Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 2023 Arbor Realty Trust Earnings Conference Call. All participants are in a listen-only mode. After this year's presentation, there will be a question and answer session, and 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, and if you should need operator assistance, please press star 0. I would now like to turn your call over to your speaker today, Paul Elanio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Savannah. And good morning, everyone. 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, 2023. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements. that are subject to 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 follow-looking statements are detailed in our FCC 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 as of 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 outstanding quarter and closed out an exceptional 2023. In fact, 2023 was one of our best years as a public company, despite an extremely challenging environment. We managed to increase our dividend twice while maintaining one of the lowest payout dividend ratios in the industry. and generated a total shareholder return of 28 percent, outperforming our peers. Additionally, and very significantly, we're able to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from everyone in the space. In fact, as Paul will discuss in more detail later, we generated gap earnings in excess of our dividend in 2023, despite recording approximately 90 million in reserves. And our distributable earnings were also well in excess of our dividend, providing one of the best dividend coverages ratios in the industry. We were also very effective in refinancing loans off our balance sheet for our capital aid agency business. We generated $3 billion of multifamily runoff in 2023 and recaptured 56% or $1.7 billion of those loans in new agency product. Our agency platform gives us a tremendous strategic advantage, allowing us to continue to deliver our balance sheet and generate significant long-dated income streams, which is a key part of our business strategy. We have been a significant player in the agency business for almost 20 years and now have been a top 10 Fannie Mae dust lender for 17 years in a row, coming in at number six for 2023. And it's extremely important to emphasize that our agency business generates over 40% of our net revenues, the vast majority of which occur before we even open our doors every day. This is completely unique to our platform, and it's something we feel is now fully reflected in our evaluation. On our last call, we gave guidance that the fourth quarter of last year and the first quarter and second quarter of this year would be the most challenging part of the cycle. We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter. As a result of this environment, we're experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second, which is not a strategy that works well with us. Second, borrowers need to bring capital to the table to right-size their deals, and raising capital is a lengthy process in today's climate. Therefore, you will see defaults rise initially until able to raise additional capital, and then deals will often be recapped. We feel we have done a very good job to date in collecting payments and have been highly effective in refinancing deals for our agency businesses, as well as getting borrowers to recapitalize their deals and purchase interest rate caps where appropriate. In fact, we had $2.5 billion of loans with interest rate caps that were expiring over the last four months. of which $1.7 billion executed new rate caps or put cash up in lieu of caps, and we continue to work on getting new caps executed every day. We also have longstanding relationships with many quality sponsors that we've been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions. As we are constantly receiving reverse inquiries from the market to purchase our assets as well, Our goal is to maximize shareholder value, and very often it's not just the value of the collateral, but the recourse provisions that we evaluate in determining how to approach each individual circumstance. The short-term nature of having a delinquent loan will not impact our decision-making process to achieve a correct economic result on a transaction. With that said, we've received a lot of public criticism in what we consider to be an extremely successful transition of assets to new ownership through the legal process or even through cases consensually. This is a very difficult and complicated work, and as I said earlier, we expect to be extremely busy in the first two quarters of this year managing through the most challenging part of this dislocation. Additionally, we continue to focus heavily on maintaining a very strong liquidity position. We currently have over $1.1 billion of cash between $1 billion in corporate cash and $600 million of cash in our CLOs that results in an additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment. as it provides us the flexibility needed to manage through the rest of the downturn and take advantage of opportunities that will exist in the market to generate superior returns on our capital. We have also done an excellent job in reducing our exposure to short-term bank debt and have no significant pending maturities to deal with on any of our warehousing facilities. We are down to approximately $2.8 billion in outstanding with our commercial banks from a peak of nearly $4.2 billion and we have over 70% of us secured indebtedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. As previously discussed, these vehicles provide a tremendous strategic advantage at times of distress and dislocation, like the environment we are in today, due to the nature of their non-mark-to-market, non-recourse elements. In addition, they contribute significantly to providing a low-cost alternative to warehouse banks, which in times like this have fluctuating pricing and leverage point parameters. Turning now to the fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of 54 cents per share excluding a one-time realized gain on an office property that we had previously reserved for. The results were well in excess of our current dividend, representing a payout ratio of around 80%. We are very pleased with the substantial cushion we have created between our earnings and dividends, which will serve us well through the balance of this dislocation. We believe our diverse business model uniquely positions us as one of the only companies in the space with the ability to continue to provide a