Arbor Realty Trust, Inc. (ABR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the First 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.

Okay. Thank you, Britney. 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 March 31, 2023. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform these statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial conditions, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks to everyone for joining us on today's call. After coming off our best year as a public company in 2022, we've had a tremendous start to 2023 with another exemplary quarter, and our diverse business model continues to offer many significant advantages over everyone else in our peer group. We have a premium operating platform with multiple products that generate many counter-cyclical [financial] income streams, allowing us to consistently produce earnings well in excess of our dividend. This has allowed us to increase our dividend another 5% or $0.02 a share to $0.43, reflecting our 11th increase in the last 13 quarters or 40% growth over that time period, all while maintaining the lowest payout ratio in the industry, which was 68% for the first quarter. Our performance continues to be head and shoulders above everyone else in our peer group. None of which have been able to increase their dividend at all in the last few years. In fact, several of our peers continue to cut their dividend in this market, while others are paying dividends of over 100% of their earnings. Additionally and very significantly, we've grown our book value per share by 45% over the last 3 years from just under $9 a share to almost $13 a share, even with 11 dividend increases during that period, while many of our peer groups have not grown their book value at all, despite cutting their dividends or best only keeping their dividends flat. Yet we still trade at similar dividend yields and price to book values as the rest of the space, despite our unquestionable outperformance, which is why we strongly believe we are completely undervalued and there has never been a better time to make a significant investment in our company. As we discussed on our last earnings call, we have been laser focused over the last 18 months and prepare for what we felt would be a very challenging recessionary environment. Currently, we have all seen the negative pressure on the financial markets, banking industry and real estate sector, which has created additional uncertainty and volatility in the market. We are operating our business with expectation that this environment will persist for some time. And a result, we are very pleased on how well positioned we are as a firm to take advantage of what we believe will be accretive opportunities to go on a premium yield on our capital. We have taken a patient and selective approach to new investments and have been heavily focused on preserving and building up a strong liquidity position. This has allowed us to accumulate approximately $900 million of cash and liquidity on hand, which again provides us with the unique ability to remain offensive. I always said there are tremendous opportunities in down markets to make a significant return on your capital if properly positioned. One of the best opportunities we have seen in recent months is the ability to repurchase our stock at significant discounts to book value and generate high double-digit returns on our capital. We repurchased approximately $37 million of stock at an average price of $10.53, which is a 17% discount to our book value and generates a current dividend yield of 16% and a yield of approximately 20% on our distributable earnings. This is a tremendous return on our capital. And again, it's something we are able to take advantage of how well positioned our firm is to be opportunistic in a volatile environment. We have also a best-in-class dedicated asset management team with tremendous expertise and loan works out and debt restructuring, which is something that is a key part of our business model, extremely valuable and unique throughout platform. A lot of misinformation has been published lately by a group of loans, totaling $229 million that we had in Houston, Texas. In order to exercise our remedies, we proceeded to foreclose on these assets and [went ahead with] one of the existing investors who was deeply committed to the project, recapitalize and restructure the debt with the appropriate guarantees, putting our loans in a much more favorably protected position. We recorded no loss on the original debt and recovered all the outstanding interest owed to us as part of the restructuring. This was an extraordinary successful debt restructuring, which clearly demonstrates the incredible depth and experience of our asset management payment. Unlike all those in this space, we've been conducting ourselves as that we've been in a recession for the last 4 quarters. And although we believe the bottom is near, we are well aware of the challenges that lie ahead. We feel we are [indiscernible] doing an outstanding job in managing through this dislocation between our multifamily-centric portfolio, the quality and structure of our loans, our asset management skill set and tenured senior management team and a track record of managing through multiple cycles and the strength of our balance sheet and the versatility of our franchise. Before I talk about the first quarter results and highlights, I want to take a few minutes to address a significant amount of false and misleading information that has been recently published about our company to a short seller report. The report is replete with factual misstatements, all of the [indiscernible] false information and [indiscernible] that is cloaked in the form of an opinion