Q2 2023 Arbor Realty Trust Inc Earnings Call
Participants
Ivan Paul Kaufman; Chairman, President & CEO; Arbor Realty Trust, Inc.
Paul Anthony Elenio; Executive VP & CFO; Arbor Realty Trust, Inc.
Crispin Elliot Love; Director & Senior Research Analyst; Piper Sandler & Co., Research Division
Jade Joseph Rahmani; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Jay McCanless; SVP of Equity Research; Wedbush Securities Inc., Research Division
Leon G. Cooperman; Founder, President, CEO & Chairman; Omega Advisors, Inc.
Richard Barry Shane; Senior Equity Analyst; JPMorgan Chase & Co, Research Division
Stephen Albert Laws; Research Analyst; Raymond James & Associates, Inc., Research Division
Steven Cole Delaney; MD, Director of Mortgage & Real Estate Finance Research & Equity Research Analyst; JMP Securities LLC, Research Division
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Second Quarter 2023 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.
Paul Anthony Elenio
Okay. Thank you, Todd, 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 June 30, 2023. 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 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 with the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.
Ivan Paul 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 outstanding quarter as our diverse business model continues to generate earnings that are well in excess of our dividend. This has allowed us to once again increase our dividend to $0.43, reflecting our 12th increase in the last 14 quarters or 43% growth over that time period all while maintaining the lowest dividend payout ratio in the industry, which was 75% for the second quarter.
In fact, we are the only company in our space that has continued to grow our dividend while many are either cutting their dividends or electing to pay out over 100% of their earnings. Additionally and very significantly, we're also one of the only companies in the space to have experienced significant book value appreciation over the last 3 years, with roughly 45% growth from approximately $9 a share to nearly $13 a share. Put simply, we have increased both our dividend and book value by over 40%, all while maintaining the lowest dividend payout ratio in the industry.
And despite being a very challenging environment over the last several quarters, we've managed to maintain our book value while we recorded reserves for potential future losses, which clearly differentiates us from every one of our peers. As we've discussed many times, we've been laser focused over the last 2 years and preparing for what we felt would be a very challenging recessionary environment. In fact, unlike others in this space, we've been conducting ourselves as if we have been in a recession for over a year now. And as a result, one of our primary focus has been and continues to be preserving and building up a strong liquidity position.
We are very pleased to report that we currently have approximately $1 billion in cash, which gives us a tremendous amount of flexibility to manage through this downturn and provide us with the unique ability to take advantage of the opportunities that will exist in this environment to generate superior returns on our capital.
There continues to be a significant amount of volatility in the market and we are well aware of the challenges that lie ahead. We feel we are right in the -- this dislocation and are operating our business with the expectation that the next 2 to 3 quarters will be the most challenging part of the cycle. As in the case with any real estate cycle, there will be issues and challenges to contend with, some of which will be a high touch and require tremendous amount of discipline and expertise.
We are extremely well positioned compared to our peers given our multifamily-centric portfolio, our asset management skills and tenured senior management experience with a track record of managing through multiple cycles and the strength of our balance sheet and versatility of our franchise.
Turning now to our second quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.57 per share, which is well in excess of our current dividend, representing a payout ratio of around 75%. The dividend policy that we have implemented with our Board of keeping such a wide disparity between our earnings and dividend provides us with a huge cushion and was a very strategic knowing full well that we're entering into a market of dislocation.
This has enabled us to raise our dividend, grow our book value and create reserves, and we believe we're uniquely positioned as one of the only companies in that space with a very sustainable protected dividend even in this challenging environment.
In our balance sheet lending business, we remain very selective, focusing mainly on converting on multifamily bridge loans into agency product allow us to recapture a substantial amount of our invested capital and produce significant long-dated income streams. In the second quarter, we continue to have success in this area with another $685 million of balance sheet runoff, $435 million of 64%, which was recaptured into new agency loan originations. As a result, we're able to recoup $125 million of capital and continue to build out broadcast position, which again currently sits at approximately $1 billion.
In our GSE agency business, we had an exceptionally strong second quarter, originating $1.4 billion of loans, and our pipeline remains elevated. Clearly, with the continued inverted yield curve, the agencies are effectively the only game in town, which gives us confidence in our ability to continue to produce strong origination volumes for the balance of the year. We also have a strategic advantage in that we focus on the workforce housing part of the market and of a large multifamily balance sheet book with that naturally feed to our agency business. And again, this agency business offers a premium value as it requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flow.
