million of GAAP income and distributable income in the fourth quarter. Okay. Great. Thanks for clarifying that. Appreciate you taking my question. We’ll take our next question from Leon Cooperman with Omega Family Office. Please go ahead. Your line is open. Thank you.

An observation and a question. The observation is, I think that your experience when you take control of this real estate shows that the real estate was well underwritten when it was originally underwritten. When you foreclose and default a property, your experience has been very good. Should you not take a bow for that? Number one. Number two, when the stock is now trading below book value, with you having an optimistic outlook in the second half of next year, are you willing to part with some capital, or would you want to hold on to the capital? We have a share buyback program out there. We’ll look at the best use of our capital. As you know, a lot of our insiders, including me, continue to buy stock as it goes below book. When a company has the right capital, we’ll make that evaluation.

We do view that as an opportunity. With respect to the REOs, it’s very interesting. If I said to everybody on this call that the loans that we were originating today, I would say that they could withstand, as I said back four or five years ago, they could withstand underwritten to a certain rate spike. Keep in mind that when we took these loans on, if it was a quarter, it went up to five. Nobody could have underwritten a 475 increase in SOFR. We always said we could underwrite a 200 to 250 basis points spike in SOFR. This is unprecedented. Also keep in mind that the Treasury was 150, 125, 150. The Treasury went up to five. These are unusual moves, and they’re prolonged. There has actually been a very, very difficult environment.

We do feel that when we get these REOs back, if we improve them and put them back in order, we’re doing very well at getting very close to where we mark them, sometimes a little above, sometimes a little around it. Our marks are pretty accurate, and we’ve been doing a really good job. We have the skill set to do it, and we’re very effective at it. We’re very pleased with the ones that we’ve taken back. As I said earlier, we’ll look to dispose of those probably in the third quarter, and we’re comfortable with how those are going. Actually, give me credit for that. Thank you, Lee. Thank you, Lee. There are no further questions on the line at this time. I’ll turn the program back to Ivan Kaufman for any additional or closing remarks. Okay. Thank you, everybody, for participating.

We are at a very difficult point in the cycle. We’re prepared for it. We’ve actually anticipated it. We’d rather not be here, but as operators, we’re addressing it. We have a lot of tools to address it. Thanks for your participation, and look forward to next quarter’s call. Take care. Have a great weekend. This does conclude today’s program. Thank you for your participation, and you may now disconnect.

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