Arbor Realty Trust, Inc. (NYSE:ABR) Q1 2024 Earnings Call Transcript May 3, 2024

Arbor Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] 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, 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 31, 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 doing forward-looking statements that are subject to risks 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 beliefs, assumptions and expectations of future performance taking into account 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.

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 extremely challenging environment. Through our diversified business model with many countercyclical income streams, we once again generated distributable earnings in excess of our dividend with a payout ratio of around 90% from first quarter. This is clearly well above the performance from our peers, most of which are paying dividends out of capital or being forced to cut their dividend substantially. And just as importantly, in a time of tremendous stress, we've managed to maintain our book value of the last 15 months while recorded 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 a period of peak stress. We also mentioned that if rates stay higher for longer that dislocation could potentially leak into third and possibly even the fourth quarter as well. And given the recent backup in rates combined with the Fed somewhat more hawk at you 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 reflected in a way we’re currently operating our business. As a result, we have been extremely active over the last four months and working through our balance sheet notebook. We’ve 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 and determine 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 bars 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, which fresh capital being brought to the table in every one of these deals.

This includes cash to purchase the low interest rate caps, fund interest rate, renovation reserves, bring any past due loans current and pay down balances where appropriate. In fact bars objected 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 for our agency business as well as leveraging our long-term standing relationships, many quality sponsors to step in and take over assets that are underperforming and assumed 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 successfully managing through 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 now approach as we continue to manage through the back 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 $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 taking 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 buyback to us through buyback stock, knowing full well that will be volatility in the market allow us to potentially repurchase our stock at discounts to book value and generate high double-digit returns on capital. In April, we repurchased approximately $11.4 million of stock at an average price of $12.19 with a 4% discount on book value and generating a current dividend yield of 14% and the 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 will continue to be opportunistic in our approach to buying back stock at a volatility process. We also continue to do an excellent job of deleveraging our balance sheet and reducing our exposure to our term debt.

We're down to approximately $2.6 billion in outstanding with our commercial banks from a peak of around $4.2 billion and we have 72% of our secured indebtedness and non-mark-to-market, non-recourse, low-cost CLO vehicles. Our CLO vehicles are major part of our business strategy as they provide us with tremendous strategic advantage in terms of dislocation due to the nature of the 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, 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 we have that make up a big part of our capital structure.

We have a very strategic and approach to capitalizing on 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 capital. Turning now to our first quarter performance, as Paul will discuss in more detail, we had a very strong first quarter producing distributable earnings of $0.48 per share, representing a payout ratio of around $0.90 clearly have the wherewithal to create a large cushion between our earnings and dividends over the last several years serving us very well in this dislocation and 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 GSE Agency business, we had a relatively strong first quarter, despite interest rates remaining stubbornly high. We reached $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 while deals as just being pushed out further. We have also done a great job in converting our balance sheet loans at the agency product which has always been one of our key strategies and a significant differentiator from our peers. That'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, Fannie and Freddie have a very specific mandate to address our 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 a social needs of society. And again the agency business of the premium values are requires limited capital and generate significant long-dated predictable income streams and produces significant annual cash flow. To this point, our $31 billion fee-based services portfolio, which grew 9% year-over-year generates approximately $122 million a year 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, so roughly $140 million annually, which combined with our service fee income and annuity totals approximately $260 million of annual gross cash earnings or $1.25 a share. This is an addition to 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 in the car platform is something we feel is not being fully reflected in our valuation. In balance sheet business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency products, allow us to do delever our balance sheet and produce significant long dated income streams.

In the first quarter, we produced another $540 million of balance sheet run off, $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 tenure 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 the last quarter, we're well-positioned to step back to the lending market and garner accretive opportunities continue to grow our platform. 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 a lender of choice in the premium markets we traffic in. We have a very strong first quarter with $172 million of fundings and a lot of $412 million of commitments signed up. We also have a large pipeline or may committed to this business and it offer us returns on our capital through construction, bridge, and permanent lending opportunities and generate strong levels of returns in the short-term, while providing significant long-term benefits by further diversifying our income trends. We are 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 and another $300 million in annualized 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 as challenges that lie ahead. I 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 car market.

We're also well-capitalized with significant liquidity and has best-in-class asset management function and seasoned executive team giving us confidence in our ability to manage through the cycle and continue to be the top performer company in our space. I'll now turn the call over to Paul and take you through the financial results.