To this point, our $29.4 billion fee-based servicing portfolio, which grew another 2% in the second quarter, generates approximately $118 million a year in reoccurring cash flow. We also generate significant earnings on our escrows and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning approximately 4.5% on around $2.8 billion of balances or roughly $125 million annually, which combined with our service income annuity, totals over $240 million of annual gross earnings or $1.20 a share. This is in addition to the strong gain on sale margins we generate from our originations platform. And again, it's something that is completely unique to our platform, providing us a significant strategic advantage over our peers.
We continue to expand our single-family rental business as we are one of the only remaining lenders in this space, allowing us to aggressively grow this platform. We remain committed to this business as it offers us 3 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 and allowing us to continue to build our franchise.
In summary, we had a very strong first half of the year with exceptional results that once again clearly demonstrates our ability to generate strong earnings and dividends in all cycles. We understand very well the challenges that lie ahead and feel we are well-positioned to manage through this cycle. Our earnings significantly exceed our dividend run rate. We are invested in the right asset class with very stable liability structures, highlighted by a significant amount of nonrecourse, non-mark-to-market CLO debt with pricing that is well below the current market.
We're also well capitalized with significant liquidity, which has put us in a unique position to be able to manage through this downturn and take advantage of the accretive opportunities that will exist in this environment. And again, with our best-in-class asset management capability and a seasoned executive team, we are confident that we will continue to be the top performer company in our space. I will now turn the call over to Paul to take you through the financial results.
Paul Anthony Elenio
Okay. Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million or $0.57 a share. These results translated into industry high ROEs again of approximately 18% for the second quarter, allowing us to increase our dividend to an annual run rate of $1.72 a share, reflecting a dividend to earnings payout ratio of around 75% for the second quarter.
Our quarterly results significantly beat our internal projections once again, largely due to substantially more gain on sale income from increased agency sold loan volumes, mainly due to stronger origination volumes in the second quarter than we anticipated. We also continue to see increased earnings on our floating rate loan book and on our cash and escrow balances in the second quarter from higher interest rates. And we generated approximately $6 million of income from our equity investments in the second quarter, which included $3.5 million of income from our residential banking joint venture from gains on servicing sales and a $2.5 million distribution from our Lexford investment.
As a result of the servicing sales in our residential joint venture this quarter, our current income tax provision was higher than usual due to book-to-tax differences associated with these sales. As Ivan mentioned, we do expect some challenges ahead. And as a result, we recorded an additional $16 million in CECL reserves on our balance sheet loan book during the quarter. These reserves do not affect distributable earnings as we have not experienced any realized losses on these loans to date.
Our loan book did see an increase in delinquencies in the second quarter as a result of where we are in the cycle. Again, this is to be expected and we're confident in our ability to manage through this downturn as we believe we are well positioned given our multifamily focus, strong liquidity position and our best-in-class dedicated asset management team with extensive experience in loan workouts and debt restructurings. And it's very important to note that despite booking approximately $48 million in CECL reserves across our platform over the last 2 quarters, we still managed to grow our book value per share by 1% to $12.67 at 6/30/2023 from $12.53 a share at 12/31/2022, and we're one of the only companies in our space that have seen significant book value appreciation over the last 3 years.
In our GSE agency business, we had a very strong second quarter with $1.4 billion in originations and $1.3 billion in loan sales. The margins on the loan sales came in at 1.67% this quarter compared to 1.72% last quarter. We produced very strong margins over the first 6 months of the year ahead of our projections, mainly due to an increase in our FHA loan production in the first 2 quarters that generate much higher margins.
We also recorded $16.2 million of mortgage servicing right income related to $1.1 billion of committed loans in the second quarter, representing an average MSR rate of around 1.43% compared to 1.23% last quarter. Our fee-based servicing portfolio grew another 2% in the first quarter to approximately $29.4 billion at June 30 with a weighted average servicing fee of around 40 basis points and an estimated remaining life of 8.5 years. This portfolio will continue to generate a predictable annuity of income going forward of around $118 million growth annually.