and a transparent attempt to mislead the investing public. It is clear to us and to be clear -- equally clear to everyone who has been diligently following the progress of our company for more than a decade that the report was written by somebody who apparently need to understand our business. No one has a sense of appropriate accounting treatment for certain transactions and who's motivated solely to profit on this short position through the dissemination of false and misleading information. While we will not go through a back and forth and every false and misleading allegations by the so-called research company. It should be obvious to everyone at this point that the reports and attempt to capitalize on fear instead of rational thought and what is so ironic is that they took one of the most successfully restructured transaction in our history that was highly lucrative to our shareholders and to try to turn it into a negative. Most importantly, we have reaffirmed with our auditors that all are accounting for the period in question is correct as evidenced by the filing of this morning of our first quarter 10-Q with no material changes. I urge our shareholders and the investment public to pay no attention to this noise that is clearly coming from biased source lacking incredibility and instead of focusing on fundamentals of our business, our tremendous operating results and in fact we are a leader in our space and continue to massively outperform our peers. Turning now to our first quarter performance. As Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.62 per share, which is well in excess of our current dividend, representing a payout ratio of around 68%. And clearly, with our extremely low payout ratio and multiple predictable reoccurring income streams, we are uniquely positioned as one of the only company in our space with a very sustainable protected dividend, even in this challenging environment. In our balance sheet lending business, we continue to be very selective, focusing mainly on converting our bridge loans into agency product, allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams. In the first quarter, we had a tremendous success in this area with another $1 billion of balance sheet runoff over $400 million of which was recaptured to new Agency loan originations. As a result, we're able to recoup $200 million of our invested capital and continue to build up our cash position to take advantage of the many opportunities we believe will exist in this downturn to generate outsized returns on our capital. And this strategy is a critical part of our business model and is unique to our platform, and we are both a top balance sheet lender and operate a very large agency business. In our GSE/Agency business, we had a strong first quarter originating $1.1 billion of loans, capped off by a very strong launch with over $530 million in originations. And with the current yield curve, and very little activity in the market for balance sheet lending. we are seeing a significant increase in our Agency pipeline, giving us confidence in our ability to continue to produce very strong Agency volumes going forward. Additionally, we have a strategic advantage and that we focus on workforce housing part of the market and have a large multifamily balance sheet loan book that actually feeds our Agency business. In fact, we are one of the leading Agency lenders in the achievement of affordable housing goals. As a result, we continue to be viewed very favorable by the agencies. And again, this Agency business offers a premium value as it requires limited capital, generates significant long-dated particular loan constraints and producing significant annual cash flow. To this point, our $29 billion fee-based servicing portfolio, which grew 3% in the first quarter, generates approximately $117 million a year in reoccurring cash flow. We also see a significant increase in earnings on our escrows and cash balances as rates have risen conceivably, which, in fact, has a natural hedge against interest rates. In fact, we are now earning approximately 4% and around $2.8 billion of balances or roughly $100 million annually, which combined with our servicing income annuity, totaled over $217 million of annual cash flow or over $1 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 a significant strategic advantage over our peers. We continue to grow our single-family rental business as we are one of the only remaining lenders in this space, allowing us to produce as much business as we want. We remain committed to the business as it offers 3 turns on our capital through construction bridge and permanent lending opportunities and generate strong levered returns in the short term while producing significant long-term benefits by further diversifying our income streams and allowing us to continue to build our franchise. In summary, we are off to a fantastic start in 2023 with an exceptional first quarter that once again demonstrates our ability to generate strong earnings and dividends in all cycles. We understand very well the challenges that lie ahead in this volatile market and feel that we are very well positioned and the best positioned company in our space to succeed in this cycle. Our earnings significantly exceed our dividend rate -- We 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 take advantage of the many accretive opportunities that will exist in this environment. And again, with our best-in-class asset management capabilities and a seasoned executive team, we are very confident that when the smoke clears, we will continue to be the top-performing company in our space, significantly outperforming our peers. I will now turn the call to Paul to take you through the financial results.

