Ivan Kaufman; Chairman of the Board, President, Chief Executive Officer; Arbor Realty Trust Inc
Richard Shane; Analyst; J.P. Morgan
Good morning, ladies and gentlemen, and welcome to the fourth quarter and full-year 2024 Arbor Realty Trust earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Okay. Thank you, Madison. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 2024. With me on our 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 assuming future results of our business, financial condition, liquidity, results of operations and objectives. These statements are based on beliefs, assumptions and expectations of our future performance, taking into account the information that's 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 caution 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 as of today within the occurrences of unanticipated events.
I'll now hand the call over to Arbor's President and CEO, Ivan Kaufman.
Thank you, Paul, and thanks to everyone for joining us on today's call. As you could see from this morning's press release, we had a solid fourth quarter, closed out 2024 as another very strong year despite an extremely challenging environment. We have executed our business plan very effectively and in line with our expectations. And despite tremendously volatile and elevated interest rate environment almost three years now, we've managed to continue to outperform our peers in every major financial category, including our dividend, shareholder return, and book value preservation.
We're well positioned for this dislocation, and going into the cycle, we had a large cushion between our earnings and dividends. We're well capitalized, are invested in the right asset class with the appropriate liability structures. This allowed us to outperform our peers and continue to pay out dividend when mostly all of our peers have to cut their dividend substantially some multiple times during this cycle and also experienced significant book value erosion. One of the guidance we have consistently discussed on our calls is how we felt that this dislocation will persist and result in a much slower recovery, rates remain higher for longer, which is something we were well prepared for.
However, rates have not just remained elevated and have actually increased significantly with the 10-year rise from 3.60% in September to as high as 4.80% in January, and now it's hovering around 4.50% with the current outlook suggesting we'll remain at these levels for the near term. This is a material change in the market resulting in significant headwinds that will affect everybody in the space. These elevated rates are created in a very challenging environment as it relates to agency origination volumes and where we've experienced success over the last few years and getting borrowed through the transition on fixed rate loans and we capped the deals, we expect that environment will create a deceleration to this area as well.
We have also seen a 100-basis-point decrease in SOFR over the last 12 months, which is reducing the earnings on our escrows and cash balances. Additionally, we expect there will be a temporary drag on earnings from the REO assets that we repositioned over the next 12 to 24 months, and I will discuss later in detail.
However, this will partially be offset by efficiencies we expect to generate from the goods to borrowing costs in the securitization market and with our commercial banks as well as growth in our servicing portfolio. As a result of these changing macroeconomic events, we have revised our earnings outlook for the foreseeable future until we see improvements in the rate environment. Based on these factors, we are now estimating our earnings for 2025 will be in the range of $0.30 to $0.35 a quarter, and would likely reset our dividend starting in the first quarter of this year in accordance with this new guidance. This outlook is reflective of the newly elevated rate environment. However, if there's a material change in short-term or long-term rates in the future, we will revise our outlook accordingly.
It's important to note that we were the only firm in our peer group to set our dividend -- to grow dividend over the last five years by 43%, while every other company in our space has cut their dividend some multiple times by 40% on average with only one company keeping their dividend flat in the last five years. And we assume that we set our dividend to the midpoint of our new earnings guidance, our dividend will be up approximately 8%, which is again -- which, again, as compared to our peers who were down at an average of 40%. Additionally, over the last five years, we have also grown our book value by 26% while recording significant reserves, which is an incredible accomplishment especially considering that our peers actually experienced a 25% erosion in their book values. We've done a very effective job despite elevated rates of working through our loan portfolio by getting borrowers through recap the deals and purchase interest rate caps.
In 2024, we were able to successfully modify $4.1 billion of bonds with borrowers committing to inject $130 million of additional capital into their deals. We also modified another $600 million of bonds in 2023, bringing our total loan modification over the last two years to $4.7 billion or roughly 60% of the remaining legacy loan book. This is tremendous progress especially in light of the elevated rate environment that has resulted in the large portion of our loan book being successfully repositioned, holding assets with enhanced collateral binds. We've also done an exceptional job of bringing in new sponsors to take over assets either consensually or with foreclosure. In fact, in the last two years, we have brought in new sponsors to recap deals with substantial new equity on approximately $900 million of loans.
This is a very important strategy that, again, successfully repositions assets with the appropriate capital, putting our loans in a much more secure position with experienced sponsors and create more predictable future income streams and, again, are reflective of us recording the appropriate level of reserves on these distressed assets. And despite elevated rates, we also generated strong runoff over the last two years with $3.4 billion of runoff in 2023 and $2.7 billion of 2024, an amazing accomplishment.
We also continue to make strong progress despite the unprecedented move up in rates on approximately $1 billion of loans that were past due at September 30th. In the fourth quarter, we successfully modified $140 million of these loans, generated $151 million of tie-off, and took back for approximately $120 million of REO assets, all of which we were able to bring in new sponsors to operate and assume our debt. This has formed progress in one quarter and has reduced it by $144 million of delinquencies we had at September 30, down to $534 million at December 31 or a 44% decrease.
We did experience additional delinquencies during the quarter of approximately $286 million, bringing our total delinquencies at December 31 to approximately $819 million which is down 13% in the quarter and down 22% from our peers which is in line with our previous guidance even in the face of rising interest rates. And our plans for resolving our remaining delinquencies to take back is already included in bringing in new sponsorships, approximately 50% of this with the other 40% to 50% would be the payroll to be modified in the future. This should put our REO assets on our balance sheet in the range of $400 million to $500 million with another roughly $150 million to $200 million that we will have brought in new sponsorship to operate. And this $400 million to $500 million of REO assets, be it on the heavy lifting portion of our loan book, we estimate will take approximately 12 to 24 months to reposition. The performance of these assets has been greatly affected by poor management and from being undercapitalized.
