Arbor Realty Trust

Please stand by, your program is about to begin. Good morning, ladies and gentlemen, and welcome to the second quarter 2024 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.

Thank you, Angela. Good morning, everyone, and welcome to the quarterly earnings call for Auto Royalty Trust. This morning we'll discuss the results for the quarter ended June 30th, 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 Auburn's expectations in these forward-looking statements are detailed in our SEC reports. Listen as a caution not to place undue reliance on these forward-looking statements, which speak only as of today. Auburn takes 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 to Auburn'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 have another strong quarter as we continue to effectively navigate through this extremely challenging environment. As we discussed in the past, we started preparing for this cycle well over two years ago. and a plan to appropriately position the company to navigate through and succeed for our investors in this challenging market is being executed in line with our expectations. We have a diversified business model with many countless cyclical income streams, are focused on the right asset class with the appropriate liability structures, and are well capitalized, which has allowed us to continue to outperform our peers in every major financial metric. Last quarter, we posted some compelling charts on our website demonstrating this outperformance. We updated these slides again this quarter, and we encourage you to review them as they clearly demonstrate that our total shareholder return, dividend growth, and book value appreciation over the last five years are outperforming everyone else in our peer group. In fact, most of our peers have cut their dividends substantially have experienced significant book value erosion and have generated a negative total shareholder return over the last five years. Clearly, this is not the position we are in, and we have continued to demonstrate over a long period of time that we are a consistent outperformer and a leader in this space. As we have communicated, We expected the first two quarters of this year to be the most challenging part of the cycle, and we have also guided to this period of peak stress affecting the third and fourth quarters as well if rates remain higher for longer. Even in the most stressful part of the cycle, we continue to post very strong operating results, which we'll discuss more in detail on today's call. We are aware of certain erroneous information in the marketplace which has been driven by short reports and is inaccurate. While our performance in this quarter speaks for itself, we would be remiss if we didn't point out certain factual inaccuracies as well as ill-informed and or inaccurate statements that are causing the most concern. there has been a swath of misinformation regarding one transaction in particular called the Westchase portfolio. For example, misinformation started that the transaction should have been reported in the first quarter when, in fact, the transaction closed in the second quarter and was appropriately and timely reflected in the company's financials. We believe that the merits of this deal were the ultimate interest of the shareholders. Specifically, we had a $100 million bridge loan collateralized by a portfolio of properties in Houston, Texas, in which the borrower defaulted. We immediately exercised our right to foreclose on these assets as we believed that there was a value above the debt. We simultaneously sold it to a new entity, which was capitalized with $15 million of fresh equity and a $95 million bridge loan at SOFA plus 300 basic points that we provided. Of the $15 million of capital that was invested in the transaction, $6.25 million, or 40%, was funded by the Austin Walker Fund, which is a private minority-owned real estate fund focusing on affordable housing that we have a 49% non-controlling limited partnership interest in. The rest of the capital came from two independent separate investors, one of which is a borrower that we have a longstanding relationship, which has a tremendous amount of expertise in renovating these type of assets and maximizing their value. We believe the stabilized value of these assets to be around $128 million, which is well above the capital stack of this deal, and the deal has now been recapitalized with the appropriate reserves, giving us confidence that the new ownership group will be able to hit the targeted business plan over the next few years. Let's Chase is an outstanding transaction that fits what we want, which is lend to affordable housing communities. We believe this transaction is a very effective workout with sound economics and consistent with our values, yet the short sellers have levied what we believe are baseless criticisms about this transaction. Again, we are extremely pleased with the results of this transaction and the benefit it presents for our stakeholders. We continue to do an effective job in managing through our loan book, and this transaction represents management's capabilities in taking back an asset and replacing it with new sponsorship and having it appropriately capitalized. Second, certain misinformation has been spread about the redemption of one of our CLOs. We have been a top issuer of CLOs for over 20 years, never once losing a single dollar of principal for our investors, even through the historic financial crisis. We