Ivan Kaufman - Chairman, President, Chief Executive Officer Paul Elenio - Chief Financial Officer.

Ryan Tomasello - KBW Ben Zucker - JMP Securities.

Good day ladies and gentlemen and welcome to the Arbor Realty Trust First Quarter 2016 Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time.

If anyone should require operator assistance, please press star and then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would like to introduce your host for today’s conference, Paul Elenio, Chief Financial Officer. Please go ahead, sir..

Okay, thank you, Ashley. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended March 31, 2016. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before we begin, I need to inform that you statements made in this earnings call may be deemed 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 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 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 our press release, we had a very productive first quarter. We produced strong operating results and continued to effectively execute our business strategy.

Before Paul takes you through the financial results, I would like to provide an update on the acquisition of our manager’s agency platform, and then reflect on our first quarter accomplishments and our business strategy and outlook for the remainder of 2016.

As we spoke about in great detail on our last call, we are extremely excited about the many benefits we will achieve from the acquisition of our manager’s agency platform.

Some of these significant benefits will include immediate accretion to our earnings and dividends, significant diversification and greater predictability to our earnings stream through a long-dated prepayment protected servicing portfolio, transitioning the REIT from a monoline-dependent entity into a fully integrated franchise with a significant agency originations business with high barriers to entry providing a natural limitation on competition, increasing our equity base and market cap, creating a larger, more efficient vehicle for us to raise capital in the future, and providing full alignment with our shareholders through significant stock ownership.

We have worked extremely hard in the last few months to put ourselves in the best position to close this transaction as soon as possible, which would allow us to realize these benefits earlier than anticipated. We mailed our definitive proxy on April 25 and have scheduled a special meeting of shareholders to approve the transaction for June 1.

We have also made significant progress in working towards obtaining the necessary approvals from the GSC’s government agencies, our banks and third parties.

We are optimistic that this progress will allow us to close the transaction as early as the end of the second quarter, again allowing us to realize the many significant benefits of this transaction earlier than expected, including the potential to increase our dividend in the third quarter.

Now I would like to talk about some of our first quarter accomplishments and our outlook for the remainder of 2016. We continue to focus heavily on growing our originations platform while remaining extremely disciplined in our lending approach by investing in senior debt.

This has allowed us to generate levered returns in excess of what we would achieve by lending in the subordinate areas of the capital stack. As we have mentioned in our last few calls, we have experienced a significant amount of runoff in the last few years which has made it difficult at times for us to continue to grow our loan portfolio.

This has also resulted in a significant increase in liquidity to deploy into new investment opportunities and grow our future earnings. The recent disruption in the CMBS market has resulted in reduced runoff, which has allowed us to grow our loan portfolio by approximately $134 million in the first quarter.

We originated approximately $218 million of loans and experienced runoff of approximately $85 million in the first quarter, and our pipeline remains strong. Our first quarter originations had an average yield of approximately 6.7% and we generated levered returns of approximately 14.6% on these investments.

The reduced runoff we experienced in the first quarter is a trend we believe could continue in the near term, which would allow us to continue to grow our portfolio and increase our core earnings.

Additionally, with a heavy focus on senior multi-family loans, our portfolio is now comprised of 88% senior debt with 75% of the debt being multi-family assets, which clearly have proven to be the most resilient asset class and product type in all cycles.

With the significant improvement we have made in our financing facilities, we are generating strong returns on our capital in a very secure part of the capital stack. As I mentioned earlier, we are also very pleased in our ability to maintain our strong liquidity position.

We currently have approximately $165 million of cash on hand, which given the current uncertainty and instability in the capital markets puts us in a unique and favorable position of being able to acquire our manager’s significant agency platform and grow our business and future earnings without the immediate need to issue additional capital.

We have also continued to enhance our debt structures, which is one of the keys to our success and remains a critical component of our business strategy.

The successful execution of this strategy has allowed us to generate superior levered returns in a very safe and stable part of the capital stack through the continued use of non-recourse securitization vehicles.

We continue to be a market leader in the CLO securitization arena and currently have nearly $800 million of non-recourse debt through three vehicles representing nearly 75% of our total financing, allowing us to appropriately match fund our assets with non-recourse liabilities and generate strong levered returns on our capital.

Additionally, we have been extremely successful in leveraging off of our unique platform and consistently creating significant additional income streams.

We produced impressive results from the investment we made in the residential mortgage banking business, reporting $6.6 million of income or $0.13 a share in earnings for the investment in 2015, and $1.6 million or $0.03 a share for the first quarter. This translates into a return of greater than 50% on our investment in this joint venture to date.