Today, these properties have an average occupancy of 35% and an estimated NOI of around $7 million which is very low and will temporarily affect our earnings. We believe there is great economic occupancy for us to step in and reposition these assets and significantly grow the asset to around 90% and NOI to approximately $30 million over the next 12 to 24 months, which will increase our future earnings significantly. We are working exceptionally hard on resolving our delinquencies which, as I mentioned, has been significantly affected by the current rate environment. If rates come down sooner than we expect, it will have a positive impact on our ability to convert noninterest-earning assets to income produced in investments earlier, which will be accretive to future earnings. This is a challenging and commanding work, and despite these increasing headwinds, I am very pleased with the progress we have made to date.
In our balance sheet lending platform, we have had an active fourth quarter originating $370 million of new bridge loans and $36 million of preferred equity investments behind our agency originations. As we said in our last call, we have started to ramp up our bridge lending program to take advantage of the opportunities we're seeing in today's market to originate high-quality, short-term bridge loans and generate strong revenue returns on our capital in the short term while continuing to build up a significant pipeline of future agency deals, which is a critical part of our strategy.
Depending on the rate environment, we believe we can originate $1.5 billion to $2 billion of bridge loans products in 2025 and enhance our leverage returns with increased efficiency seen in the securitization model with our commercial banks. Another major component of our unique business model is our capital-light agency platform which provides a strategic advantage, allowing us to continue to delever our balance sheet to generate significant long-dated income strategy which is a key part of our business strategy. We have been a significant player in the agency business for 20 years and now have been a top 10 Fannie Mae DUST lender for 18 years in a row, coming in at number 6 in 2023 and number 8 in 2024. We had a very strong fourth quarter, originating $1.35 billion of new agency loans, which, as you remember, was towards the top end of the range that we guided in our last quarter's call. We explained that our origination targets were $1.2 billion to $1.5 billion of Q3, Q4 depending on the rate environment and despite the significant uptick in rates in the fourth quarter, we were well above what we had anticipated. We still managed to produce very strong volumes.
We closed down '24 with $4.3 billion of GSE agency volume despite a volatile rate environment throughout the year. With rates where they are today, we are experiencing a very challenging origination climate, and they continue to remain elevated likely going forward resulting in 10% to 20% decline in our agency production in 2025 to a range of $3.5 billion to $4 billion, which will again be very rate-dependent.
We also did a good job converting our balance sheet loans and the agency product in 2024 despite elevated rates. In the fourth quarter, we generated $900 million of payoffs and $530 million or 59% of these loans being refinanced into fixed rate agency deals for the full year 2024. We recaptured 65% or $1.6 billion of the $2.5 billion multifamily balance sheet runoff and agency production. This is on top of the $3 billion of multifamily runoff we generated in 2023 with a 56% recapture rate in agency loans.
And as I stated earlier, with rates at these levels, it has certainly become more challenging for borrowers to obtain an agency take out on our balance sheet loans. We continue to do an excellent job in growing our single-family rental business. We had a strong quarter with $1.7 billion of new loans in 2024, which is our best year yet, and it was well above our 2023 production of $1.2 billion. We have now eclipsed $5 billion of production in this platform to date, and we're very excited about the opportunity we're seeing to continue to grow this platform and make it a bigger contributor to our overall business. This is a great business that offers us returns on our capital through construction bridge and permanent lending opportunity, generates strong revenue returns in the short term while providing significant long-term benefits by further diversifying our income streams.
We also continue to make sustained progress on our newly added construction lending business. We believe this product is very appropriate for our platform as it offers returns on our capital through construction bridge and permanent agency lending opportunities and generate mid- to high-teens returns on our capital. We closed our first deal in the third quarter of $47 million, our second deal in the fourth quarter for $54 million, with a long pipeline of roughly $200 million under applications and another $200 million in annualized and $800 million of additional deals for the current lease ratings. And based on our deal flow, we are confident in our ability to originate $250 million to $500 million of this business in 2025.
In summary, we had a strong 2024 once again, significantly outperformed our peers. We have executed our business plan very effectively and in line with our objectives. Clearly, the landscape has shifted significantly in the last 90 days, and we expect there to be a substantial headwind in the future. We do believe we will have some positive offsets from reduced borrowing costs on our bank lines and through greater efficiencies in the securitization market as well as we continue to fund up our bridge asset borrowing construction lending business which generates strong revenue return on our capital.
Additionally, if short term and long term rates decline further, mitigate some of our hedge of our economy experiments and increase our future earnings. In the meantime, we remain heavily focused on working through and managing our loan book while continue to grow areas of our business to increase to many diverse countercyclical income streams we have developed. We have a very seasoned experienced management team that has operated effectively through multiple cycles. And our work is (technical difficulty) the balance (technical difficulty) occasion, and I'm confident we will continue our longstanding track record of being a top performer in this space.
I will now turn the call over to Paul to take you through the financial results.
Paul Elenio
Okay. Thank you, Ivan. We had a strong fourth quarter and full-year 2024, producing distributable earnings of $81.6 million or $0.40 per share for the quarter and $1.74 for the year, which translates into ROEs of approximately 14% in 2024. As Ivan mentioned, due to the drastic change in the macroeconomic climate, adjusting our forecasted distributable earnings for 2025 to $0.30 to $0.35 per quarter. Clearly, rates have played a big factor in our earnings outlook, and future changes in the interest rate environment will more certainly dictate whether we can grow our earnings sooner than planned.
