Arbor Realty Trust

Good morning ladies and gentlemen and welcome to the third 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 press star 1 on your telephone. If you want to remove yourself from the queue simply 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 Elenio, Chief Financial Officer. Please go ahead.

Paul Elenio Okay. Thank you, Jamie, 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 September 30th, 2024. 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 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 ARVA'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. ARVA 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. 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 challenging environment. As we discussed in the past, we appropriately positioned the company to succeed in this market, are executing our business plan very effectively and in line with our expectations. We have a diversified business model with many counter-cyclical income streams, are invested in the right asset class with the appropriate liability structures, and are well capitalized, which has allowed us to consistently outperform our peers in every major financial category over a long period of time and by a wide margin. In fact, most stock 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. As we have stated many times, and as you can clearly see from the charts posted on our website, our results have been nothing short of remarkable, and we're a consistent outperforming and leader in this space. As we discussed on the last few calls, we expected the first two quarters of this year to be the most challenging part of the cycle. And we also thought it could leak into the third and fourth quarters as well if rates remain higher for longer. With the recent 50 basis point rate cut by the Fed and a significant drop in the 10-year to a low of around 360, we began to see a much more positive outlook as a result of cap costs becoming less becoming far less expensive and bars being able to access five and ten year fixed rate agency deals and buyers moving off the sidelines and becoming extremely active in the market however there's been a backdrop in the 10-year again to 425 which has somewhat changed the tenor and we now believe that the recovery will be a little bit slower and could lead to a challenging fourth quarter, which is consistent with our previous guidance. We continue to do a very effective job of working through our portfolio by getting borrowers to recap their deals and purchase interest rate caps. In the third quarter, we modified another $1.2 billion of loans with $43 million of fresh equity committed to be injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, fund interest and renovation reserves, bring past interest due, current, and pay down loan balances where appropriate. We also continue to make progress in line with our previous guidance on the approximately $1 billion of loans that were passed due at June 30th by either modifying these loans, foreclosing and taking them into REO, or bringing in new sponsorship, either consensually or simultaneously with the foreclosure. Last quarter, we discussed our plans for these loans, and we estimated that approximately 30% to 35% of the pool would be modified another 30% to 35% would pay off, and the remaining 30% would be taken back as REO. In the third quarter, we successfully modified 250 million of these loans, or 23%, and we expect to modify another roughly 10% in the fourth quarter. We also had one delinquent loan for $8 million pay off in full in the third quarter, and we're expecting another 300 million plus of these delinquencies to pay off over the next few quarters. Additionally, we took back as REO roughly $77 million of loans in the third quarter and are expecting to take back another $250 million plus over the next few quarters. This is strong progress in one quarter and has reduced to $1 billion in delinquencies we had as June 30th down to just over $700 million at September 30th, or a 30% decrease. But as expected, we did experience additional delinquencies during the quarter of approximately $225 million, bringing our total delinquencies at September 30th to approximately $945 million, which is down 10% from our peak in the second quarter. And while we anticipate having additional delinquencies in this environment, we believe our resolutions will exceed new defaults, resulting in a continued decline in our total delinquencies. It is also very important to distinguish between REOs we take back and bring in new sponsorship to operate and assume debt, and REOs we own and operate ourselves. Of the 77 million of REOs we took back in Q3, 20 million we successfully brought in new sponsors to operate and assume our debt, and 57 million we now own and operate directly. We are working exceptionally hard in resolving our delinquencies in accordance with our plan, which, when achieved, will convert non-interest earning assets into income-producing investments that will be highly accretive to our future earnings. This is a challenging and demanding work, and I am very pleased with the progress we are making in resolving our delinquencies in accordance with our objectives. We also continue to focus on maintaining adequate liquidity levels and the appropriate liability structures, which is critical to our success in this environment. Currently, we have approximately $600 million in cash and liquidity, providing us with the flexibility needed to manage through the balance of this downturn and take advantage of the opportunities that exist in this market to generate stronger funds on our capital. One of these opportunities is our bridge lending platform. And I have said before, some of the best times, some of the best loans are made in the bottom of the cycle. We believe now is the appropriate time to start ramping up our bridge lending program again and take advantage of the opportunities that exist in the market to originate high-quality short-term bridge loans, allowing us to generate strong level returns on our capital in the short run, while continuing to build up a significant pipeline of future agency deals, which is critical to our strategy. We have also done an excellent job at deleveraging our balance sheet