In the second quarter, we also received $3 million in prepayment fees as compared to $2 million last quarter. And given the current rate environment, we're estimating that prepayment fees will likely run around $2 million a quarter going forward. In our balance sheet lending operation, our $13.5 billion investment portfolio had an all-in yield of 9.07% at June 30 compared to 8.83% at March 31, mainly due to increases in LIBOR and SOFR rates, partially offset by an increase in nonperforming loans in the second quarter.
The average balance in our core investments was $13.6 billion this quarter as compared to $14.1 billion last quarter due to law of exceeding originations in the first and second quarters. The average yield on these assets increased to 9.19% from 8.94% last quarter, mainly due to increases in SOFR and LIBOR rates, partially offset by an increase in nonperforming loans in the second quarter and from less acceleration of fees from early runoff.
Total debt on our core assets was approximately $12.1 billion at June 30 with an all-in debt cost of approximately 7.25%, which was up from a debt cost of around 6.97% on March 31, mainly due to increases in the benchmark index rates. The average balance in our debt facilities was approximately $12.5 billion for the second quarter compared to $13 billion last quarter. The average cost of funds in our debt facilities was 7.11% for the second quarter compared to 6.69% for the first quarter, again, primarily due to increases in the benchmark index rates, combined with the full effect of the unsecured notes we issued in March.
Overall net interest spreads in our core assets decreased to 2.08% this quarter compared to 2.25% last quarter, and our overall spot net interest spreads were 1.82% at June 30 and 1.86% at March 31.
Lastly, we believe it's important to continue to emphasize some of the significant advantage of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated recurring earnings. We have several diverse and countercyclical income streams that allow us to produce strong earnings in all cycles. The most significant of which is our agency platform, which is capital-light and generates very high ROEs through strong gain on sale margins, long-dated service and annuity income and increased escrow balances that are significantly more income in today's higher interest rate environment.
Additionally, we are multifamily-centric and have a substantial amount of our non-mark-to-market, nonrecourse CLO debt outstanding with pricing that is well below the current market. We're also well capitalized with significant liquidity and have a best-in-class asset management and senior management team that have tremendous experience and expertise in operating through multiple cycles. And we believe these features are unique to our platform, giving us confidence in the ability to continue to outperform our peers. 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. Todd?
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Steve Delaney with JMP Securities.
Steven Cole Delaney
Sure. Ivan and Paul, congrats on another strong quarter. Maybe I'll start off with something that was not the highlight of the quarter, but I think important to discuss, you had the 3 new NPLs, all multifamily. I'm curious whether those were -- were they 3 loans to 3 distinct borrowers. And is there any common theme leading to the downgrades?
Ivan Paul Kaufman
Why don't you take those?
Paul Anthony Elenio
Yes. So Steve, it's Paul. Thanks for the question. So we did have 3 new nonperforming loans during the quarter on our balance sheet totaling about over $116 million. They were all to different borrowers, 2 of the properties were in the Houston, Texas area and the other was in the Atlanta, Georgia area. I've gone -- deals have gone 60 days delinquent this quarter, but that's kind of the geographics and the borrowers were all different borrowers.
Steven Cole Delaney
Yes. I mean the geo sounds good. Is it a interest rate problem? I mean is people just behind there? Is it cash flow? Or just leasing problem?
Ivan Paul Kaufman
Let me give a little bit of a view on it. I think generally, in particular with the assets we're talking about is you often have underperforming sponsors. The underperforming sponsors, it catches up to them a little bit. So when you see stress in the portfolio like we're seeing it's a fact that the sponsors are not executing along their plan. And that's one part.
The second part is that we are in the cycle a long period of time and has elevated interest rates do put stress on these assets. The rates are up anywhere between 10% to 100%, so they run into payment issues and often they're late in the payment, trying to raise additional capital and try and get them in a proper position. But what we're seeing most of all with a stress on some of these loans. A lot of it is execution. I mean, there are other factors as well, elevated interest rates, increased insurance costs and increased taxes and increased labor costs. So it's a combination of all, but generally, if you have good operators, they're able to manage effectively. The poor operator catches up with them a little bit.
Steven Cole Delaney
Okay. Great. And Paul, did I understand that on -- when you put these in as nonperforming that you added $5 million into your reserve for these 3 loans, is that correct?