Okay. Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $122 million or $0.62 per share. These results translated into industry high ROEs once again of approximately 20% for the first quarter, allowing us to increase our dividend to an annual run rate of $1.68 a share, reflecting a dividend to earnings payout ratio of around 68% on those first quarter earnings. Our first quarter results significantly beat our internal projections, largely due to approximately $16 million of income received from equity investments in the first quarter, which included a large equity kicker we had related to a loan payoff and a distribution from our LexFord investment. We also experienced higher gain on sale income from increased sold loan volume, mainly due to a stronger origination volumes in the latter half of the quarter than we anticipated, and we continue to see increased earnings on our floating rate loan book, and our cash and escrow balances in the first quarter from higher interest rates. We also recorded an additional $20 million in CECL reserves on our balance sheet loan book during the quarter as a result of using more conservative assumptions in our model due to a decline in the macroeconomic outlook for commercial real estate. These reserves are general in nature and do not affect distributable earnings as we have not experienced any realized losses this quarter. Our balance sheet loan book continues to perform well in this market with no increases in default or delinquencies in the first quarter. And as Ivan mentioned earlier, we believe we are well positioned given our multifamily focus, strong liquidity position and our best-in-class dedicated asset management team with tremendous experience giving us confidence in our ability to successfully manage through this cycle. In our GSE/Agency business, we had a strong first quarter with $1.1 billion in originations and $800 million of loan sales. The loan sale numbers were less than our fourth quarter sales, as we mentioned last quarter, due to a large portfolio deal that closed in December that also settled in the same month in order to help the agencies meet their affordable lending caps. The margin on our first quarter sales was up substantially to 1.72% compared to 1.33% in the fourth quarter, again mainly due to a large deal that closed in December of last year would have reduced margin and from a higher percentage of FHA loan sales in the first quarter that contain much higher margins. We also recorded $18.5 million of mortgage servicing rights income related to $1.5 billion of committed loans in the first quarter, representing an average MSR rate of around 1.23% compared to 1.12% last quarter, mainly due to reduced servicing fees on the large portfolio deal we closed in December. Our fee-based servicing portfolio grew another 3% in the first quarter to approximately $29 billion at March 31, with a weighted average servicing fee of 40 basis points and an estimated remaining life of 9 years. This portfolio will continue to generate a predictable annuity of income going forward of around $117 million growth annually. We did see substantially less accelerated runoff in our Agency loan book again in the first quarter due to market conditions, which has resulted in reduced prepayment fees. In the first quarter, we received $2 million in prepayment fees as compared to $6 million last quarter. And again, given the current rate environment, we're estimating that prepayment fees will continue to run around $2 million a quarter going forward. In our balance sheet lending operation, our $13.6 billion investment portfolio had an all-in yield of 8.83% at March 31 compared to 8.42% at December 31 mainly due to increases in LIBOR and SOFR rates during the first quarter. The average balances in our core investments was $14.1 billion this quarter as compared to $14.8 billion last quarter, due to runoff exceeding originations in the first quarter. The average yield on these assets increased to 8.94% from 7.91% last quarter, excluding $8 million in back interest collected on the repayment of a nonperforming loan in the fourth quarter, mainly due to increase in SOFR and LIBOR rates and from more acceleration of fees in the first quarter. Total debt on our core assets was approximately $12.6 billion at March 31, with an all-in debt cost of approximately 6.97%, which was up from a debt cost of around 6.50% on December 31, mainly due to increases in the benchmark index rates. The average balance in our debt facilities was approximately $13 billion for the first quarter compared to $13.7 billion last quarter. The average cost of funds in our debt facilities was 6.69% for the first quarter compared to 5.80% for the fourth quarter, again primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets increased to 2.25% this quarter compared to 2.11% last quarter, excluding $8 million of defaulted interest we collected in the fourth quarter. And our overall spot net interest spreads were 1.86% at March 31 and 1.92% at December 31. Lastly, we believe it's important to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated recurring earnings in the future. As Ivan mentioned earlier, we have several diverse and countercyclical income streams that allow us to produce strong earnings in all cycles, the most significant of which is the value of 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 earn significantly more income in today's higher interest rate environment. Additionally, we're multifamily-centric and have a substantial amount of 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 our ability to continue to outperform our peers and deliver high-quality and sustainable earnings and dividends in the future. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have at this time. Britney?