are experts in managing these vehicles and have issued and repaid many vehicles, returning all invested capital to our bondholders. We called the CLO on June 17th in the ordinary course of business, and in doing so, we turned the principal investments of each bondholder in full for outsized returns on our capital and maximized returns to our shareholders. Additionally, the Shaw reports have also stated that we did not give proper notice to our bondholders prior to the redemption, but timely filed the appropriate SEC forms out for the redemption, and that we committed securities fraud. The rules are very clear. We are required to give notice to our bondholders 10 days prior to the redemption, which we did formally through the trustee on May 31st, and we are required to file an SEC form on the redemption 45 days after the quarter in which the redemption occurred, which is, in this case, not until August 14th. We have collapsed and redeemed over a dozen CLOs in the past 10 years and each time giving the proper amount of notice and filing all SEC required documents in a timely manner. Third, we have been criticized for how we have been managing our loan book in this distressed environment. when, in fact, the company has done a very effective job in maximizing return to our shareholders, which, again, are evidenced in the numbers that we have reported. This quarter, we successfully modified another $730 million of loans, with $23 million of fresh capital being injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, fund interest and renovation reserves, bring past due interest current and pay down loan balances where appropriate. We also continue to make progress on approximately $1 billion of loans that are past due by either modifying these loans, foreclosing and taking them into REO, or bringing in new sponsorship either consensually or simultaneously with the foreclosure. In addition, we've been extremely successful quarter given the recent decline in interest rates by generating $630 million of payoffs with $490 million of these loans being refinanced into fixed rate agency deals. And as I've said in the past, if interest rates go below 4%, obviously as they've done in the last week or so, we expect that this will become more meaningful to our business. Despite these facts, Arbor has been subject to repeated attacks in the reports generated by short sellers, and we expect these attacks will continue. The best response to these attacks, and which we believe are unfair and unjustified, are our financial results and our earnings call here today. It has also been widely reported that in the wake of these attacks over an 18-month period, Arbor has received requests for information from government agencies, including the Department of Justice. Arbor consistently has cooperated and will continue to cooperate with any such requests. Likewise, it is our policy not to comment on any such inquiries. That said, I would like to provide more detail about some additional results that have resulted from our execution of strategies to manage the business through an environment that poses market-wide challenges. One of the items I touched on earlier is how important having adequate liquidity and appropriate debt instruments are to your success in these types of markets. As a result, we have focused heavily on maintaining a strong liquidity position. Currently, we have approximately $700 million of liquidity between around $700 million in corporate cash and $200 million of cash in our CLOs that results in an additional cash equivalent of approximately $50 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 to take advantage of opportunities that will exist in this market to generate superior returns on our capital. We also continue to do an excellent job in deleveraging our balance sheet and reducing our exposure to short-term bank debt. We are down to approximately $2.8 billion in outstanding commercial banks from a peak of approximately $4.2 billion, and we have 67% of our secured embeddedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. CLO vehicles are a major part of our business strategy as they provide us with a 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 contribute significantly to providing a low-cost alternative to warehousing banks, which in times like this have fluctuating pricing and leverage point parameters. In fact, one of the significant drivers of our income streams are low-cost CLO vehicles, as well as fixed-rate debt and equity instruments that make up a big part of our capital structure. We are very strategic in our approach to capitalizing our business with a substantial amount of low-cost, long-term, long-dated funding sources, which has allowed us to continue to generate outsized returns on our capital. Another major component of our unique business model is our significant agency platform. which offers a premium value as it requires limited capital and generates significant, long-dated, predictable income streams and produces considerable annual cash flow. In the second quarter, we had a strong origination at $1.1 billion despite elevated rates for most of the quarter. The recent drop in the 10-year and the 5-year combined with tighter spreads has allowed us to continue to build a strong pipeline of future agency deals, giving us confidence in our ability to grow our agency volumes going forward. We've also done a great job in converting our balance sheet loans into agency products, which has always been one of our key strategic