Paul Anthony Elenio
That's correct, Steve. We did record a specific CECL reserve of $5 million related to one of the loans but nonperforming. The other two, we believe the values are fine, the borrowers are just seeing a little strength as Ivan mentioned and we're working hard with those borrowers to get those deals to perform but we don't see right now any need for reserves on the other two. So we did take a $5 million reserve related to one of the assets.
Ivan Paul Kaufman
Yes. And I will take a note as of yesterday, the borrower made -- has made one of this payment. So his mind is making efforts to make it. He still remains a little bit behind, but he's made progress. And he's getting there. He's just -- a very slow process.
Steven Cole Delaney
Great. Well, I appreciate the color on that. I'll leave it there. I'm sure the other guys have questions for you too. Have a good weekend.
Paul Anthony Elenio
Thanks, Steve.
Operator
We'll take our next question from Stephen Laws with Raymond James.
Stephen Albert Laws
First off, congrats, another strong quarter, another dividend increase, a lot of those in the past couple of years and a lot of positives in the quarter. But Ivan, I wanted to follow up on your comment. You started with talking about the next 2 to 3 quarters being the most challenging. And I think it's likely due to the issues you just mentioned in your answer to Steve Delaney. Is it interest rate caps rolling off? I mean can you talk of it, is it behind business plans, the good operators, bad operators. Do we think about this being really a wave of stress from originations, say, 2 years ago? Or is it a bigger sample size given different maturity dates?
Ivan Paul Kaufman
So let me give you a little bit about macro view on this one that we've had for quite some time. And one that has obviously put us in a very favorable position in terms of liquidity and strategy and personnel and resources. It's been our view that generally, these downturns last 18 to 24 months and on the outside of it. And if it's a downturn, that's a short term, it's 15 months.
We've been at this already for at least 5 quarters and that's why we think that there could be another 2 to 3 quarters left. Having been for multiple cycles, we feel now we're pretty much on the bottom of the cycle and that we're going to work our way out of it shortly. But the bottom is the most difficult period of time.
Our borrowers are working really, really hard to manage their loans and their portfolios. And this is a peak of their stress right now, we feel it. They're working hard to raise capital, get their assets in a good position. So we're just thinking and planning for a little bit more elevated than it's been in the last quarter and we think the next 2 quarters given where we are in the cycle and what our outlook is going to be a little bit tougher.
So the bars are -- put a lot of resources in, stretched on their resources. Interest rates have remained elevated. The cost of labor, even though it's coming down, put a lot of stress on people's portfolios. And the other aspect, which is beginning to fade a little bit, which people don't talk about, but I've talked about on our prior calls, is the economic vacancy specifically in areas like New York and New Jersey and other I'll let areas like that, where the economic vacancy, the ability to get rid of nonpaying tenants has been extremely elevated and it is going to begin to come down.
In certain markets, we have physical occupancy of 97% to 98%. You have economic vacancy of 10% to 12%, and that's been putting a lot of stress, so we think the economic vacancy is going to begin to come down. Our outlook in terms of interest rates is at this point, a little bit more favorable than it was 6 months ago and 9 months ago and the ability for people now to really put their time and attention to managing their assets that become much more focused. But we do think that the next 2 quarters will be the worst of the quarters and that's what we're seeing. But economic vacancy has played a pretty significant part in terms of making -- having these borrowers struggle.
Stephen Albert Laws
And a follow-up, Paul, can you given the outlook for kind of a couple of challenging quarters to continue through this. What gives you confidence that the current reserves are appropriate? How are you looking at the losses? And what's the risk that those reserve levels need to increase possibly materially in the next couple of quarters?
Paul Anthony Elenio
Sure, Steve, thanks. So we do look at this in a very detailed level. A lot of the reserve building you're seeing is from stress in the portfolio, as Ivan said and what we think could happen over the next couple of quarters. A lot of it's the macroeconomic view out there on commercial real estate.