[Operator Instructions] We'll take our first question from Steve Delaney with JMP Securities.

Congratulations on another strong quarter to start the year. Big news, I'd been in the banking world, of course. And I'm curious, given Signature's presence in New York, if they were a material competitor to Arbor in any way? And how does the demise of that bank impact your opportunity set in New York going forward?

Sure. That's a good question. And I think what things people are not focusing on many, many of these regional banks were strong competitors of ours. And they really took over a large part of the market, in particular, when rates rose they were well below the market. And their model is an interesting model, but if they don't necessarily have their own originations, they get fed by brokers, and they build their portfolios based on being the lowest price. And very often as we're seeing now, not just the lowest price, but having assets that are really nonsalable. So getting rid of a lot of these regional banks who lend improperly, right, by being below the market line on short-term deposits is something that we believe is very healthy for companies like ours who maintain a huge amount of discipline. And as we stated on our call and consistently do, we have a very matched asset liability structure. Anybody can generate loans, right? When they don't match their assets and liabilities correctly [indiscernible] and then they underprice their loans. So I think, like us, we have a tremendous origination set. We're very disciplined in the way we do our business and eliminating these lenders who don't even know how to originate all they do is really take over loans from brokers at the lowest price. I think we'll create a better landscape for us. And it's going to be very clear, It's definitely in the interim that being an Agency lender with the ability to underwrite sell and securitize loans into the market with Fannie, Freddie and FHA is just an invaluable tool specifically in line in times of illiquidity like today.

Ivan, do you think that this is -- goes far beyond Signature and that there's a broader many banks, I guess, playing that game or playing that card and possibly the FDIC is going to come down on them from a regulatory standpoint. So beyond just New York, are you expecting to see this broadly across the country with respect to the banks that do the broker Fed lending model?

Yes. I mean it's huge. I mean, this is just a tip of the iceberg, but I believe the FDIC will keep these people afloat and they're always amazing on the First Republic when you saw that the government gave them $90 billion from their treasury to keep them alive. So anybody who has fixed rate loans, who originated fixed rate loans in the 3s and they're sitting with fixed rate loans in the 3s, they're paying on deposits in the 4s, they can't raise equity to sell their assets, it's probably a 30% haircut. I would say that the Fed is going to have to decide who stays and who doesn't stay. And then there are other institutions that are much healthier because they have more floating rate loan books so they've been able to manage their book. but they're on the parts with losing deposits, right? So they're losing deposits and yet they still have to fund up a lot of their assets that they put on their books, and they're being grouped in a little bit unfairly. so I believe to the extent like Pac West who has billions and billions and billions, that's just 1 of many, of 5-year loans in the 3s. Anybody can do the math, a 5-year loan in the 3 is when rates are 5.5 in a liquid piece of collateral poorly underwritten but it is worth $0.20, $0.30, $0.40, that wipes out their regulatory capital. And you can't raise capital when you're in that situation. When you're losing deposits, you have a run. So I think the Fed has done a reasonable job in at least providing lines. I would love to see the disclosed amount of the lines that were provided to all these regions and all these local banks and that would tell you the significance of the run on deposits and how much you [indiscernible] these people up. But when your asset values are so significantly less and you're really insolvent on a mark-to-market basis, because you went ahead and you originated fixed rate loans with your term liability costs. And you have an inverted yield curve, you're in tough shape. So I believe this will continue. A lot will do with what the Fed does. And where rates elevated on the short term and of course, the cost of deposits being so high, this problem is not going away. And then, of course, what you'll see is for those people who are borrowing from the Fed, I don't know what them borrow, but you'll have negative earnings to some extent because your assets are less than your cost to fund them. So this is a real issue. But more importantly, it's a real long-term issue. It doesn't seem fair in a sense that we just got through the great financial crisis such a short time ago, and we're actually doing the exact same thing just under a different mantra. So some reason the system never learns and we're back where we were and if the Fed didn't step in, it would be worse in [indiscernible] way financial crisis, [would] have a total eradication of the banking system. So I think we'll manage through this. I think there'll be others, and there'll be winners and losers and mergers. But unfortunately, I think there was [indiscernible] the big 4, 5 or 6 banks are just going to get bigger. So it's going to really affect -- to your first question, the competitive landscape [indiscernible] for lenders like us who I think will have more flexibility because we won't be competing unfairly against government-sponsored banks who get to operate in really inappropriate way. So we're optimistic that will be great for companies like ourselves.

And was a much more substantial response than I expected. So -- but I'm going to pass on my other couple of questions. I know there are other analysts on the line, but I appreciate the conversation.

Thank you and thanks for your support Steve, you have been a great friend to the company.

We will take our next question from Stephen Laws with Raymond James.

Surprising on the dividend increase. And I guess along those lines, I don't know how much credit you're getting for it, probably very little. But can you talk about how you think about allocating capital between buying more stock or something else in your capital stack or new investments attractive opportunities you talked about. I enjoyed the response to Steve's question a second ago. So maybe how do you think about the trade-off there with your use of cash?