We also generated $200,000 of additional income in the first quarter from one of our equity interests, and we expect these two investments to generate a consistent annuity going forward of around $1.5 million to $2 million of income per quarter.

These strong results continue to demonstrate our unique ability to create significant additional earnings from new business ventures and from structured transactions, which we view as an important part of our franchise and an additional means of diversifying our income streams and adding to our earnings capabilities.

As we have highlighted earlier, the acquisition of our manager’s agency platform will also add significant additional income streams and extended duration of our earnings sources through long-dated prepayment protected servicing income from a significant agency servicing portfolio.

Overall, we are very pleased with our first quarter accomplishments and our ability to continue to successfully execute our business strategy by growing our loan portfolio and core earnings run rate while maintaining a strong liquidity position.

We’re also very excited about the acquisition of our manager’s significant agency platform, which we believe will be immediately accretive to our earnings and dividends and add significant diversity, duration and stability to our earning streams.

We feel strongly that the many benefits we will realize from the acquisition will have a transformational effect on our future growth and success. I will now turn the call over to Paul to take you through our financial results..

Okay, thank you, Ivan. We generated AFFO for the first quarter of $6.9 million or $0.13 per share, excluding depreciation expense, non-cash stock compensation expense, and $3.1 million of expenses incurred during the quarter related to the potential acquisition of our manager’s agency platform.

As Ivan mentioned, we were also able to grow our loan portfolio significantly during the quarter which will increase our earnings run rate going forward, and we continue to generate significant additional income streams, recording $1.9 million of income from our equity investments in the first quarter as well.

Looking at the rest of the results for the quarter, the average balance in our core investments was up to $1.64 billion for the first quarter from $1.57 billion for the fourth quarter due to the originations outpacing our runoff during the quarter.

The yield on these core investments decreased to 6.25% for the first quarter from 6.82% for the fourth quarter, largely due to significantly more accelerated fees from early runoff in the fourth quarter combined with higher yields on our first quarter runoff.

The weighted average all-in yield on our portfolio was down slightly to around 6.27% at March 31, 2016 compared to 6.32% at December 31, 2015 due to higher yields on our runoff in the first quarter.

The average balance in our debt facilities was also up to approximately $1.22 billion for the first quarter from approximately $1.18 billion for the fourth quarter, again due to the growth in our loan portfolio during the quarter.

The average cost of funds in our debt facilities increased slightly to approximately 4.19% for the first quarter compared to 4.16% for the fourth quarter, and our estimated all-in debt cost decreased to approximately 4.09% at March 31, 2016 compared to around 4.12% at December 31, 2015.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense, our average cost of funds would be approximately 4.48% for the first quarter and approximately 4.45% for the fourth quarter, and our estimated all-in debt costs would be 4.38% at March 31, 2016 compared to 4.43% at December 31, 2015.

Overall net interest spreads on our core assets on a GAAP basis decreased to 2.06% this quarter compared to 2.66% last quarter.

Including the preferred stock dividends as debt cost, our average net interest spreads also decreased to approximately 1.77% this quarter from approximately 2.37% last quarter, largely due to significantly more accelerated fees in the fourth quarter from early runoff.

However, our overall spot net interest spread including the preferred stock dividends as debt cost was flat at 1.89% at both March 31, 2016 and December 31, 2015, which combined with the growth in our loan portfolio during the first quarter has increased our core earnings run rate going forward.

Our average leverage ratios on our core lending assets were also flat at approximately 64%, including the trust preferred and perpetual preferred stock as equity for both the first and fourth quarters, and our overall leverage ratios on a spot basis including the trust preferred and preferred stock as equity was 1.5 to 1 at March 31, 2016 compared to 1.4 to 1 at December 31, 2015.

NOI related to our OREO assets increased approximately $1.1 million compared to last quarter due to the seasonal nature of income related to a hotel property that we own, and we project that we will produce NOI in 2016 of approximately $1.1 million to $1.4 million on our remaining OREO assets, the majority of which was already realized in the first quarter, again mostly due to the seasonal nature of a hotel property we own.

Additionally, as Ivan mentioned earlier, we recorded $1.9 million of income in the first quarter from our equity investments, and we expect these investments to continue to produce approximately $1.5 million to $2 million of income a quarter going forward.

This success continues to add to our core earnings capabilities and diversifies our income streams, and with the addition of our manager’s agency platform we will add significant additional long-dated income streams through a predictable annuity of servicing income from a prepayment protected significant agency servicing portfolio.