We obviously think we have adequate reserves today. We built $48 million of reserves across our platform, both on the agency and the balance sheet side in the last 2 quarters. But I think it's a great question and I think I don't know what others are saying out there in our space, but I do expect over the next couple of quarters to continue to see reserve building, maybe similar to where we were this quarter, maybe a little higher, maybe a little lower, but that's my expectation. Obviously, we'll see where rates go and what happens in the market. But my expectation is that there will be some reserve building over the next 2 to 3 quarters, probably consistent or slightly consistent to where we were in the last couple of quarters. Ivan, would you agree with that?
Ivan Paul Kaufman
Yes. And I think it's extraordinarily important to focus on the fact that as we've put reserves on the books, we've maintained our book value and we haven't had our book value and our cushion between our dividend and our earnings is so large and as I mentioned in my comments, that's always been very critical to us and the Board to make sure that we have that knowing we're going into a recession and now we're going into a difficult environment, it's normal to have reserves.
I think the fact that we're able to create these reserves, which are against future losses and that decrease our book value and maintain it is remarkable and a real testament to how we've managed through the cycle. But I do agree with Paul. I do think that what we've seen in this quarter could continue for another quarter or 2. And our balance sheet is well positioned.
Operator
We'll take our next question from Crispin Love with Piper Sandler.
Crispin Elliot Love
First, can you just speak to your ability to roll your repo facilities that are coming up? And then just what percent of your loans have interest rate caps right now?
Ivan Paul Kaufman
Yes. I mean the repo facilities and that a major concern with us is very diversified and they've come down dramatically. And we've continued to renew them in fact, the banks are more aggressive, they want to do business with them as the outstands keep coming down. And as you're watching the securitization market, the securitization market is returning, the CLO market is returning. We're not far from readdressing some of that and even bringing our outstandings at our bank down and continue to meet with management and treasury with the different institutions. And they're aggressive to continue to have more outstanding.
So that's the least of our issues and if we look at our outstandings on repo and our ratios are extremely healthy. So we feel really good about it, and we feel really good about accessing the CLO market and actually creating greater efficiencies than we have today, and we're pretty efficient. So that's our view on that. With respect to caps and everything, Paul, you can address that and I can give us some commentary as well.
Paul Anthony Elenio
Yes. I think, Crispin, just to add on to Ivan's comments on the repos. I mean, I think we've done a great job of continuing to delever the balance sheet from natural runoff in the portfolio. Obviously, there's no balance sheet lending going on right now that makes any sense. So as loans run off, we're naturally delevering the balance sheet. And I think we've done a great job of managing the efficiency in our CLO vehicles to help do that. I think currently today, we stand with 70% of our secured indebtedness in nonrecourse, non-mark-to-market vehicles. And as you look, those leverage numbers continue to come down quarter-over-quarter.
So while we're very confident that our repo lines are healthy, and we'll have no issue rolling them as we've never had. And as Ivan said, the banks are getting more aggressive, just prudently, we're delevering the balance sheet and putting us in a much better spot. So I think we've been focusing on that for a while knowing how you go through these cycles.
As far as the rate caps in our book, it's always been a big part of our strategy to have certain structural efficiencies in our loans and a good portion of our loan book have rate caps. I think it's somewhere in the high 60s for low 70s, but also a good portion of our loans have interest reserves and interest serve replenishment guarantees probably in the same range, probably about 60%. And then there's a crossover that certain loans that have rate caps and interest rate reserves. I don't have that percentage handy, but a good portion of our book has rate caps and interest reserves.
Crispin Elliot Love
Okay. I appreciate that. And then just during the quarter, did you buy any loans to add in your CLOs? And if so, are you able to size that?
Paul Anthony Elenio
I don't recall doing that during the quarter. I have to look, we do have similar amount of credit risk assets designated in our CLOs as we did last quarter, $114 million. But Ivan, do you know if we purchased anything back, I'm not aware. If we did, it was one loan, but I have to look.
Ivan Paul Kaufman
I don't recall off it.
Operator
We'll take our next question from Jay McCanless with WedBush.
Jay McCanless
It looks like special mentioned loans in the multifamily portfolio went up about $500 million from the first quarter to the second quarter. Could you maybe talk about what drove that decision? Is there any type of geographic or vintage risk we need to be mindful of with that book and the loans that moved to special mention.
Paul Anthony Elenio
Sure. Yes. So it's a natural progression as loans get closer to maturity and move on to have your ratings move all around. I will preface this that we originate loans that are special mention. Special mention is not a category that gives us a concern that there's a pending loss or delinquency or nonperformance coming. It's just one of the tools we use as a management tool to focus more on a loan if we think certain things are changing or certain things in the market are changing.