We've also been affected by elevating legal and consulting fees as a direct result of the short sell reports which is something we expect will continue for the foreseeable future. We estimate these fees will be approximately $0.03 to $0.05 a share going forward, which is reflected in our new guidance.
In the fourth quarter, we modified another 15 loans totaling $470 million, and approximately $206 million of these loans, we required borrowers to invest additional capital and recap their deals, thus providing some form of temporary rate relief to repay accrual feature. The pay rates were modified on average to approximately 5% to 9% with 2.3% of the residual interest due being deferred for maturity. $140 million of these loans were delinquent last quarter are now current in accordance with the modified terms. In the fourth quarter, we accrued $18.7 million of interest rate into all modifications paying accrual features, $7.6 million is related to modifications that were completed in the years prior to 2024, and $1 million is on [mezz] and PE loans originated in '24 behind agency loans that have obtained accrual feature as part of their normal structure. This leaves $10 million worth of accrued interest in the fourth quarter related to modifications of bridge loans in 2024, $1.5 million of which is related to our fourth-quarter modifications.
The table summarizing all of our 2023 and 2024 material modifications and the related accrued interest on these loans is detailed in our 10-K, which we expect to file later this afternoon. Our total delinquencies are down 13%, $819 million at December 31 compared to $945 million at September 30. These delinquencies are made up of two buckets. Loans that are greater than 60 days past due and loans that are less than 60 days past due we're not reporting interest income on unless we believe the cash we received. The 60-plus delinquent loans -- or NPLs were approximately $652 million this quarter compared to $625 million last quarter due to approximately $128 million of loans progressing from less than 60 days delinquent to greater than 60 days past due and $153 million of additional defaulted loans during the quarter which was largely offset by $134 million of payoffs and modifications and $120 million of loans taken back as REO.
The second bucket consisting of loans in a less than 60 days past due came down to $167 million this quarter from $319 million last quarter due to $157 million in modifications that run off, $128 million of loans progressing to greater than 60 days past due, which was partially offset by approximately $133 million of new delinquencies during the quarter. And while we're making good progress in resolving these delinquencies, at the same time, we do anticipate that we will continue to experience new delinquencies especially in this current rate environment. In accordance with our plan of resolving certain delinquent loans, we have foreclosed on some real estate, and we expect to take back more over the next few quarters as Ivan guided to earlier.
The process of taking control in order to improve these assets and create more of a current income stream takes time which is even more challenging in this climate. Additionally, we have been very successful over the last few quarters in collecting back interest owed where we would modify certain loans. A good portion of our remaining delinquencies are more of a heavy lift through foreclosure and repositioning over time which will likely result in less back interest being collected going forward on workouts. These are some of the reasons we're guiding to reduce earnings in the near term.
In the fourth quarter, we took back $120 million of REO assets. We've been highly successful at bringing in new sponsors on certain assets to take over the real estate and assume our debt. This strategy is a very effective tool turning debt capital of the nonperforming loan into an interest-earning asset which will increase our future earnings. In the fourth quarter, we accomplished this on two REO assets totaling about $70 million, which we accounted for our at sales and new loans. The other $51 million of REOs related to one asset that we took back in the fourth quarter that we subsequently decided to flip to a new sponsor and provide a new loan. We closed on this deal yesterday, and the purchase prices at our net carry value of $45 million, which is net of $5.7 million in specific reserves that we took on this asset in '23 and '24. As a result, we will have a one-time realized loss in the first quarter of approximately $6 million, which we already reserved for and is reflected in our book value, and we will now have a performing loan which will add to our rate of income.
We believe we've done a very effective job of properly reserving for our assets over the last two years, and we did not incur any material losses in 2024. We are expecting to have some realized losses in 2025 through similar executions on REO assets and by repositioning certain loans with new sponsors, which we expect will be in line with our prior reserves on these assets. The timing and magnitude of these losses is hard to predict at this point, but once we know a transaction is likely to occur, we will continue to signal that result ahead of time if possible. And again, please keep in mind that these potential losses reflect the reserves we've already taken, which demonstrates how prudent we've been in recording the right level of reserves on our loan book.
As a result of this environment, we continue to build our CECL reserves recording an additional $13 million in specific reserves in our balance sheet loan book in the fourth quarter. And again, we feel we've done a good job of putting the right level of reserves on our assets, which is evident by transactions we have been able to effectuate to date at or around our carrying values net of reserves.
It's also important to emphasize that despite booking approximately $170 million in CECL reserves across our platform in the last two years, $135 million of which was in our balance sheet business, we saw a very nominal decrease in book value of around 2%, while our peers experienced an average book value decline of approximately 20% over that same time period. Additionally, we are one of the only companies in our space that have seen significant book value appreciation over the last five years with 26% growth over that time period versus our peers whose book value have actually declined an average of approximately 25%.
In our agency business, we had an exceptional fourth quarter despite headwinds from higher rates. We produced $1.4 million in origination and $1.3 billion in loan sales with very strong margins of 1.75% for the fourth quarter compared to 1.67% last quarter. We were also incredibly pleased with the margins to be generated in 2024 of 1.63% which exceeds 2023 pace of 1.48% by 10%, and we recorded $13.3 million of mortgage servicing rights income related to $1.35 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1%, which is down from 1.25% last quarter due to a higher mix of Freddie Mac loans in the fourth quarter, which contained lower servicing fees.