Operating expenses excluding acquisition costs were up compared to last quarter primarily due to the vested portion of annual restricted stock grants issued to our employees, directors, and the employees of our manager in the first quarter.

Lastly as Ivan mentioned, we have made significant progress on the acquisition of our manager’s agency platform and are optimistic that we will close this transaction by the end of the second quarter or early in the third quarter. This will allow us to potentially realize the many benefits of this transaction earlier than originally anticipated.

In addition to the filing of our definitive proxy, which is available on both our and the SEC’s website, we have also filed and put up on our website in our Investor Relations section an investor presentation which contains certain detailed information on Arbor, our manager’s agency platform, and some of the significant benefits of the proposed acquisition.

We hope this additional information will be helpful to our shareholders. 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.

Ashley?.

[Operator instructions] Our first question comes from Jade Rahmani of KBW. Your line is open..

Hi, this is actually Ryan Tomasello on for Jade. Thanks for taking my questions, guys..

Hey Ryan..

Just starting off with overall market conditions, how would you characterize the current level of activity, deal volume, and the stability of pricing going forward? For example, are you seeing a pull-back from banks, and in conjunction with lower CMBS volumes and the upcoming maturities, is there any worry about a potential liquidity crunch in the coming months?.

It’s Ivan. I’m going to try and keep my response brief, because I could probably talk about that for a couple hours.

But clearly, the dislocation in the CMBS market, the uncertainty in the CMBS market has created for a firm like ours certain opportunities to do a greater amount of bridge lending as people cannot get CMBS loans in a consistent manner, both on price and proceeds.

We can use our balance sheet and provide capital where in the past it was more difficult to do so, so we’re probably going to do some senior lending on the commercial side for some real good core New York City assets that we couldn’t have done before at really attractive spreads and probably be able to get mid-teens adjusted returns, if not better.

So we’ve seen some greater opportunity come out of that dislocation, and in fact on adjusted Dodd-Frank rules and keep the risk retention rules we think on a longer term basis, we’ll be able to play more significantly in that space and specifically in the $10 million to $15 million market, which is an area that is--you know, most of the larger institutions don’t like to play in, so that’s good for us.

You’ll see a little bit of a pick-up in volume this year, especially in the first two quarters with good spreads, so we’re pretty happy about that.

In terms of overall, clearly our agency business, the one that the REIT is acquiring, we’re seeing very strong volumes and a little less competition, not only with the CMBS market has gone away but also because some of the banks are a little full or are readjusting their underwriting parameters, and the agencies have maintained a very consistent underwriting parameter and I think where some [indecipherable] we’re more aggressive, we’re going to see some greater opportunities in the agency business, and we’re pretty thrilled with the level of volume, how the first two quarters look and certainly our outlook for the balance of the year, given what’s happening in the marketplace.

What we’re also seeing which we’re happy about is while the banks were extremely aggressive specifically in the New York City metropolitan area, I think they’ve really overstepped their bounds and they’re pulling back a little bit, so it’s really given us the opportunity to put on real quality assets and have a bigger market share..

Great, that’s really helpful color. My second question relates just when you alluded to in your prepared remarks regarding the loan repayments in the quarter.

Any more color you can provide on how volatility impacted those repayments and what you expect in terms of runoff for the balance of the year?.

Yes, I think what Paul alluded was the fact that prepayments slowed a little bit, and that could be a result of the CMBS market really backing up.

I mean, the CMBS market is very aggressive and they’re able to take assets out of our portfolio once they stabilize a little quicker than sometimes we anticipate, so with that market being dislocated and with the spreads being higher, I think people have to stabilize their assets a bit longer to get to the kind of execution that they want, and the cost benefit of exiting earlier has gone away.

So I think we’ll see a little more duration in our portfolio, which is good for us. I mean, clearly when assets gets stabilized, it’s the best part of that asset, you really want to keep it as long as you can.

The riskiest part is always in the early stages, so I think the longer day that we can have on some of our bridge assets, the actual quality of our risk-adjusted returns really goes up and we’re able to maintain a higher balance.

As Paul mentioned, we’re sitting on $165 million of undeployed cash -that’s a lot of cash for a firm like ours, and whether we deploy it for this acquisition or into new lending opportunities, it’s going to be extremely accretive [indecipherable] grow our core dividend..

Great.

Just regarding the CLO market, how is pricing in that market and execution in that market looking currently, and do you expect to be able to access it in the near future?.

So for most firms, the CLO market is closed. For us, we believe we have an opportunity to go into the market. We don’t have an immediate need right now. We have a good balance of funding on our current CLO book, which is about 75% of our funding versus our bank lines.