I have the numbers going up from 32% last quarter to 37% this quarter in special mention. But there's nothing specific I can say related to a group of loans, a geographic location. It's just the natural progression of our loans.
We did have, as you saw a little bit of a move, but not much in the substandard and doubtful, which is related to the nonperforming loans we put on the books this quarter and a little more stress. But the special mention doesn't give us a level of concern that there's going to be a loss or a default. It's just things we look at when we look at the loans to highlight more of a focus on the loan.
Jay McCanless
Okay. Sounds great. The second question, could you please repeat the comments you made about moving bridge loans into agency volume? I guess how much of that are you doing and what type of mezzanine financing would Arbor be putting in to make those deals happen?
Ivan Paul Kaufman
So we had a fairly effective reduction in on balance sheet and a conversion into fixed rate loans with the agencies. A lot of that is the loan (inaudible) they got out of bridge, they get stabilized and with the tenure being so volatile, the lower the tenure, the greater the opportunity there is and with an inverted yield curve, it's a natural shift from floating rate loans into fixed rate loans, and that's something we've been doing consistently from time to time, and I don't have the numbers, Paul may have it, we will be -- we do put some mezzanine lending on some of those loans, not that much (inaudible) a lot of those loans are 65% loan-to-value and have a certain coverage and sometimes when the borrowers paying down those loans, putting more equity, we'll also put some mezzanine lending into that to facilitate those transactions.
We like that kind of lending. We think the returns are extraordinarily healthy and is a good part of our business, but it's not a very big part of our business. And Paul, maybe you can comment on how much money we put out in the quarter for that kind of business?
Paul Anthony Elenio
Yes. I think it's exactly what Ivan said. It's not a big part of our business, but it is some of our business and it was pretty benign this quarter. We had $685 million of balance sheet runoff. We recaptured $435 million of that into the agencies, which was 64% recapture rate very high and we only gave $1.5 million of mezz behind one of those agency loans.
In the first quarter, we had like $1.2 billion of runoff. We were captured just under 50% of that and we put $5 million in mezz behind the agency. So it's not been a very big part of our business. It's helpful, but we've seen a really, really nice recapture rate almost about 50% for the first 2 quarters here and runoff that we brought over to our agency book, which is the way we model our business.
Ivan Paul Kaufman
We happen to like that mezzanine lending, we know the collateral, we know the cash flow of the yields we generally run 13%, and it's long dated. So it's a good part of our book. But at the end of the day, even though it's something that borrowers look into, sometimes they just change their mind and say it's better to raise the equity and pay down the loan themselves. So we're not putting out as much as we thought we would.
Operator
We'll take our next question from Jade Rahmani with KBW.
Jade Joseph Rahmani
A follow-up to the last question for Jay. You said the better for the borrowers to raise equity, so I assume that means they're raising preferred equity because in the refi, the GSEs or another lender would consider the preferred equity as equity, is Arbor providing any preferred equity? And is that an attractive opportunity? You all have had these loans on your balance sheet, so would know the credit pretty well.
Ivan Paul Kaufman
Yes. So when he mentioned mezz, I also looked at the same as preferred for us, it's structural. We always like mezz better, it has better revenues. But I think it's one and the same for us, whether we talk about preferred mezz. So we're open to doing both depending on whether it's Fannie or Freddie or what the structural enhancements are.
And we think since we know the assets, we know the borrowers, it's often very good opportunities and what we're uniquely positioned for. Is it often small pieces, they can run anywhere from $500,000 to $5 million and for them to bring in outside provider. The cost of inefficiencies are really, really, really high. So with us having full knowledge of the bar and the collateral and being able to implement those in a very cost-effective way, it puts us in a strategic position to be the provider.
Jade Joseph Rahmani
Are you surprised that there hasn't been more back? Or is it that the borrowers are raising prep equity from someone else?