Our fee-based servicing portfolio also grew 8% year over year to approximately $33.5 billion December 31, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity income going forward of around $127 million gross (inaudible) As Ivan mentioned earlier, 100 basis point decline in short-term rates has reduced the earnings on our cash in escrow balances. We are now at a run rate of between $80 million to $85 million at $1.25 compared to approximately $120 million that we earned in 2024 for a $35 million to $40 million reduction which will affect our 2025 earnings. In our balance sheet lending operation, our $11.3 billion investment portfolio had an all-in yield of 7.8% December 31, compared to 8.16% at September 30, mainly due to a decrease in SOFR during the quarter.
The average balance in our core investments was $11.5 million this quarter compared to $11.8 million last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield of these assets decreased to 8.52% and from 9.04% last quarter mainly due to a reduction in SOFR, which was partially offset by more back interest collected in the fourth quarter on loan modifications and paydowns.
Total debt on our core assets decreased to approximately $9.5 billion at December 31 from $10 billion at September 30, mostly due to paying down CLO debt with cash in those vehicles in the fourth quarter. The all-in cost of debt was down to approximately 6.88% to 12/31 versus 7.18% in at 9/30, mostly due to a reduction in SOFR which was partially offset by lower rate debt tranches being paid down from CLO runoff and the new $100 million unsecured debt instrument imposed in the fourth quarter. The average balance on our debt facilities was down for approximately $9.7 billion for the fourth quarter compared to $10.1 billion last quarter, mainly due to paydowns in our CLO vehicles from runoff for the fourth quarter. And the average cost of funds in our debt facilities was 7.10% in the fourth quarter compared to 7.58% for the third quarter, again, from a decline in SOFR.
Our overall net interest spreads in our core assets was relatively flat at 1.42% this quarter versus 1.46% last quarter, and our overall spot net interest spreads were 0.92% at December 31 and 0.98% at September 30. And lastly and very significantly, we've managed to delever our business 30% during this dislocation to a leverage ratio of 2.8 to 1 from a peak of around 4.0 to 1 two years ago.
That completes our prepared remarks this morning, and I'm going to turn it back to the operator to take any questions you may have at this time. Madison?
Operator
(Operator Instructions) Steve Delaney, Citizens JMP.
Steve Delaney
For starters, just really appreciate you guys being upfront with us today about your expectations for the dividend this 2025. It's just I think it's a lot easier for the market to hear that today than in March when you have to declare first quarter. So thank you for that clarity.
Ivan, you talked about some resolutions involving outside money. I'm curious this opportunity that starts with distressed bridge loans and eventually it rolls into REO. So I think we're talking about the same investment opportunity. Are you seeing institutional money, big money, fresh money, looking at this space as a unique maybe once in a decade opportunity, is that money coming in? And if it's not coming in, do we need that to get this problem cleaned up in the next one to two years?
Ivan Kaufman
So I'm going to bifurcate my response because you have add a little color to it. Number one, in the third quarter, fourth quarter when the 10 year and the 5 year dropped considerably, you were seeing a real level of activity in the space. And then right prior to the election, the 10-year jump from 3.60 to 4.80. I think it went on pause. So it's a bit of a pause period. But there are two types of collateral that we're looking at as in my comments.
The ones that we effectively transitioned to the sponsors, there's a lot of demand for that. And there's plenty of capital and plenty of entrepreneurial capital for that. A lot of it is people with access to institutional money or a (technical difficulty) that are all network. And there's plenty of activity. And every time we (inaudible) an asset in multiple (inaudible) assets, that would be good.
The more difficult part is the ones where the heavy lift areas, which is kind of -- where it takes time to get hands on those assets. Sponsors are kind of rascals. They steal the cash flow, don't manage those assets, and they get brought down to a level where we need to bring in our own capability, get those up to speed. Once they're up to speed, there'll be a lot of demand for them.
But I think there's a little bit of a pause in the market, and that's really reflective of our comments, not sure why everybody's all excited with the NMAC about 1 month and 1.5 month ago. And I was shocked at how people were thinking they're going to have a great year in light of the increased rate environment. So I think a lot will have to do with where rates settle in. Clearly, we have runoff to a 50. If you see rates coming down to where they were, you'll see tons of money flood back into the space and have the exuberance some of our experience on our last quarter's call where the refinance volumes and the activity was starting to pick up. So it's very much greater in my opinion.
Steve Delaney
So I'm hearing you say the outside money right now as you sit today, you rework the bridge loan and there's new sponsors, there's people willing to step in there. The heavier lift, if you've got an REO, 30% lease needs further renovation whether that's something you feel like your team at Arbor is better equipped to take that property over, manage the property, and then look to sell that property in 12 to 24 months. Am I hearing you clear on that?
Ivan Kaufman
That's correct. Every time we get our hands -- these ones where it's more difficult and our hands-on was, as I said, these sponsors or sort of bad players in the market using the legal system to delay the process, steal the cash flow, and not manage the asset. So every single asset that we take back, as we're taking it back, we have a 24-month plan, and we were able to really show how we can get it from where it is today. Mostly monthly, monthly increase the NOI, putting the right CapEx to get the stuff to speed. And our guess is we're going to be able to sell all those assets somewhere between 12 and 24 months for bank valuation once we stabilize it.
