Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the first quarter 2024 Arbor Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. Out of 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 0. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay, thank you, James, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter ended March 31st, 2024. 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 our 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 very strong quarter, despite an extremely challenging environment. Through our diversified business model, with many counter-cyclical income streams, we once again generated distributable earnings in excess of our dividend, with a payout ratio of around 90% for the first quarter. This is clearly well above the performance of our peers, most of which are paying their dividends out of capital or have been forced to cut their dividends substantially. And just as importantly, in a time of tremendous stress, we've managed to maintain our book value over the last 15 months while recording reserves for potential future losses, which clearly differentiates us from everyone else in our peer group. The vast majority... of which have experienced significant book value erosion in this environment. On the last call, we gave guidance that the first two quarters of this year would be the most challenging part of the cycle, and we are in a period of peak stress. We also mentioned that if rates stay higher for longer, that dislocation could potentially leak into the third and possibly even the fourth quarter as well. And given the recent backup in rates, combined with the Fed's somewhat more hawkish view on the timing of potential rate cuts in 2024, we believe this is a distinct possibility and is something we have been preparing for and has reflected in the way we are currently operating our business. As a result, we have been extremely active over the last four months in working through our balance sheet loan book. we have demonstrated tremendous patience and poise in dealing with the most recent wave of delinquencies. Again, 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 the correct economic result on a transaction. With this philosophy in mind, we had a tremendous amount of success in the first quarter, working through a substantial amount of our delinquencies and modifying these loans by getting borrowers to bring a significant amount of fresh equity to the table and recapitalizing their deals. As a result, in the first quarter, we successfully modified 40 loans, total of $1.9 billion, with fresh capital being brought to the table in every one of these deals, This includes cash to purchase new interest rate caps, fund interest rate and renovation reserves, bring any past due loans current, and pay down balances where appropriate. In fact, Barr has injected approximately $45 million of new capital into these deals, with $1.65 billion of these loans purchasing new interest rate caps. We have also been highly effective in refinancing deals through our agency business. as well as leveraging our long-term standing relationships with many quality sponsors to step in and take over assets that are underperforming and assume our debt. This is a difficult and complicated work in an extremely challenging environment, and I can't say enough about the efforts put forth by our entire organization in successfully managing through the teeth of this dislocation. We're very pleased with the success we have had to date, and expect to remain extremely busy over the next few months and steadfast in our approach as we continue to manage through the balance of this downturn. Clearly, in this environment, having adequate liquidity is paramount to our success. As a result, we have focused heavily on maintaining a very strong liquidity position. Currently, we have approximately $1 billion of cash between us between $800 million of corporate cash and $600 million of cash in our CLOs that result in additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment as it provides us with the flexibility needed to manage through this downturn and take advantage of opportunities that will exist in this market to generate superior returns on our capital. As you may recall, a few months back, we allocated $150 million of our capital stock to buy back stock. Knowing full well there would be volatility in the market, allowing us to potentially repurchase our stock at discounts to book value and generate high double-digit returns on our capital. In April, we repurchased approximately $11.4 million of stock at an average price of $12.19 million. with a 4% discount to our book value and generating a current dividend yield of 14% and a yield of approximately 16% on distributable earnings. This is a tremendous return on capital, and with around $138 million of remaining capital available for this strategy, we will continue to be opportunistic in our approach to buying back stock if the volatility persists. We also continue to do an excellent job in deleveraging our balance sheet and reducing our exposure to short-term debt. We're down to approximately $2.6 billion in outstandings with our commercial banks from a peak of around $4.2 billion, and we have 72% of our secured indebtedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. Our CLO vehicles are a major part of our business strategy as they provide us with tremendous strategic advantage in times of distress and dislocation due to the nature of their non-mark-to-market, non-recourse elements. In addition, they contributed significantly to providing a low-cost alternative to warehouse banks, which in times like this have fluctuating pricing, leverage points, and parameters. In fact, one of the significant drivers of our income