and a significant differentiator from our peers. And it's also very important to emphasize that a significant portion of our business is in the workforce housing part of the marketplace. As we all know, Fannie and Freddie have a very specific mandate to address the workforce 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 for society. Our fee-based servicing portfolio, which grew another 3% this quarter and 12% year-over-year to $32.3 billion, generates approximately $124 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances, which act as a natural hedge against interest rates. In fact, we are earning 5% on around $2.4 billion of balances, or roughly $120 million annually, which combined with our service and income annuity, totals $245 million of annual gross cash earnings, or $1.20 a share. This is in addition to the strong gain-on-sale margins we generate from our origination platform. And it's extremely important to emphasize that an agency business generates 45% of our net revenues, the vast majority of which occurs before we even open our doors each day. This is completely unique to our platform. In our single-family rental business, we continue to be the leader of choice in the premier market we traffic in. We have another strong quarter with $185 million of fundings and another $280 million of combined signed-up commitments. We have a large pipeline and remain committed to this business, and it offers us returns 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 seeing steady progress in our newly added construction lending business. This is a business we believe can produce very accretive returns on our capital by generating 10% to 12% unlevered returns initially and eventually mid to high routines returns on our capital once we leverage this business. We continue to see a nice increase in our portfolio of potential deals with roughly $250 million under application another $250 million in LOIs outstanding, and $850 million of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us free turns on our capital through construction, bridge, and permanent agency lending opportunities. in summary we had another very productive quarter and are working exceptionally hard to manage through the teeth of this dislocation we feel we have done an excellent job in working through our loan book and getting borrowers to recap their deals with fresh equity as well as bringing in quality sponsors to manage underperforming assets and working through our non-performing loans we understand very well the challenges that lie ahead and feel we are well-positioned. We have a diversified business model. We are invested in the right asset class with very stable liability structures. We're also well-capitalized and have the best-in-class asset management function and seasoned executive team, giving us confidence and ability to navigate through this distressed environment. And despite the misinformation circulated in the marketplace about our business strategies, we continue to reiterate that we stand by our financials and our disclosures, and we have always conducted our business operations and practices in the best interest of our shareholders. I will now turn the call over to Paul to take you through the financial results. Okay, thank you, Ivan. We had another strong quarter producing distributable earnings of $91.6 million, or $0.45 per share, which translated into ROEs of approximately 14% for the second quarter. As Ivan mentioned, we successfully modified 28 loans in the second quarter, totaling $733 million. On approximately $398 million of these loans, we required borrowers to invest additional capital to recap their deals, with us providing some form of temporary rate relief through a pay-in-the-cool feature. The pay rates were modified on average to approximately 7.18%, with 2.14% of the residual interest due being deferred until maturity. $155 million of these loans were delinked last quarter and are now current in accordance with their modified terms. Our total delinquencies were $1.05 billion at June 30th compared to $954 million at March 31st. 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 that we are not recording interest income on unless we believe the cash will be received. The 60-plus-day delinquent loans, or non-performing loans, were approximately $667 million this quarter compared to $465 million last quarter due to approximately $264 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, a $9 million loan that went non-performing this quarter, which was partially offset by $62 million of loans being modified in the second quarter that are now performing. The second bucket, consisting of loans that are less than 60 days past due, came down to $368 million this quarter from $489 million last quarter, mostly due to $264 million of loans that progressed to non-performing and $138 million of loans being modified or that paid off during the quarter, which was partially offset by approximately $281 million of new loans this quarter that we did not accrue interest on. And while we expect to continue to make progress in resolving these delinquencies, at the same time, we do anticipate that there will be some new delinquencies in this environment. We're currently working through a number of these loans that we expect to resolve by taking back the properties and then working to improve these REO assets to create more of a current income stream. this could take 60 to 120 days which will likely result in a low order mark for net interest