Steve Delaney
Paul, a quick one for you to close out. In December, Fitch upgraded Arbor's primary servicing rating to CPS2+. It looks like a large focus of that was on your agency servicing. But to any extent did that servicing upgrade reflects the work you were doing on the bridge loans in your CLOs?
Paul Elenio
Yeah. I don't have the definitive answer, but I do believe you are correct, Steve, that the majority of that rating, if not all of it, has to do with how we're servicing the agency book. It may have some impact on the balance sheet book, but we were just upgraded because of the quality of servicing shop we have. We've made a lot of investment in that division, both from a technology perspective and staffing perspective, and our rating just keeps getting better and better, which I think should not be overlooked. As you just mentioned, I'm glad you pointed that out.
Ivan Kaufman
Steve, getting back to your comment, I was just reflecting on in terms of the assets. We tried very well the assets that we've put to the sponsors, and the level of improvement is remarkable. The pending assets that were probably having occupancies in the mid-70s are well on their way to 90s. The fact that the cosmetics improvements are remarkable. So when we're able to transition to new ownership, we ended up with a mass that (inaudible) that then becomes extremely more valuable in a very, very short period of time because we're able to bring our expertise to the table with that expertise and capital we're lacking.
The stuff that we retain, our goal is to get these assets in that position in 12, 18 months, or 24, whatever it is, and then bring in those sponsors. We can get the right valuations that are more reflective of where we think the values are. We have a great track record on it. In fact, we had a loan we come back two years ago, which was 70% occupied. We're just selling it right now for probably closer more than the debt. We got the occupancy up to 93% and almost where it needs to be.
So that's kind of standard for how we run our business.
Operator
Stephen Laws, Raymond James.
Stephen Laws
I wanted to touch on modifications from last year. I think it was around $4 billion a lot of which was done in early part of the year, maybe when borrowers and everybody had a different interest rate outlook. Can you talk about how you expect those modified loans to perform over '25? Were those modifications how many were somewhat reliant on really from rates over the course of '25? And how do you expect are those modifications typically 12 or six-month duration extensions?
Or how do you think about the modified loans maturing over the course of this year?
Ivan Kaufman
So I think it's important to have a little bit of an overall -- so keep in mind that we have run off in our portfolio over the last 2 years of almost $6.1 billion and that's -- we either through a refinance or sale or all the people taking them out. So the amount has been dramatic. With respect to the modified loans, keep in mind, bridge loans are short-term and they have a lot of tests. So it's very, very normal to modify a loan in this kind of rate environment and give people a little bit more runway if they can bring more capital was a period of time when SOFR was sitting at [ 530 ] when it dropped. It was a lot of relief or bars who got white caps that help in their lifetime to give them more opportunity.
So when we look at a modification of the loan, we take a look at whether this sponsor could bring more capital to sponsor doing a good job and whether he has a capability to improve the performance of those assets. And the majority of those times, the super majority of costs we track their performance and going extremely well.
There are periods of time, and they don't quite do understand -- they could resolve an additional -- and paybacks. But on the whole, the strategy has been extremely effective to the -- to cloud. Keep in mind, that almost all our loans have recourse provisions with multiple sponsors. So it's not like people could just hand back the keys as an alternative. They are being put in a position where they have to bring capital to the table.
And there are many circumstances to take over ownership. We still have access to those personal financials and judgment as well. So our goal is always to improve the [ game ] get into that position. Specifically in markets that we're experiencing a little bit of softness or delays in ports and into that nature. So for the most part, we are seeing tremendous improvement in the NOI of the properties.
Stephen Laws
Appreciate the comments there. And Paul, could you touch on the servicing escrow balances again? I think you said $80 million to $85 million, but I want to make sure I understand that the new level we should think about? And kind of what's driving the change in that, what the components are driving that reduction?
Paul Elenio
Sure. So when I speak of earnings on our escrows and cash, it's 2 components. We lump it into one, but we can break it out. So we're sitting with $1.5 billion of escrow balances right now. And we have, at year-end, we had about $500 million of cash between cash on hand and cash in the CLOs.
So that's call it, $2 billion. And right now, still was at under [ 140 ], we're earning slightly below that, probably about [ 415 ] is what we're earning currently. So if you take that $2 billion multiply it by 415, you probably have $85 million, both in earnings on the cash that we have on our balance sheet and in the vehicles and on our escrows.
Last year, we earned $120 million between earnings on escrows and earnings on cash for 2 reasons. One, SOFR was higher throughout the year. And remember, SOFR has been dropping. So the full effect of the drop in SOFR is not in the '24 numbers -- cash has come down, obviously, as we use some of our cash to run our business. So that's the 2 components that are driving the $120 million versus the $85 million.
The one thing I will say is that's a number that's bad. The one thing I'll say that will partially offset that is we are expecting, even though we're guiding to lower agency volume today, if rates stay where they are, we still believe our agency volume will eclipse our runoff in the agency business. So we will have some growth in the servicing portfolio that will partially offset that. But those -- that's the math.
Ivan Kaufman
I want to add to that slightly and reflect on our comments I've given you before, we experienced [ $3.4 billion ] runoff in 2024, that was a concern interest rate environment that existed in today's interest rate environment, we're forecasting to remain this 450 level to 475 or 480 levels that will be more like 1.5. However, if we go back to the interest rate environment that we have, we'll revise up our notes of run-off $3 million. That's a material difference. And that material difference will result in a reprice in our agency business as well. So our outlook is really respected is an elevated interest rate environment and how it impacts our business.
And we would see a similar run rate as we did last year, as (inaudible).