and reducing our exposure to short-term bank debt. We have approximately $2.9 billion in outstanding with our commercial banks, which is down from a peak of $4 billion. And we have 65% of our security net in this and non-mark-to-market, non-recourse, low CLO vehicles. Our CLOs are a major part of our business strategy, and they provide us with a tremendous strategic advantage in times of distress and dislocation due to the nature of their non-lawful market, non-recourse elements. In addition, they contribute significantly to providing a lower-cost alternative for warehousing banks, which in times like this have fluctuating pricing and leverage points parameters. In fact, one of the significant drivers of our income change are our low-cost CLO vehicles, as well as fixed-rate debt and equity instruments that make up a big part of our capital structure. We were very strategic in our approach to capitalizing our business with a substantial amount of low-cost, 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 third quarter, we produced $1.1 billion of agency originations, which was in line with our second quarter volumes. In the third quarter, we also saw a big dip in the 10-year to a range of 360 to 380, which immediately resulted in a massive increase in our agency pipeline to approximately 1.9 billion, which is one of the highest levels we have ever seen. During that timeframe, the agencies got significantly backed up by creating a delay of three to six weeks, which certainly affected the timing of our closings, which was compounded by the recent backup in rates to solvably above 4% again. As a result of these factors and given the magnitude of our pipeline, we are guiding our fourth quarter volumes to be in the range of $1.2 billion to $1.5 billion, which is very rate dependent. If rates stay at these levels, we are confident we can originate $1.2 billion in the fourth quarter. But if rates get meaningfully below 4% again, we can produce the top end of our range to $1.5 billion. We also continue to do an effective job at converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. In the third quarter, we generated $520 million of payoffs, and $385 million, or 74% of these loans being refinanced into fixed-rate agency deals for the first nine months of this year. We recaptured over 60%, or $1.1 billion, of our balance sheet runoff into agency production. And as I have said in the past, if interest rates continue to decline, we expect that this will become an even more meaningful part of our business going forward. Our fee-based servicing portfolio, which grew another 2% this quarter and 10% year-over-year to $33 billion, generates approximately $125 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances. In fact, we are earning 4.6% on around $2.3 billion of balances, or roughly $120 million annually, which combined with our servicing income and annuity totals $235 million of annual gross cash earnings, or $1.15 a share. This is in addition to the strong gain-on-sale margins we generate from our originations platform. And it's extremely important to emphasize that our agency business generates over 45% of our net revenues, the vast majority of which occurs before we even turn the lights on every day. This is completely unique to our platform. We continue to do an excellent job in growing our single-family rental business. We have another strong quarter with $240 million of fundings and another $375 million of commitments signed up, which now brings our nine-month numbers to $1.1 billion, which is already right on top of the total we've produced for all of last year, and brings our total commitment volume to $4.6 billion from this platform. Additionally, we have a large pipeline and remain committed to doing this business that results in three turns 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 also continue to make steady progress in our newly added construction lending business. This is a business we believe can produce very accretive returns to our capital by generating 10% to 12% unlevered returns initially and mid to high unlevered returns on our capital when we obtain leverage. We closed our first deal in the third quarter for $47 million, and we continue to see growth in our pipeline with roughly $300 million under application and $200 million in LOIs and $600 million of additional deals in the current screening. We believe this product is very appropriate for our platform as it offers us three turns on our capital from construction, bridge, and permanent agency lending opportunities. And again, between our SFR and construction lending products, we expect to be able to continue to grow our balance sheet loan book and generate strong returns on our capital, very importantly, seeding a significant amount of our future agency production. In summary, we had another productive quarter, and we are working very hard to manage through the balance of this dislocation. We feel we've done an excellent job in working through our loan book and in 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 realize that although the market backdrop is improving, there's still a lot of work to be done to manage through this environment, and we believe we're well-positioned to execute our business plan and continue to outperform our peers. 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 distributive earnings of $88 million, or 43 cents per share, which translated into ROEs of approximately 14% for the third quarter. As Ivan mentioned, we modified another 24 loans in the third quarter, totaling $1.2 billion. On approximately $710 million of those loans, we required borrowers to invest additional capital to recap their deals, with us providing some form of temporary rate relief through a pay and accrual feature. The pay rates were modified on average to approximately 6%, with 2.5% of the residual interest due being deferred until maturity. 240 million of these loans were delinquent last quarter and are now current in accordance with their modified terms. Our total delinquencies are down 10% to 945 million at September 30th, compared to 1.05 billion at June 30th. 