Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 2022 Arbor Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Alenio, Chief Financial Officer. Please go ahead. Hey, thank you, Todd, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter and year-ended December 31, 2022. With me on the call today is Ivan Kauffman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman. Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we had another tremendous quarter and an exceptional 2022 as our diverse business model continues to offer many significant advantages over everyone else in our peer group. In fact, our 2022 results reflect one of our best years as a public company, and we believe we are well positioned for continued success. We have a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings that are well in excess of our dividend. This has allowed us to increase our dividends three times in 2022 and in 10 of our last 11 quarters, all while maintaining the lowest dividend payout ratio in the industry, which was 70% for 2022. And our performance is head and shoulders above everyone else in our peer group, almost all of which have been unable to increase their dividends at all the last few years, and some are even paying dividends of over 100% of their earnings. We have strategically built our platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to continue to outperform in this economic downturn. We have been very cognizant over the last 18 months preparing for what we believe would be a very challenging recessionary environment. As a result, 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 over $800 million of cash and liquidity on hand. providing us with the unique ability to remain offensive and take advantage of the many opportunities that will exist in this recession to go on a premium yield on our capital. We are also invested in the right asset class and have strategically positioned ourselves with appropriate liability structures highlighted by a significant amount of non-recourse, non-mark-to-market CLO debt with pricing that is well below the current market, allowing us to go on a premium yield on our assets. As you cannot emphasize enough, especially in the current environment, the importance is having a best-in-class, dedicated asset management function and an experienced and tenured executive management team that have a proven track record of successfully operating through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing in our space for several years in a row. Turning now to our fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.60 per share, which is well in excess of our current dividend, representing a payout ratio of around 67%. Our financial results also continue to benefit greatly from rising interest rates, which has significantly increased in net interest income and on floating rate loan book, as well as earnings on our escrow balances. And clearly, with our extremely low payout ratio and multiple predictable reoccurring income streams, we're uniquely positioned as one of the only companies in our space with a very sustainable, protected dividend, even in a challenging environment. In our balance sheet lending business, we continue to remain selective, looking to replace our runoff with higher quality loans with superior spreads. In the fourth quarter, we strategically reduced our balance sheet loan book by $600 million on approximately $500 million of new originations, offset by $1.1 billion of runoff. This allowed us to recapture $150 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. Our level of returns on our fourth quarter originations came in at over 16%, as we have a significant amount of replenishable capital in our low-cost CLO structures that has meaningfully increased the returns on our capital. Additionally, we have participated in our first Freddie Q Series securitization in the fourth quarter, which demonstrates our strong social commitment to providing liquidity to the preservation of the affordable multifamily housing markets. This transaction also provides us with another low-cost financing option, allowing us to reduce our warehousing debt by more than $350 million of loans into a non-recourse, non-mark-to-market securitization vehicle. And we now have nearly $8 billion in securitized debt outstanding, representing around 70% of our secured indebtedness at pricing that is well below the current market. We continue to place a heavy focus on converting our multifamily bridge loans into agency loans, which is a critical part of our business strategy, and our agency business is capital light and produces significant long-dated income streams. We had tremendous success in the fourth quarter, recapturing over $500 million, around half of our balance sheet runoff, into new agency originations. A key component to our success in this area is a unique opportunity that exists in today's market, given the inverted yield curve, to go on a premium yields on our capital by refinancing certain of our balance sheet loans into agency product and provide mezzanine financing. This has allowed us to convert some of our balance sheet loan book into agency business with a long-dated servicing income and repatriate a portion of our capital into mezzanine positions behind agency loans at lower LTVs. In fact, in the fourth quarter, we successfully refinanced around $200 million of balance sheet runoff into new agency loans and funded $20 million of mezzanine loans on these transactions, which are generating 13% unlevered on our capital. This is a strategy we believe in and, again, is somewhat that is unique in our business, and we are both a top balance sheet lender and operate a very large agency platform. In our GSC agency business, we had a very strong fourth quarter, originating $1.5 billion of new loans. These numbers include a few large deals in December that were accelerated in order to close by year end, resulting in a light start to 2023 with approximately $150 million of originations in January. However, our pipeline remains strong, giving us confidence in our ability to produce similar volumes in 2023. Additionally, We have a strategic advantage in that we focus on the workforce housing part of the market and have a large multifamily balance sheet loan book that nationally feeds our agency business. In fact, we are one of the leading agency lenders in the achievement of affordable housing goals, and as a result, we will continue to be viewed very favorably by the agencies. And again, this agency business offers a premium value and it requires limited capital and generates significant, long-dated, predictable income streams and produces significant annual cash flow. To this point, our $28 billion fee-based service and portfolio, which is mostly prepayment-protected, generates approximately $115 million a year in reoccurring cash flow. We've also seen a significant increase in earnings on our escrow balance, as rates continue to rise, which acts as a natural hedge against interest rates. In fact, we are now earning in excess of 4% on approximately $2 billion of balances, or roughly $80 million annually. And combined with our servicing annuity, we are generating $195 million of annual cash earnings, or approximately a dollar a share, before we even turn the lights on every day. This is in addition to the strong gain on sale margins we generate from our origination platform. And again, something that is completely unique in our platform, providing a significant strategic advantage over our peers. In our single family rental business, we had an outstanding year as we continue to grow out that platform and going to increase market share. In the fourth quarter, we funded $116 million of prior commitments and committed another 350 million of new transactions, putting our total deal flow at 1.2 billion in 2022. We also have a very large pipeline of deals we are currently processing. And again, we love this business as it generates strong