So first of all, we bought back $37 million out of $50 million when you go into a blackout period like we are, it's problematic. So we sort -- set different ranges. We don't have the ability to have this question. I would love to have bought back more, but the stock never got into the last range that we wanted in order to buy them back. It's funny because my only regret and I told Paul, we're so quick to do that [indiscernible] $100 million share buyback and not only $50 million. So our intentions would be probably to go back to the Board and increase that level and if the market continues to improperly value us, then we certainly will continue to buy stock at these levels, especially when we're out of a blackout period. So we have significantly more capital. We will increase that once the dust settles here and go back to the Board to try and increase more. It's just a tremendous way to get a return on investment. It's a tremendous way to increase our book value. And we like it at these levels. We're -- as I said, we're a little frustrated, we couldn't get it all used. But you have to balance things. There are so many different aspects of our business. While we would love to buy back and use all our capital for that, we run a business, we run a franchise. And the idea is to build our business in this great opportunistic time and build long-term relationships and reoccurring revenue. When we can get mid to high teens on our loan portfolio and investing in going to clients and also produce multiple terms on that capital by getting long-dated servicing, that's extraordinarily compelling. So we balance all the different things. In addition, as you know, we really can't access capital. It's really to Paul's testament and the company's estimate that we did our better offering last year even despite the negative environment. we're one of the only firms who not only access the debt markets and sometimes the equity markets and different instruments, but do it in a very efficient and appropriate way. So we're sitting on a great deal of cash. We're seeing great opportunities and as I mentioned on the call, the single-family business, which we've been talking about for years, is an amazing business, and it's funny. We competed against a lot of regional banks and the regional banks were crazily priced, but we still garnered a decent amount. So now we're extraordinarily well positioned for that business. It's a great business, and we are a leader in it. We're using our capital extraordinarily well. We'll continue to build that business. The bridge lending business, we don't feel is a good time right now because where SOFR is to be lending at 9% roughly on a 1-year situation. It doesn't make a lot of sense from people buying 5 [indiscernible] assets and have cap costs. So we'll look at the yield curve. We'll look at the opportunities, we'll look at where cap rates are and we'll look to see how we can build our franchise in the long term. But yes, we would like to go to the Board and increase that buyback. We think if the market continues to be rational, and clearly, as we all can see that we're totally improperly valued. And that's okay. That's just opportunity for all of us as long as we're patient. We are natural [indisceernible] if you've been following us. We are never short term of my thinking, and that's why we're so well positioned because when everybody was doing loans at the top of the market, we were pulling back and pulling back heavily. And when everybody was using short-term leverage, we were very heavily into our CLOs in the market. So we think this dislocation will create extraordinary long-term value. We're good stewards of management of capital, and we think these are extraordinary times to build long-term value.

Great. I appreciate those comments. A quick follow-up, if I may. Paul, you mentioned in your prepared remarks that gain on sale margins, I think, improved in the late part of the quarter. Can you talk about -- are those still looking having redone it from earlier this year due to the second quarter to date?

Yes, I think it's a great question, Steve. Thanks. And yes, we did see a nice pop in our gain on sale margin. Some of that, as I said in my prepared remarks, had to do with we had some large portfolio deals. We did at the end of last quarter with like a 1 point margin. So it was dragging that margin down a little bit in the fourth quarter, and we had more FHA sales this quarter, which obviously that's a 3-, 4-point business, as you know. But we are seeing a trend of some strong margins here on our April product. I think we closed $425 million of Agency product in April. So off to a really good second quarter start as we talked about our pipeline is building as the agencies are kind of the only game in town right now with the yield curve where it is and the balance sheet business, not really attractive for everyone and a lot of players not in the market today. But we are seeing really solid margins. I always guide to like [101 35] to [101 50]-ish range. But -- and I think we'll be in that range, maybe towards the middle to the top of that range, but margins are holding strong.

We will take our next question from Crispin Love with Piper Sandler.

My first one is on credit. I'm just curious if you'd be able to share some of the underlying credit stats for the CLOs structured loan book and the Fannie loss share. I'm just curious how they're faring in expectations over the near to intermediate term?

Yes. Ivan, do you want me to take some of that?

Yes, go ahead.