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're 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 $625 million this quarter compared to $676 million last quarter due to approximately $152 million of modifications, $77 million of loans taken back as REO, which was partially offset by $110 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, and $68 million of additional defaulted loans during the quarter. The second bucket consisting of loans that are less than 60 days past due also came down to $319 million this quarter from $368 million last quarter due to $88 million of modifications, $110 million of loans progressing to greater than 60 days past due, an $8 million payoff which was partially offset by approximately $157 million of new delinquencies during the quarter. And while we're making good progress in resolving these delinquencies in accordance with the objectives that we discussed earlier, at the same time, we do anticipate that there could be new delinquencies in this environment. As Ivan mentioned, in accordance with our plans of resolving certain delinquencies, we have started to take back real estate in the third quarter, and we expect to take back more over the next few quarters. The process of taking control and working to improve these assets and create more of a current income stream takes time, which, as I mentioned on our last call, will likely result in a low watermark for net interest income over the next couple of quarters until we have worked through this portfolio. This is what we expected, and it's consistent with our previous guidance that this would be the period of peak stress and the bottom of the cycle. In line with our strategy of taking back REO assets, we decided to break out our REO assets into a separate line on this quarter, which was previously included in other assets on our balance sheet. As Ivan discussed earlier, we took back approximately 77 million assets in Q3, 57 million of which we currently own and operate, which was accounted for as REO. and roughly $20 million that we had brought in new sponsorship to run and assume our debt, which was accounted for as a sale and a new loan in the third quarter. The other roughly $78 million in REO on our balance sheet at 930 were deals taken back in previous years that were included in other assets in the past. We also continue to build our CECL reserves, given the current environment, recording an additional $16 million in reserves in our balance sheet loan book in the third quarter. It's important to continue to emphasize that despite booking approximately $162 million in seasonal reserves across our platform in the last 18 months, $132 million of which were in our balance sheet business, we were still 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 are one of the only companies in our space that has seen significant book value appreciation over the last five years with 28% growth in that time period versus our peers whose book values have declined on average approximately 22%. In our agency business, we had a solid second quarter with $1.1 billion in originations and loan sales. The margins on our loan sales was up to 1.67% for the third quarter from 1.54% last quarter. We also recorded $13.2 million of mortgage servicing rights income related to $1.1 billion of committed loans in the third quarter, representing an average MSR rate of around 1.25%. Our fee-based servicing portfolio also grew to approximately $33 billion on September 30th, with a weighted average servicing fee of 38 basis points and an estimated remaining life of seven years. This portfolio will continue to generate a predictable annuity of income going forward of around $125 million gross annually. And this income stream, combined with our earnings on escrows and gain on sale margins, represents over 45% of our net revenues. In our balance sheet lending operation, our $11.6 billion investment portfolio had an oil yield of 8.16% at September 30th, compared to 8.60% at June 30th, mainly due to a decrease in sulfur during the quarter. The average balance on core investments was $11.8 billion this quarter, compared to $12.2 billion last quarter, due to runoff exceeding originations in the second and third quarters. The average yield on these assets increased slightly to 9.04% from 9% last quarter, mainly due to slightly more back interest collected in the third quarter than the second quarter from third quarter modifications, which was partially offset by some new non-accrual loans in the third quarter. Total debt on our core assets decreased to approximately $10 billion on September 30th from $10.3 billion on June 30th, mostly due to paying down CLO debt with cash in those vehicles in the third quarter. The all-in cost of debt was down to approximately 7.18% at 9.30 versus 7.53% at 6.30, mostly due to a reduction in sulfur. The average balance in our debt facilities was down to approximately $10 billion for the third quarter compared to $10.8 billion last quarter, mainly due to the unwind of CLO-15 that occurred late in the second quarter, combined with paydowns in our CLO vehicles from runoff in the third quarter. The average cost of funds in our debt facilities was up slightly to 7.58% for the third quarter from 7.54% for the second quarter. Our overall net interest spreads in our core assets was flat for both the second and third quarter at 1.46%, and our overall spot net interest spreads were down to 0.98% September 30th from 1.07% at June 30th, mostly due to less CLO debt outstanding, which has a lower cost of funds from paydowns during the quarter. We also continue to improve our financing sources, adding a new banking relationship with a $400 million warehouse facility that we closed in the third quarter. And lastly, but very significantly, 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 65% non-recourse, non-mark-to-market CLO debt with pricing that is still well below the current market, providing strong-leveled returns on our capital. That completes our prepared remarks for this morning, and I'll now turn it over to the operator to take any questions you may at this time. Jamie?

Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, simply press star 2. so that others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We will pause for just a moment to assemble the queue. We'll hear first from Steve Delaney with Citizens JMP.