streams are low-cost CLO vehicles, as well as a fixed rate debt and equity instruments that make up a big part of our capital structure. We have a very strategic approach to capitalizing our business with a substantial amount of our low-cost, long-dated funding sources, which has allowed us to continue to generate outsized returns on our capital. Turning now to our first quarter performance, as Paul will discuss in more detail, we had a very strong first quarter producing distributive earnings of $0.48 a share, representing a payout ratio of around $0.90. Clearly, having the wherewithal to create a large cushion between our earnings and dividends over the last several years has served us very well in this location. I believe that this cushion, combined with our diversified business model, uniquely positions us as one of the only companies in this space with the ability to continue to provide a sustainable dividend. In our GSC agency business, we had a relatively strong first quarter, despite interest rates remaining stubbornly high. We originated $850 million in the first quarter, and our pipeline remains elevated. Traditionally, first quarter production numbers are normally lower than the rest of the year, and certainly the backup in rates has not helped this trend. Despite the current rate environment, we continue to maintain a large pipeline, and we are not seeing significant fallout in this market. Rather, deals are just being pushed out further. We've also done a great job in converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. It's also very important to emphasize that a significant portion of our business is in the workforce housing part of the market. As you know, Sandy and Freddie have a very specific mandate to address the workforce slash affordable housing needs, which is a major issue in the United States. making Arbor a great partner that continues to fulfill a very important mandate for the federal agencies as well as the social needs of society. And again, the agency business offers a premium values that requires limited capital and generates significant, long-dated, predictable income streams and produces significant annual cash flow. To this point, our $31 billion fee-based servicing portfolio, which grew 9%, year over year, generates approximately $122 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 $2.8 billion of balances, or roughly $140 million annually, which combined with our servicing income and annuity totals approximately $260 million of annual gross cash earnings per or $1.25 a share. This is in addition to the strong gain on sale margins we generate from our originations platform. And extremely important to emphasize that our agency business generates 40% of our net revenues, the vast majority of which occurs before we even turn on the lights each day. This is completely unique to our platform and something we feel is not being fully reflected in our valuations. In our balance sheet business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency product, allowing us to delever our balance sheet and produce significant long-dated income streams. In the first quarter, we produced another $540 million of balance sheet runoff, $210 million, or roughly 40%, of which was recaptured into new agency loan originations. With today's high interest rates, we are chipping away at converting loans to agencies. But if the 10-year gets back to 4% again, it will become far more meaningful. And every quarter point drop in interest rates from there will accelerate this conversion process significantly. As we touched on in the last quarter, we are well-positioned to step back into the lending market and garner accretive opportunities to continue to grow our platforms. We believe that in these type of markets, you can originate some of the highest quality loans with attractive returns, which will allow us to grow our balance sheet and build up our pipeline of future agency deals. In our single-family rental business, we're off to a great start this year as we continue to be the leader and the lender of choice in the premium markets we traffic in. We had a very strong first quarter with $172 million of fundings and a lot of $420 to $12 million of commitments signed up. We also have a large pipeline and remain committed to this business, and it offers us three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong leverage 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're starting to see in our newly added construction lending business. This is a business we believe we can produce very accretive returns on our capital by generating 10% to 12% unlevered returns initially and eventually mid-to-high returns on our capital once we leverage this business. We have started to see a nice increase in our pipeline of potential deals with roughly $200 million under application, another $300 million in LOIs, 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 returns on our capital through construction, bridge, and permanent agency lending opportunities. In summary, we had a very productive first quarter, and we are working exceptionally hard to manage through the balance of this dislocation. We understand very well the challenges that lie ahead, feel we are very well positioned. Our earnings exceeded our dividend run rate. We are invested in the right asset class with very stable 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. We're also well capitalized with significant liquidity and have the best-in-class asset management function and seasoned executive team giving us confidence in our ability to manage through this cycle and continue to be the top performer company in our space. I will now turn the call over to Paul and take you through the financial results.