Paul Elenio: Okay. Thank you, Ivan. As Ivan mentioned we had another very strong quarter producing distributable earnings of $97 million or $0.47 per share and $0.48 per share excluding a $1.6 million realized loss on a previously reserved for non-performing loan that paid off with slight discount in the first quarter. These results translated into our leads of approximately 15% for the first quarter and resulted in a dividend payout ratio of around 90%. As Ivan mentioned, we successfully modified 40 loans in the first quarter totaling $1.9 billion all of which have borrowers invested additional capital as part of the modification terms. On $1.1 billion of these loans, we required borrowers to invest additional capital to recap their deals with us providing some form of temporary rate relief to obtain full feature.

The pay rates are modified at an average to approximately 7% with only around 2% of the residual interest being confirmed. A subset of these loans totaling $713 million made up the vast majority of our less than 60 day delinquencies at December 31, which we received, all pass to interest owned on these loans importance of the modified terms. Last quarter we disclosed two pools of loans that were relevant in total delinquencies in our balance sheet loan book. Our 60-plus day delinquencies and loan that was less than 60 days past due that we were only reporting interest income on to the extent cash was received. The 60-plus day delinquent loans are non-performing loans were approximately $275 million last quarter and the less than 60 days past due loans were $957 million.

Our non-performing loan numbers are now $465 million this quarter due to approximately $175 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, and roughly $50 million of net new additions for the quarter. The less than 60 days past due loans or our non-accrual loans came down to $489 million this quarter mostly due to $713 million of loans being successfully modified as I mentioned earlier inline with $175 million of loans moving to 60 plus days delinquent, which was partially offset by approximately $420 million of new loans this quarter that we did not accrue interest on. So in summary, our total delinquencies are down 23% from $1.23 billion last quarter to $954 million this quarter, which is significant progress again deliver tremendous success we had in modifying resolving loans and continued strong collection efforts.

And while we expect to continue to make considerable progress in resolving these delinquencies at the same time, we do anticipate that there will be new delinquencies in this challenging environment. We also continue to build our CECL reserves recording an additional $18 million on our balance sheet loan book in the first quarter. We feel it's very important to emphasize that despite booking approximately $108 million CECL reserves across our platform in the last 15 months, $88 million which was in our balance sheet business. We still grew our book value per share 1% to $12.64 a share at $3.31 2024 from $12.53 a share at $12.31 2022 which is well above the performance of 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 36% growth during that time period versus our peers whose book values have declined an average of approximately 18%. And our agency business we had a solid first quarter with $850 million in originations and $1.1 billion of loan sales. The margin on these loan sales came in at 1.54% this quarter compared to 1.32% last quarter mainly due to some larger deals in the fourth quarter that carry lower margins. We also recorded $10.2 million of mortgage servicing rights income related to $775 million of committed loans in the first quarter representing an average MSR rate of around 1.31% compared to 1.55% last quarter mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter which contain higher servicing fees.

Our fee-based servicing portfolio also grew to approximately $31.1 billion in March 31 with a weighted average servicing fee of 39 basis points and estimated remaining life of around eight years. This portfolio will continue to generate a predictable annuity of income going forward of around $122 million gross annually. And this income stream combined with earnings on our escrow and gain on sale margins represent 40% of our net revenues. And our balance sheet, lending operation are $12.25 billion investment portfolio had an all-in yield of 8.81% at March 31 compared to 8.9% at December 31, due to a combination of an increase in non-performing loans and some new loans that did not make their full payment as of March 31 that we decided not to accrue for, which was partially offset by modifications in the first quarter on the vast majority of our less than 60-day past due loans from last quarter.

The average balance in our core investments was $12.5 billion this quarter compared to $13 billion last quarter due to runoff exceeding originations in the fourth and first quarters. The average yield on these assets increased to 9.44% from 9.31% last quarter due to the successful modification of the bulk of our pass-through loans, allowing us to collect a majority of the back interest owned on our fourth quarter delinquencies, which was partially offset by an increase in non-performing loans and some new non-accrual loans in the first quarter. Total debt on our core assets decreased to approximately $11.1 billion at March 31 from $11.6 billion at December 31. The oil in cost of debt was flat at approximately 7.45% at both 12/31 and 3/31. The average balance on our debt facilities was approximately $11.4 million for the first quarter, compared to $11.8 billion last quarter.

The average cost of funds in our debt facilities was basically flat at 7.5% for the first quarter, compared to 7.48% for the fourth quarter. Our overall net interest spreads in our core assets increased 1.94% to 1.94% this quarter, compared to 1.83% last quarter, again from the successful modification of the majority of our past due loans from last quarter. And overall spot net interest spreads were down to 1.37% at March 31, and from 1.53% at December 31, mostly due to an increase in non-performing loans during the quarter. Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 20% over the last 15 months to a leverage ratio of 3.2:1 from a peak of around 4.0:1. Equally as important, our leverage consists of around 72% 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 may have at this time. James?

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