And the real inflection point is really going to be the 5 to 10 year. If we see the 10-year and the 5-year, get back around that 4% level, you'll see the same trend that we were seeing on the third quarter and fourth quarter that would (inaudible) experience not reach that run off.
Paul Elenio
And Steve, one of the things I want to add is we were obviously very aware SOFR was dropping, and we knew it would have an impact on our escrows and our cash. But I think the real fundamental change over the last 90 days that was a little bit surprising to us. And we talked about the some prior calls, we knew you could look at our filings that shows when the shock would be if rates go down or up on our cash and escrow in our portfolio, but we thought there would be a pretty big offset in the fact that the 10-year would be low, and we have significantly more origination volume on the agency side, that is not happening right now. It may change as an said with the rates, but that's the big change. So it's not a surprise to us that escrows and cash earnings go down with some dropping.
But we also thought we'd have a lower 10-year, which is where we were last quarter, and we have a much more robust origination platform to offset that.
Stephen Laws
Yes. I appreciate the comments on that. And one last question. regarding new dividend level being determined, I know the $0.30 to $0.35 guide for quarterly distributable earnings. Are you going to base the dividend on that?
Or will you look at kind of distributable earnings less PIC income and think about the dividend closer to a cash earnings level? Or how will you and the Board think about determining that new dividend level?
Paul Elenio
Yes. So I think we will look at it as distributable with PIC. But again, we just as we go, right? Just to give you an example, we've modified $4.7 billion of loans in the last 2 years, as I have said in this contrary, 2.4 build-outs have pain accrual features. But we're only accruing on $1.7 million of those.
So there's another $500 million that we've decided not to accrue on. So we decisions as we go along we adjust as we go along on whether we think still should be accruing this or not based on value. The ones we are accruing, we feel really confident we're going to receive. So we have those in distributable earnings. But again, none of this has been decided yet with the Board, we need to see -- we've done today is give you, as of today, where we think the short-term guidance would be.
We need to see where the first quarter comes in. We just see a couple of more months of this project. And by May, when we're on our first quarter call, we'll have 3 months in the books and another month of market data, and we will base our dividend on what we think it looks like going forward, not just for 1 quarter, so we'll look at 12 months, and we'll say, where do we think we get it to and where are we comfortable? Today, which is just a guide of a range of what we're seeing right now.
Ivan Kaufman
I mean, just to give you a concept, we're sitting with $1 billion pipeline (inaudible) that can close unless a 10-year drops to [ 4.25 ] range. So our guidance couldn't change to the upside with the change in interest rates. But to be realistic, we don't want to mislead anybody. We want to take consideration with this new elevated [ print-based ] dispute volatility with the election as we know it seems like we're in a range, whether it be a few quarter, 2 quarters, 3 quarters or 4 quarters, we're not sure. But just accordingly, we think we're just responsible by laying out where this current interest rate environment, which is different than where and that affect our business.
Operator
Leon Cooperman, Omega Family Office.
Leon Cooperman
I missed most of the call because I had a conflict with another company jumped out their call. But as something you said differently, let me just say that I think that you guys have done a terrific job in managing through a difficult environment. And I personally refunded by the cost of dealing with the short sellers because I think you've been extremely transparent in our dealings with the investors. No surprises here. I think you've done a very good job of navigating the environment.
But let me ask you some questions rather than give you a shout out. what's your confidence in your book value? And one secondly, were your willingness to use liquidity to buyback liquidity, if it drops below standard book value. And what kind of return do you think you should earn a rig basis on your book and loan environment?
Ivan Kaufman
So on to I'm glad you asked that question because -- we've had a tremendous success and track record in terms of taking distressed loans -- bringing new sponsors and either having proper reserves or take back -- so we're really comfortable with it. And we modify our loans which are always the -- loans, which have that biggest highlight on them where it can in any major modifications to reappraisals. Based on the appraisals were for us to take whatever reserves are necessary. We've been right on the mark. So I'm extraordinarily comfortable with the reserves that we've taken.
But track record speaks for itself. Paul, I don't --
Paul Elenio
Yes. I just think the book value where it is today, Lee, if the market state is today, we may have to take some more level of reserves on certain assets as we move through this higher for longer scenario, and it may take book value a a little bit, but we don't think it will be material. Because we think we have provided the right level of reserves to date. So I think it could go down a little bit, but I don't think it goes down significantly and our track record has been that it has moved down significantly over the last 2 years in a very difficult market. As far as returns on equity.
I think it depends on where we set our dividend. But if you look at our range on the low end of the range, in 10% or 11% of the high end of the range, we're 12% return on equity, right? I haven't given where it is. So we did a 14$ for 2024 I think we did similar for '23. I think 10% to 12% is realistic.
And I think there's upside on top of that if this doesn't stay where it is longer than we're expecting.
Ivan Kaufman
In terms of buying back stock (inaudible) keep in mind, we have a very, very vibrant business, specifically on the [ SMR ] side generating outsized returns. We have to fund that business, construction lending business with the fund condition, we're expecting to do $1.5 billion to $2 billion of bridge loans. So we have a $5 billion worth of book business, which is the Board -- early will not [ $1.5 billion ] of runoff and we'll use subcapital to not runoff. But we have to be sensitive to keep our business growing. We've done an outstanding job of that.
And that's where our -- going to be returns on the new business in the mid-teens, which is very accretive to the business we've done. So we'll continue to focus on growing our business and then, of course, managing through some of the legacy issues we have.
Leon Cooperman
What does it mean? If we stock at $10, $11, we would not buy it?