Ivan Paul Kaufman
We thought there'd be more, but there isn't. I think we had forecast, I think, in our numbers, we would probably put out between pref and mezz to about $10 million a month. That's what was in our cash projections and we're not hitting those numbers by any means. So we're well behind what our own views were, how they're getting the capital, where they get into capital. I don't get that involved in. I'm just happy with the conversion from the balance sheet into an agency loan that provides us a long-dated income stream and fits our business model. So I'm not always familiar with how they achieve their goal.
Jade Joseph Rahmani
On modifications, is it reasonable to assume that you're doing about 15% -- that you will be modifying about 15% of the portfolio?
Ivan Paul Kaufman
I think it's very fluid. So there are -- it's just consistently different and I can't -- I don't have a particular number at all is just a point in time. So I don't have a stat on that.
Jade Joseph Rahmani
And just last question would be when you think the right time would be to ramp up originations considering the strong liquidity, are you holding liquidity just to get through these next 2 to 3 quarters in which you think the stress will play out and originate afterwards because clearly, post this, the yields will probably be lower than where they are today.
Ivan Paul Kaufman
So that's a great question. And in my comments, we talked about our single-family business in terms of the build-to-rent business in that business. We are extremely aggressive, we have ramped that up, and we want to continue to grow that. And we like that business, and we all ramped up and we want to dominate that business, and we will be one of our bigger lenders.
I think on the multifamily side, I do believe that business will return. We've talked about it. We put together programs. And I do believe the second half of 2024 will be a very, very good year for the multifamily bridge loan business. We will get aggressive, we'll start to get aggressive at the end of the fourth quarter, maybe first quarter. We have liquidity for it and we also have the outlook that itself will come down and that multifamily transactions will start to occur and people will want to borrow float-rate business. And there will be a great opportunity and we want to be a leader on that side, too.
It's early right now. I think you're a quarter early for that business. I think fourth quarter will start to pick up. And definitely, in the first quarter, we aim to be extraordinarily aggressive in that business.
Operator
We'll take our next question from Rick Shane with JPMorgan.
Richard Barry Shane
Most have been asked and answered. But I did want to ask the restricted cash on the balance sheet came down sharply. What drives that just so we understand it?
Paul Anthony Elenio
Rick, it's Paul. So a couple of things. One, we had one vehicle, we were delevering. And as you may have seen, we called one of the vehicles during the quarter and took out one of our CLOs. But as runoff is occurring in certain vehicles that may be past the replenishment period, you can -- that restricted cash goes down to pay debt. That happened during the quarter in the vehicle that we retired and one of the vehicles we're delevering. And then just generally, when there's loan runoff, if you can put loans in from your balance sheet book that are on your repo lines into the CLOs, then you're chewing up restricted cash.
So we've seen a little bit of more efficiency this quarter and moving loans off our balance sheet, delevering and putting them into vehicles and then you've got the natural wind down of a couple of vehicles that starts to reduce restricted cash. That restricted cash ends up coming into corporate cash, but that's the natural progression of why that number has changed this quarter.
Richard Barry Shane
Got it. Okay. That's very helpful. And then I'd love to circle back on Jade's question about the mods and extensions. And he said at a 15% number and Ivan, understandably, you kind of said that number moves around. Can we just get some context of sort of during the second quarter the value -- the notional value of loans that were modified and extended both on balance sheet and within the CLOs?
Ivan Paul Kaufman
I don't have that off-hand. And it is a fluid process between extensions and modifications, and it's something that we could take a look at the data. It's just something that's constantly changing.
Paul Anthony Elenio
Yes. I don't have it in front of me, Rick, but my recollection is it wasn't very significant at all this quarter, but that could change. It all depends on the cycle and where we are, but we haven't seen significant modifications that I'm aware of in either of those vehicles to date.
Richard Barry Shane
Got it. And then last question for me. Ivan, you've talked about the next 2 to 3 quarters being the most challenging. You've also spoken of sort of the fluidity of what's going on. Just curious what you're seeing in terms of loan performance in July.
Ivan Paul Kaufman
I think when we're talking about it, we're not even talking about June, we're talking about where we are today. I don't really reflect on that as a June conversation, a reflect on it as of timing as of the moment and what we're in the middle of. So it's pretty much along my comments and how it look is that we should have somewhat of, as Paul mentioned, the continuation in terms of reserves and outlook for the third and fourth quarters, similar to what we had in the second quarter.
Operator
We'll take our next question from Lee Cooperman with Omega Family Office.