income over the next couple of quarters until we have worked through this portfolio this is what we expected and is consistent with our previous guidance that this would be the period of peak stress and the bottom of the cycle we also continue to build our cecil reserves giving the difficult market backdrop record an additional 29 million on our balance sheet loan book in the second quarter $7.5 million were specific reserves we took on assets this quarter with a balance in additional general reserves. The increase in general reserves from previous quarters was mainly due to changes in the assumptions in our models on real estate values given the challenging environment. We feel it is very important to emphasize that despite booking approximately $145 million in CECL reserves across our platform in the last 18 months, $117 million of which was in our balance sheet business, we still were able to maintain our book value. This performance is well above our peers, the vast majority of which have experienced significant book value erosion in this market. Additionally, we're one of the only companies in our space that has seen significant book value appreciation over the last five years with 30% growth during that time period versus our peers whose book values have declined an average of approximately 20% in that timeframe. As discussed, as Ivan discussed earlier, we're pleased with the success we are having in working through our balance sheet loan book and in resolving our delinquencies. As we've stated many times, we have several recourse provisions in our loan documents that lend value to the resolution process. last quarter we realized a 1.6 million dollar loss an 11.3 million dollar loan that paid off at a discount we immediately pursued one of our recourse provisions and are pleased to report that we received a 900 000 settlement payment in the second quarter related to this loan we also had a very successful resolution on a legacy reo office property that we foreclosed on back in the fourth quarter of 2021 To a lengthy marketing process, we were able to sell this asset above our carrying value, resulting in a second quarter gain of $3.8 million. In our agency business, we had a strong second quarter with $1.1 billion originations and loan sales. The margins on our loan sales was flat at 1.54% for both the first and second quarters. We also recorded $14.5 million in mortgage servicing rights income related to $1.1 billion of committed loans in the second quarter, representing an average MSR rate of around 1.32%, which was also flat compared to last quarter. Our fee-based servicing portfolio also grew to approximately $32.3 billion on June 30th, with a weighted average servicing fee of 38 basis points and an estimated remaining life of 7.5 years. this portfolio will continue to generate a predictable annuity income going forward of around 124 million dollars gross annually and this income stream combined with our earnings on escrows and gain on sale margins represented 45 percent of our net revenues for the quarter In our balance sheet lending operation, our $11.9 billion investment portfolio had an all-in yield of 8.60% at June 30th compared to 8.81% at March 31st due to a combination of an increase in non-performing loans and some new loans that we did not make their full payment that we did not accrue interest on, which was partially offset by modifications in the second quarter on some of our previously delinquent loans. The average balance in our core investments was $12.2 billion this quarter compared to $12.5 billion last quarter due to runoff exceeding originations in the first and second quarter. The average yield on these assets decreased to 9% from 9.44% last quarter due to substantially more modifications in the first quarter resulting in the collection of a significant amount of back interest owed combined with an increase in non-performing loans and some new non-approval loans in the second quarter. Total debt on our core assets decreased to approximately $10.3 billion June 30th from $11.1 billion at March 31st, mostly due to the unwind of CLO 15 and the paydown of other CLO debt with cash in those vehicles in the second quarter. The only cost of debt was up to approximately 7.53% at 6.30 versus 7.44% at 3.31. The average balance on our debt facilities was approximately $10.8 billion for the first quarter compared to $11.4 billion last quarter. The average cost of funds on our debt facility was up slightly, 7.54% for the second quarter compared to 7.50% for the first quarter. Our overall net interest spreads in our core assets decreased to 1.46% this quarter compared to 1.94% last quarter, again, from a significant amount of back interest collected in the first quarter from modifications. And our overall spot net interest spreads were down to 1.07% on June 30th, but 1.37% on March 31st, mostly due to an increase in non-performing and non-accrued loans during the quarter. Lastly, as we continue to shrink our balance sheet loan book, we have delevered our business 25% over the last 18 months to a leverage ratio of 3 to 1 from a peak of around 4 to 1. Equally as important, our leverage consists of around 67% non-recourse, non-mark-to-market CLO debt with pricing that is below the current market, providing strong levered returns on our capital. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you guys may have at this time. Angela?

Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Steve Delaney with Citizens JMP. Please go ahead.