If our volumes kick up, we’ll entertain--and our prepayments slow, we’ll entertain going back to the market. We think that it will probably be about 15 to 20 basis points more expensive than it was perhaps nine months ago, but that can change. But we feel we could get off an effective transaction because of our reputation and our brand in the market. .

Then just one last question, if I could, regarding the agency platform. Can you provide how many originators are currently at that platform and if you are anticipating headcount growth, given the tailwinds that the GSCs are seeing in terms of volume? I believe there was a recent industry trade publication that alluded to recent hires. .

We have about 20 originators, somewhere in that level, and we try and grow our origination base by 5 to 10% a year. For us, most of our originators are organically grown. We train them, we start them out at early stages, we have training programs, and it takes a long time to grow that.

Currently we have a training group of around--you know, anywhere between six to 12 people, and it takes about two years to turn those people into originators. We’re not that active in terms of recruiting people from other firms. We don’t use that as a mainstay. There are times that people do come to us.

We’d like to see the origination staff grow from 5 to 10% a year, and we’ve been pretty effective at doing that and of course allowing our originators themselves to grow in capacity by providing them greater administrative support.

So it’s not just growth in the number of sales people, it’s growth in the effectiveness of our own sales people, and we have multiple strategies to do that and we’re pretty pleased with how we’ve been handling that.

In terms of quality of personnel and staff, it is a competitive industry and that’s always an issue in building a franchise, being able to retain your people as well as being able to attract quality people. That’s an ongoing challenge and we believe we’ve handled that fairly well to continue to grow our franchise..

Great. Thanks for taking my questions..

Thank you. Again ladies and gentlemen, to ask a question, please hit star and then one. Our next question comes from Ben Zucker of JMP Securities. Your line is open..

Thanks. Good morning guys, and thanks for taking my question. I actually just really wanted to focus on the owned real estate portfolio right now. I noticed that the carrying value of that owned real estate was down maybe 28% year-over-year, but at the same time the NOI declined by 51%.

So for my first question, I was just wondering how you guys would characterize the quality of the remaining real estate portfolio, not including what’s been sold subsequent to 1Q and understanding it’s a seasonal business, just because it seemingly isn’t maybe as high quality as what was in the portfolio at this point last year..

Hey Ben, it’s Paul. So as you pointed out, subsequent to the quarter we did sell off pretty much the majority of our OREO remaining book. We’re sitting with two assets left, one of them is the hotel property down in Florida, the other is an office building that we recently took over.

So we’re left with two assets and we’re evaluating now the strategy on those assets, but as I put in my prepared remarks, the lion’s share of the portfolio has been sold either prior to the quarter or subsequent, therefore the NOI associated with those assets has obviously disappeared, but it’s turned into cash that we’re able to deploy into what we think are quality bridge loans with strong levered returns.

So we don’t see a lot of NOI left in those two assets, and we’ll evaluate those assets over the next coming quarters to see what our strategy is; but like you indicated, the lion’s share of that portfolio has been monetized.

We’ve done a great job at creating the value, holding onto those assets, improving them, creating value, and now we’re deploying that value back into our core business, which is our bridge lending program..

So basically when there’s a drop in NOI if we sell an asset, we feel we’ve achieved the right value on that asset and we can redeploy that cash back into our core business of bridge lending, and replace the drop in NOI with perhaps even an accretive effect of having a better return on the cash that we’ve received from the sale of that asset..

No, that makes perfect sense, and it sounds like we’re kind of on the same page because now as we’re sitting here with your full-year guidance, $1.1 million to $1.4 million, we already sold $1 million, it almost kind of implies the remaining--you know, the $31 million plus of real estate that’s not held for sale and hasn’t been sold is more or less dead money, and if that could be turned around and conservatively levered up and generate another $100 million of investable dry powder, that might be something you guys would be looking to do down the road, if I’m hearing you correctly.

.

Yes, piece by piece, patiently. The other thing too is sometimes managing these assets takes a lot of effort, and we have to also measure the cost and expense of managing that as well as the accounting treatment, and we take all of that into consideration. .

That’s great, I hear you. My other questions about the repayments were already asked and answered, so thanks again guys for taking my questions..

Sure, thanks..

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to management for any further remarks..

Okay, thanks to everybody for participating on today’s call. We’re extremely excited about where we are today between our core business as well as the transaction at hand, and hopefully on our next quarter we’ll be able to have very favorable news about the completion of that transaction. Have a nice day, everybody..

Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You can now disconnect. Everyone have a wonderful day..