levity returns and offers us returns on our capital through construction, bridge, and permanent financing opportunities. In reflecting on 2022, We had another exceptional year and once again, clearly outperformed our peer group. We are well positioned with earnings and significantly exceed our dividend run rate, are invested in the right asset class and have very stable liability structures. We've also focused heavily on building up a strong liquidity position, which has put us in a unique position to take advantage of the many accretive opportunities that will exist in the market. given us great confidence in our ability to continue to significantly outperform our peers. I will now turn the call over to Paul to take you through the financial results. Okay, thanks, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million, or $0.60 per share. We also had a record year with distributable earnings of $2.23 per share in 2022, an 11% increase over our 2021 results. These results translated into industry-high ROEs of approximately 18% in 2022, allowing us to increase our dividend three times to an annual run rate of $1.60 a share, reflecting a dividend-to-earnings ratio of around 67% for the fourth quarter and 70% for the full year 2022. Our fourth quarter results beat our third quarter numbers and our internal projections, largely due to substantially more net interest income on our floating rate loan book and higher earnings on our escrow balances due to the increase in interest rates. We also experienced significantly more gain on sale income from stronger fourth quarter agency volumes and the early settlement of a few large agency loans to help meet agency affordable lending caps. Additionally, we benefited from no current tax provision this quarter in our PRS, mainly due to year-end timing differences and adjustments that resulted in a lower 2022 full-year current tax expense that was trued up through the fourth quarter provision. Our fourth quarter results also contained a few large items that are worth noting. We reported $7.4 million in a one-time expense related to the settlement of a litigation we had outstanding for several years. This was the only material litigation we were involved in, and we're pleased to have resolved this item as we were spending several hundred thousand dollars a month in legal fees on this case, which will now reduce our operating expense run rate by two and a half to three and a half million a year going forward, or a penny a share. We were also very pleased to have resolved our only significant non-performing loan in the fourth quarter with a full payoff of a $20 million loan on a student housing asset. As part of the payoff, we received $8 million in back interest and fees that we did not have accrued, resulting in a substantial increase to our net interest income for the quarter. In our GFC agency business, we had a very strong fourth quarter with $1.5 billion in originations and $1.7 billion in loan sales. The loan sales numbers were significantly above our third quarter sales of $1 billion, mainly due to a large portfolio deal that closed in December but also settled in the same month in order to help the agencies meet their affordable lending caps. The margin on our fourth quarter sales were 1.33% compared to 1.30% in the third quarter, We also recorded $17 million of mortgage servicing rights income related to $1.5 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.12% compared to 1.51% last quarter, mainly due to a reduced servicing fee on the large portfolio deal we closed in December. Our fee-based servicing portfolio grew 4% in 2022 to approximately $28 billion, with a weighted average servicing fee of 41.1 basis points and an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $115 million gross annually, which is relatively unchanged from last quarter, despite very strong volumes and less early runoff in the fourth quarter. This, again, was due to the closing of a large portfolio deal in the fourth quarter with a 12 basis point servicing fee. We did see substantially less accelerated runoff in our agency loan book in the fourth quarter due to market conditions, which has resulted in prepayment fees leveling off as well. In the fourth quarter, we received $5.6 million in prepayment fees as compared to $11.2 million in the third quarter. In January, prepayment fees were around $1 million, and given the current rate environment, we're estimating that prepayment fees will run between $2 and $4 million a quarter going forward. In our balance sheet lending operation, our $14.5 billion investment portfolio had an all-in yield of 8.42 percent at December 31st compared to 7.15 percent at September 30th, mainly due to the significant increase in LIBRA and SOFA rates and from higher yields on new originations as compared to runoffs during the fourth quarter. The average balance in our quarter investments was $14.8 billion this quarter as compared to $15 billion last quarter due to the runoff exceeding originations in the fourth quarter. The average yield in these assets increased to 8.12% from 6.57% last quarter, mostly due to the $8 million in back interest we collected on the repayment of a non-performing loan and increases in the SOFR and LIBOR rates, partially offset by less acceleration of fees in the fourth quarter. Total debt on our core assets was approximately $13.3 billion at December 31st. when all in-debt costs were approximately 6.5%, which was up from a debt cost of around 5.33% on September 30th due to the increases in the benchmark index rates. The average balance in our debt facilities was approximately $13.7 billion for the fourth quarter compared to $13.9 billion last quarter. The average cost of funds in our debt facilities was $5.80 for the fourth quarter compared to 449 for the third quarter, primarily due to increases in the benchmark index rates and from the convertible and unsecured debt issuances we did in the third and fourth quarters. Our overall net interest spreads and our core assets, excluding the $8 million of default interest we collected in the fourth quarter, increased to 2.11% this quarter compared to 2.08% last quarter. And our overall spot net interest spreads were up to 1.92% at December 31st from 1.82% at September 30th, again, mostly due to the positive effect of rising rates on our floating rate loan book and higher spreads in our new originations. 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. One of these features is the continued growth we'll see in our net interest income spreads as rates rise in our floating rate loan book. In fact, all things remaining equal, a 50 basis point increase in rates, 20 basis points of which has already occurred since year end, would produce approximately 5 cents a share annually in additional earnings. Additionally, we have approximately 7.6 billion of CLO debt outstanding with average pricing of 167 over, which is well below the current market and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations. And very significantly, our substantial ESCO balances will continue to produce tremendous earnings as rates are predicted to continue to rise. These earnings have grown substantially as we have approximately $2 billion in balances that are now earning around 4% or $80 million annually effective February 1st, which is up significantly from a run rate of approximately $7 million annually at this same time last year. And as Ivan mentioned earlier, these features are unique to our business model, giving us confidence in the quality and sustainability of our earnings and dividends. 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. Todd? Thank you, sir. As a reminder, if you would like to ask a question, please press star 1 on your telephone now.

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So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Again, to ask a question, please press star 1. Our first question from Steve Delaney with JMP Securities.