Ivan Kaufman
It would be a strong possibility. I think what you have to do if you ask me if I would buy it, listen to what I say on watch value. So I've always been very forward and covered my own actions, I'm the largest shareholder of the REIT. And if there's an opportunity of this (inaudible), I'm sure, plenty of management can be active in the spot and in this product.
Leon Cooperman
Good luck and congratulations. We did a very good job in short sales of your same sales, so the understanding the quality of earnings and the quality of the management.
Ivan Kaufman
Leon, you said on more than I usually say that tell us, but anyone who cares to take time to look at the history and the problems of their sellers and their founders and take a look at them forward to see the issues they've had with the regulators and the costs around the world, and they can take their comments for what they were. You've done your research, I've done mine, and we'll make our investments in accordingly.
Operator
Rick Shane, JPMorgan.
Richard Shane
Sort of 2 lines. First, a little housekeeping. Paul, you mentioned $500 million of nonaccruing loans. Can we go through in the $0.30 to $0.35 guidance? What's the drag from nonaccruals?
What's the contribution from PIK. And was the $0.03 to $0.05 that you cited for legal and regulatory quarterly. And can you help us sort of understand the context of that expense?
Paul Elenio
Yes. So the $0.03 to $0.05 is annually. We've run probably $0.02 to $0.025 already in 2024, and we're expecting that number will just be the same number, but for a longer period of time because it really wasn't ramping up until the second quarter. So I would say that it's $0.03 to $0.05 for the year on the cost -- been consulting, legal and administrative related to the short sellers if it continues. That's our view.
And then as far as the drag on earnings, I think we have $819 million of loans earning 0. What we've commented is that I think in this environment will resolve some and we'll have some new ones. I think our track record has been, and we still think even in this rate environment, will be able to make progress in 10% range. We did 13% this quarter, which we were impressed with, but it will also impact us on the REO side because I think -- a big temporary drag, Rick, as I've alluded to, we already took back $100 million of loans in the first quarter, and we had $50 million on our books now that are in legacy. We have $100 million -- to look at the numbers, we have $176 million in REO on our balance sheet, $45 million is a loan we flipped yesterday that I mentioned.
So now you're down to $131 million. $80 million that are legacy assets we've had on our books before the crisis, and we're working through to try to dispose of them.
So about $50 million to $55 million is due for this crisis. We took back another $100 million in January already. So if the $150 million, as Ivan said, we're probably going to end up between $400 million and $500 million. So the drag is that $400 million to $500 million has an NOI of about $7 million but certainly not nearly what it would have been -- had been paying a current interest rate. And then that's going to be temporary until we can reposition those assets and then hopefully we'll have a significant upside in the future, but that's probably 24 months out.
So I think the drags from where we are now to where we're guiding to $0.30, $0.35 are these are the components reduced agency origination volumes, which obviously hit earnings, right? The full effect of SOFR on your escrows and your cash balances offset slightly by servicing the full effect of the delinquencies for a longer period of time than they've been outstanding and the drag on the REO assets. Well, we have some positive offsets, yes. will probably be largely more efficient through the securitization markets. And obviously, if rates change, we can pick up volumes and have a better performance on our assets, but those are kind of the components.
Richard Shane
And how much of the quarterly $0.30 to $0.35 is from PIK?
Paul Elenio
I don't have those numbers here, but I would say it's probably going to be similar to what we've had. It's probably to $150 million a quarter.
Richard Shane
Okay. Great. And then pivoting that was the sort of the housekeeping stuff. In the quarter, you guys did $35 million almost $36 million of prefs and as $97 million the year. Are those part of -- is that loans on outside investments opportunistically?
Or is that related to the structured portfolio where you're providing additional capital to existing borrowers. And I'd love to relate that to some extent to the $130 million of capital contributed on the [ AMAS ] during the quarter during the year?
Paul Elenio
Yes. So I think they're a little different. We may be combining concepts. But -- so the $97 million that you referred to, if not all, the vast majority are not new investment opportunities there. Prep AMAS, we're putting behind agency models that are keep playing off our balance sheet.
So what happens? The guy is a balance sheet loan and he wants to convert it to a fixed rate low and depending where rates are, they'll come to the table, it'll be short capital because of the restrictions in the agencies on the debt cover at the LTV and he'll bring to the table some money and will put some money in the form of medicine behind him, which puts us in a better spot, right? Because if we were 80% LTV, on a bridge loan and struggling and now he has a 70% LTV loan on the agencies he had a kick in 5%. We have taken 5%. Our PE MAS is behind 70%, not behind 80%, right?
And then they usually get about a 14% return. And then there's a PIK on it because you have to give you have to have the current pay has to be a debt cover like [ 110 ] to your MAS and PD. So it's just a calculation of like some of the ones we did this quarter were 9%, 10%, 11% pay and the rest was picked because we had good coverage to our PE.
Ivan Kaufman
I want to just add to that, that's been a low of course, of our business, correct.
Richard Shane
I really appreciate the clarification on that. It is helpful. And if I can just pivot to my very last question. So during the year, you guys noted $4.1 billion, you took in $130 million of additional capital associated with that which equates to about 3%. Can you put that 3% additional capital in the context of what you see the decline in property values.
How does that sort of match up in terms of how much property is actually down?
Ivan Kaufman
I don't understand your question.
Richard Shane
So you had borrowers put in 3% in order to modify loans. And I think anecdotally, property values are down substantially more than that. So I'm kind of curious how you think about how much additional capital a borrower needs to put in order to maintain an LTV?