Leon G. Cooperman
Let me just first say, I congratulate you on your performance. I've been investing in the company for about a decade. In the last couple of years, you've spoken to me very conservatively assessing the outlook and I think the company's performance is not an accident as a result of your positioning them, and I congratulate you on your correct reading of the environment. Let me -- if I can get on to some other questions. Your distributable earnings of $0.57, do you think there's a lot of push and pulls. Do you think that's close to recurring earnings? Or you think you overearned in this quarter?
Paul Anthony Elenio
Yes. I think we don't give a financial outlook, Lee, but I would say that we're expecting that those numbers will be not that strong in the third and fourth quarter, but I don't know how much different. We've had a couple of things during the quarter. I'll give you an example. We had $1.3 billion of loan sales in our GSE agency business. We have excessively high second quarter volume, given that rates rose to about 4% for a short period of time and have come back down, we see a little backlog in that business. We expect that business to be strong for the balance of the year, but I'm projecting $1 billion, $1.1 billion versus $1.4 billion in agency business in the third quarter and probably something stronger than that in the fourth quarter.
So I expect our agency business to come in for the year higher than we did last year, but I do expect a dip down in the third quarter and then a big rise in the fourth quarter. So that gain on sale associated with those sales will change and likely end up with a reduction in gain on sale and a slightly less distributable earnings. Also, we are expecting the portfolio to continue to run down as there is no balance sheet lending and run-off has been naturally brought up to our agency business. So I don't know if it's easy for us to say that, that's a recurring number. I can't tell you what the number is going to be, but those are a couple of items that I think could make it slightly less going forward. Having said that, we still think the number is substantially higher going forward than where our dividend is today, right, Ivan?
Leon G. Cooperman
Yes. So as we get to it. I think that the 57 is probably higher now than it will be in another couple of quarters but I suspect that the earnings will be above the dividend.
Ivan Paul Kaufman
We still feel very confident about that, Lee. You don't like to comment on the distributable borrowing because if we did we did wrong every time we've exceeded everybody expectations including...
Leon G. Cooperman
The 3 loans that were highlighted as being issues, what is the loan-to-value ratio on average for those 3 loans?
Ivan Paul Kaufman
I don't have them off hand. But one, we took a reserve against and we didn't expect payment, but we got payment. We got a June payment. The other one is a great asset, just poorly managed, so we have to take a look at what the stabilized value of that asset is. And you have to also keep in mind that on a lot of these loans, we have a lot of recourse on these loans with substantial sponsors. So we look at a combination of not just the asset but the sponsor and the recourse liability that we have. So it's a combination of multiple factors on each of these different assets.
Leon G. Cooperman
Last question, just an observation. What do you think the (inaudible) thinking about? The fully diluted share count is 187 million shares. If I take what you own, what the employees own with Black Rock owns and Blackstone owns what I own? these guys are sort of a meaningful percentage of the float. And what do you think they're thinking?
Ivan Paul Kaufman
All I can say is they didn't properly understand the company. When they shorted the stock, the information, as we've talked about on the calls before, was inaccurate. And on the face of it is all of the analysts, everybody made no sense. So I think whatever they did, they've made a tremendous error in their analysis. I mean, our performance has certainly been contrary to all their comments. And more significantly, they just didn't understand the fundamentals of our company relative to our peers. But Paul, if you have any comment on that?
Paul Anthony Elenio
I think that's it. I mean, I don't know who's shorting the stock. I'm not involved in who's shorting it. But I don't know what their thinking is, but a lot of times, these are just financial our place and they either work or they don't, but we just continue to do what we do, continue to perform really well, and the results of our performance will be what they are for those people.
Operator
Thank you. At this time, I would like to turn the call back to Ivan Kaufman for any closing remarks.
Ivan Paul Kaufman
Sure. Well, thank you, everybody, for participating on the call and being shareholders of the company. We once again had an extraordinary quarter, raising our dividend, having great earnings and are very prepared to manage through the rest of the year. And everybody, have a great weekend. Take care.
Paul Anthony Elenio
Thanks, everyone.
Operator
Thank you. This does conclude the Second Quarter 2023 Arbor Realty Trust Earnings Conference Call. You may disconnect at this time and have a wonderful day.