Yes, sure. So as you saw, Crispin, we were certainly more conservative this quarter with our CECL reserves. As you know, those CECL reserves don't really translate always into realized losses. So we've got some specific reserves against some balance sheet assets that we've had for a while, some legacy assets. We've not seen a significant amount of stress, a little bit of stress. We've had a little bit of a migration some loans from past watch to special mention. But again, special mention is not a category that means to us that we're going to have a loss. So there's going to be a default imminent. It's just changes in where maybe values have gone or where interest rates have gone. So overall, I think the balance sheet book is holding up well in this market. We do expect the market to be challenging over the next few quarters. As Ivan said, we think the bottom is near, but it will take time to rebound, but it's been performing well. We've put some CECL reserves away. But we're not seeing really a lot of stress on the balance sheet side and on the CLO side as well. On the Agency side, we do have as you know, loss share component with Fannie Mae. We saw a little bit of a tick up in delinquencies this quarter, but not significant and things move in and out all the time. We've put a couple of million more in specific reserves on our books this quarter related to our agency book. But for the most part, things are pretty stable. We haven't seen a tremendous move negatively on the credit of either side of our portfolio, both the balance sheet or the Agency. Ivan, would you say that's accurate?

Yes, I would say that's accurate. The one thing that we have seen, which is worth noting because I think it's a transitory and work itself out. We're still seeing in some of the jurisdictions, people having tough time affecting their tenants really, really long. You'd think with COVID, it's all behind us. It's not. So you're seeing economic occupancy a lot lower, which is putting a lot of stress on our borrowers because they don't have the income to support their debt service and they're coming out of pocket, which they should and they will. And that's causing some of our 30- and 60-day delinquencies on the agency side to pop up. We think that we're 50%, 60% [indiscernible] in the back end of that as the court systems are loosening up. But there are some jurisdictions who are just not moving quickly. And it's not fair to the landlords to allow tenants to stay in their property for years and not pay rent and not be able to evict them. So that has caused a little bit of a tick up in delinquencies. Our borrowers are holding on. They're committed to their assets. They're struggling, but they're getting there. But I think the worst is over on that. I think that we will turn the corner on those kind of things, but people don't really talk about that, but we see it in fund center. We see it in certain specific geographic locations. And we see it if a borrower has 5 or 6 or 8 or 10 properties across his portfolio, he's dealing with that. And that will work itself out over time because the value is still in the real estate. The operator is a good real estate. They've dipped into a pocket of good deal and they're looking to solve those problems they're solvable over time, and we're working with a lot of these borrowers to get through some of those issues.

Great. I appreciate all the detail there. And then just looking at the income statement for the quarter. I note that the income from equity affiliates was elevated in the quarter at $14 million. I think, Paul, you alluded to some of this in your prepared remarks, but can you just expand on that a little bit deeper? And what were some of the key drivers that drove that increase in the quarter?

Sure. So Crispin, as I mentioned in my prepared remarks, we had 2 components that drove that line item to be higher than it has been in the past. One of them was we got a distribution from our Lexford investment, and that happens. We'll get that sometimes quarterly, sometimes biannually. It depends on the performance of that investment, and that's our share of that. And that was about just under $5 million. But the other $11 million was an equity kicker that we had on the preferred equity loan that we had built into the document many, many years ago. I don't know that we have any of those left, but that's a legacy type structure we had when we were doing preferred equity years ago, and we had an equity kicker in there that if certain things happen or transpired and there was a certain amount of proceeds from a sale, we would get a piece of that. And to our surprise, -- the borrower did a great job of selling his asset for a significant dollar amount, significantly more than maybe we had expected. And that equity kicker became viable. And so we ended up with 22% of the excess proceeds from the sale after certain waterfalls happen in certain debt repayments. So we got paid back our preferred equity, all our interest and we ended up with an $11 million equity kicker. I can't tell you that we have any -- many or any of those left. They're left over from the days when they were enhancing your yield on a potentially enhancing your IRR on a preferred equity instrument. But that's -- that's just an example of the things we've done over the years and the value we create, and that's something that came in real positive in the first quarter.

Paul, what's worth noting on that is really a form of interest because when we do a PE loan, we take less of a coupon of return and a trade-off for a little bit of a higher return down the road. So what you're seeing with some of these equity [indiscernible] is really just an accumulation of interest that we've foregone and on front, which we really believe that would be better down the road. So while it may be a little bulky, it really is a representation of a level of interest that we foregone for that number of years. And we do that from time to time where we believe that the opportunities will be greater on a return basis to take a kicker than current interest. And it's also more conservative. It's almost like pay and accrue. But sometimes, we just say, listen, we're just happy with taking an equity and kicking it down the road and diversifying our income streams, which is the benefit that we did here, and it does happen from time to time with the firm, and we've always had a history of doing these things.