sustainable dividend. And just as importantly, in a time of tremendous stress, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from our peers. In our balance sheet lending business, we continue to focus on working through our loan book and converting our multifamily 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 fourth quarter, we were able to, again, be highly effective with this strategy, producing another $800 million of balance sheet runoff. $465 million, or 58%, of which was recaptured at new agency loan originations. As a result, we recouped over $100 million of capital and continue to build up our cash position, which again currently sits at around $1.1 billion. With today's current interest rates, we will continue to chip away at converting loans to the agencies, but if the 10-year goes below 4% again, it will become more meaningful, and every quarter of a point drop in rates from here will be even more impactful. As we touched upon last quarter, we also believe we are well positioned to step back into the lending market and go on our accretive opportunities to continue to grow our platform. We feel now is the appropriate time to originate some of the highest quality loans with attractive returns, allowing us to grow our balance sheet and build our pipeline of future agency deals. In our GFC agency business, we had another great quarter and an exceptional 2023 despite elevated interest rates. We originated $1.3 billion in the fourth quarter and $4.8 billion for the full year, representing a 7% increase over our 2022 numbers. This is a tremendous accomplishment in light of the fact that the agencies were down 25% to 30% in production year over year. We've done an excellent job in gaining market share and converting our balance sheet loans the agency product, which has always been one of our key strategies and a significant differentiator from our peers. We also originated $300 million of 5 to 10-year fixed-rate GSE agency alternative products to our private label business, bringing our total agency volume to $5.1 billion for 2023. Traditionally, January is a much slower month with the agencies, which resulted in us originating $250 million of loans. The February numbers are looking much stronger, and we have a large pipeline setting us up for what we believe will be another very solid year in agency originations for 2024. And again, this agency business offers a premium value as it requires limited capital and generates significant long-dated predictable income stream and produces significant annual cash flow. To this point, our $31 billion fee-based servicing loan portfolio, which grew another 4% in the fourth quarter, and 11% year-over-year generates approximately $121 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning 5% on around $3 billion in balances, so roughly $150 million annually, which combined with our servicing income annuity totals approximately $270 million of annual gross earnings, or $1.30 a share. This is in addition to the strong gain on sale margins we generate from our originations platform, providing us a strategic advantage over our peers. In our single-family rental business, we had a very strong fourth quarter and a full year 2023 as we continue to dominate the space and have become a lender of choice in the premium markets we traffic in. We had $200 million of fundings and another $470 million of commitments signed up in the fourth quarter and closed out 2023. with $1.2 billion of new commitments. We also have a large pipeline and remain committed to this business as it offers us three terms on our capital through construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams. We're also very excited about the opportunities we think we can garner from our newly added construction lending business as we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid-to-high-teens returns. We continue to build up a pipeline of potential deals and now have roughly $44 million under application, another $400 million in NOIs, and a significant number of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us three turns on our capital through construction, bridge, and permanent agency lending opportunities. Lastly, I would like to spend some time talking about the short reports that have been written on our company. We want our loyal investors' space to understand that these reports are written in a way that is purposely designed to drive down the company's stock price to achieve the desired goal of profit from a short position. As such, the facts, assumptions, predicated future events and marking conditions, as well as conclusions in these reports, are exaggerated, laced with incomplete and inaccurate data, and slanted only to provide a negative view on Arbor, and again, truly for personal gain. And while we will not get into a back-and-forth on the information in these reports... or have detailed discussions on any specific loans, what we will point out is that the short reports state that our CLO delinquencies were 16.5% in December and 26.6% in January, when in reality the rates are 1.3% for December and 5.6% for January and as of today. More importantly, the 30-day delinquency numbers are 0.9% for December and 1.2% for January as of today, which are the numbers the industry focuses on. This is a perfect example of using certain select data as of a point in time that does not contain the full picture or represent the industry's focus, only to inject fear into the market for personal gain. We urge our long-term shareholders to ignore these one-sided, self-motivated reports and focused only on our results and public disclosures and the fact that we've consistently outperformed our peers. It is also very important to emphasize that a significant portion of Arborist Lending is multifamily focused, specifically in the workforce housing part of the market. As we all know, Fannie Mae and Freddie Mac have had a specific mandate to address the workforce slash affordable housing needs which is a major issue in the United States, making Arbor a great partner. This product requires a high level of management, tremendous expertise, which we have been very effective at for decades. Because this product may not have the same curb appeal as other multifamily product types, we are being criticized for a core part of our business that we have been extremely effective at, and will continue to fulfill a very important mandate for the federal agencies, as well as the social needs for society. Again, we thank you for your continued support, and now I will turn the call over to Paul to take you through our financial results.