Ivan Kaufman
Every case is different, Rick, and on all properties declined, some improved performance. So I can't answer your question in the macro. We take each situation, we evaluate the capital they can put it on the assets performing are going to improve. So each one is better.
Operator
Jade Rahmani, KBW.
Jade Rahmani
Can you discuss the lower cash balance in the structure business? What drove the quarter-on-quarter decline? And also, did you experience any margin cost?
Ivan Kaufman
Sure. So we did not experience any margin calls. We have great relationships with our lenders. In fact -- to probably give some color that the market for commercial banks and securitizations is really, really strong right now. So maybe it's a good time to comment on that.
I'm sure you're aware that the CLO market and the bank lending market has improved dramatically. And those are some of the benefits that will offset some of these other factors. The CLO market, I'm sure you've seen deals are getting done in the $150 million to $175 million range as opposed to deals that 2 years ago could get done and that express were in the [ $75 million ] range. So we see huge efficiencies on that side. The commercial banks are partners and relationships we've had they've been more and more aggressive at higher advance rates and lower spreads.
And these things will translate to better margins for us going forward. It's a lagging effect. It's all beginning over the last couple of months, and we should have some real positive impact on our income -- trees going forward, which will be an offset to some of the negative.
Paul Elenio
And as far as the cash balance dropping it's math, right? We had put on, as you saw, $307 million of bridge in our new product that we love. We funded up our SOFR business, which continues to grow. So that requires cash obviously, the runoff has partially offset that. There's also timing on cash, right?
When you are taking back an REO asset, you may have to buy it out vehicle and then you relever it. So there's always timing on why those cash numbers move. But we're sitting at about $450 million of cash and liquidity today. And obviously, we've used some of that cash to grow the platform.
Jade Rahmani
And then just the agency business cash balance when you break out the different segments, is that more akin to corporate cash? How fungible is that cash?
Paul Elenio
Yes, it's all fungible. You just -- the agency business obviously generates cash, it's capital light and then it gets moved up to the -- it's just the way you break out the segments. But when you look at a company like ours that you're managing cash, all of that cash is fungible and all of that is corporate cash.
Jade Rahmani
Lastly, just on the GSE side, have you gotten any put back? I know JLL closed 1 Walk & Dunlop talked about what they've received. It'd be helpful to hear if you've received any loan put back.
Ivan Kaufman
We have not -- we have not had to put back or had to buyback on.
Operator
Crispin Love, Piper Sampler.
Crispin Love
First, you've had $370 million plus of bridge originations in the fourth quarter, highest level in a long time, in line with your guidance from last quarter. Can you speak to expectations going forward in bridge as rates have backed up in September? And then do you have an outlook for agency originations for the first quarter?
Ivan Kaufman
Yes. The $370 million of bridge is a good quarter. As I mentioned in my comments, we're expecting about $1.5 billion to $2 billion for the year, and we expect it to move fairly evenly over the year. I think if short-term rates drop, you can see that number going up considerably, but that's the level that we think it's rate environment.
Paul Elenio
And as far as your second part of your question, Crispin, yes, the reason we've given a $0.30 to $0.35 kind of guidance per quarter, is it -- won't be linear, right? Certainly, the first quarter or 2, we may be on the lower end of our range, then it will grow from there. and a lot has to do with the fact that the agency business, given where rates are, is off to a slow start. So we're expecting a a much lower first quarter in the agencies and then we expect it to build from there for 2 reasons. One, historically, the first quarter is usually a slower quarter because a lot of people close all their loans at the end of the year.
And to the back of a race to put some people on the sidelines. We've got a big pipeline. We've got a lot of loans ready to go. It's just a matter of convincing borrowers to transact at these levels and a lot of them are still patiently waiting to see where the 10 year goes. So we are expecting the numbers to be much lighter in the first quarter and then hopefully grow from there.
Ivan Kaufman
And what you did see is a strong fourth quarter, not only with Albeit all agency lenders and the agencies -- you look at the comments I had, we would have even done more with the agencies were backed up and we raised -- we have this huge pipeline on the side. So the first quarter is going to be a little light because so much was done in the quarter and where the rates are today is just a fun sitting on the side of the balance sheet on the pipeline. And if you do see a meaningful move for the 10-year down, you'll see that number. increase substantially.
Paul Elenio
Yes. And it wouldn't be surprising if the agency business for the quarter was $600 million to $800 million. It all depends on what's going to happen.
Crispin Love
Great. I appreciate all the color there. And then just last one for me. Can you provide any update on the DOJ SEC investigation from last year? And you mentioned legal fees related to short seller reports in your prepared remarks.
Does that also include legal fees related to the investigations as well?
Ivan Kaufman
So as you know, we don't comment on regulatory inquiries with respect to the elevated costs. We, as you know, go through (inaudible) to step up. On process, the expense was reporting -- our compliance and all the contracts -- we are working extremely hard. Our auditors are doing double and triple and quadruple work. We've had to stand up our compliance and all our procedures and processes.
So that's what we estimate the equipment of a -- opportunity environment.
Operator
Thank you. And it appears that we have reached our allotted time for questions. I will now turn the program back to Ivan Kaufman for any additional or closing remarks.
Ivan Kaufman
Okay. Well, thank you, everybody, for your time. 2024, we expect next year that we move up given this current rate environment. We appreciate your participation on the call and rate come in our favor (inaudible) however, even with this adjusted -- rate environment (inaudible) extremely strong about -- years in this space (inaudible).
Operator
Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.
