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

Steve DeLaney – JMP Securities Ryan Tomasello – KBW George Bahamondes – Deutsche Bank.

Good day ladies and gentlemen and welcome to the Q1 2017 Arbor Realty Trust 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. [Operator Instructions]. As a reminder, today’s conference is being recorded.

I would like to turn the call over to Mr. Paul Elenio, Chief Financial Officer. Sir, you may begin..

Okay, thank you, Chelsea and 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, 2017. 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 this morning’s press release, we had another very successful quarter as we continue to grow our brand, expand our market presence and broaden our products through our significant operating franchise.

Before I turn it over to Paul to take you through the financial results, I would like to talk about some of our significant first quarter accomplishments as well as our outlook for the remainder of 2017. We continue to build momentum and produced very strong results through our diverse and dynamic originations platform.

We had a tremendous first quarter in our agency business, originating $1.3 billion in loans which is the strongest first quarter volume in our history and also match the record originations we’ve produced in the fourth quarter of 2016.

Additionally, our pipeline is at an all time high and we’re extremely positive about our outlook for the remainder of the year and confident that we’ll produce record originations again from our agency business in 2017.

We have also been very successful in leveraging our significant origination platform and strong footprint in the GSE multi-family lending arena to increase our research in our brand recognition. This has allowed us to access the broader market resulting in a substantial increase in our average loan size over the last several quarters.

The ability to originate larger loans while still remaining a dominant force in the small balance lending arena will allow us to continually increase our market presence and getting a larger portion of the overall lending market.

Originating both large and small loans effectively is a very unique skill set and sets us apart from many other lenders and will greatly enhance value of our franchise going forward. This significant growth in our agency platform will continue to grow our service and portfolio substantially.

At March 31, 2017, we had a servicing portfolio of approximately $14.5 billion which is a 7% increase from year-end.

This portfolio has 48 basis point weighted average servicing fee which generates a reoccurring, predictable, long-dated annuity that is mostly prepayment protected and continues to add significant diversity, duration and stability to our earnings streams.

And the tremendous success we have had in our agency business has also been extremely accretive to our core earnings and allowed us to increase our dividends substantially. We have increased our dividend another 6% this quarter to $0.18 a share which is our third dividend increase and 20% increase in our dividend over the past year.

Additionally, as I mentioned earlier, we are very positive in our outlook for the rest of 2017 which will contribute greatly to our core earnings going forward.

So overall, we are very pleased with the results of our agency platform and are confident that this business will continue to produce significant reoccurring and predictable earnings and a longer duration asset which will allow us to continue to grow our earnings and dividends in the future.

This business also provides a very durable growth platform while minimizing the potential impact of capital markets and interest rate volatility.

In our transitional balance sheet lending business, we also had a very active and productive quarter and we continued in our balance sheet while remaining extremely disciplined in our lending approach and are continuing to prove a non-recourse financing vehicles.

This has allowed us to generate strong levered returns on our capital in a very safe and very stable part of the capital stack. In the first quarter, we originated approximately $146 million of loans and experienced run-off of approximately $190 million.

Our first quarter originations had an average yield of approximately 7% and we generated leveraged returns of approximately 14% on these investments.

The first quarter originations came in lighter than expected at approximately $85 million that were expected to close in March closed early in the second quarter instead which will result in increased second quarter origination volumes.

In addition, our pipeline remains strong and we remain confident that through our deep originations network, we will produce portfolio growth in 2017 similar to what we achieved in 2016.

Additionally, with a heavy focus on senior multi-family loans, our portfolio of approximately $1.7 billion is now comprised of 92% senior debt and 83% of that debt being multi-family assets which clearly have proven to be the most resilient asset class and product type in all economic cycles.

We also continue to have tremendous success in greatly enhancing our non-recourse financing vehicles which is one of the keys to our success and is a critical component of our business strategy. In April, we closed our seventh CLO securitization vehicle.

This is $360 million vehicle with 77.5% leverage at three year replenishment period at an all – price before fees of 1.99% of a one month LIBOR which is 49 basis points tighter than our last securitization.

The leverage and pricing on this new vehicle were our most favorable terms to-date in any of our CLO vehicles and we were also able to increase the capacity for the financing of other asset classes as well.

We have a tremendous amount of experience and capability in the securitization arena and continue to be a market leader in this space, cultivating a loyal and growing base of investors in each one of our securitizations that highly value our strong transaction performance and other diverse platform.

We now have four non-recourse CLO securitization vehicles up with approximately $1 billion of non-recourse debt with replenishment periods going out as far as three years allowing us to appropriately match fund our assets with non-recourse liabilities and generate strong revenue returns on our capital.

Additionally, we have approximately $175 million of available liquidity between cash on hand and deployable cash inside our CLO vehicles. This capital is readily available to fund our future investment opportunities which will increase our core earnings going forward as well.

Overall, we are extremely pleased with our first quarter results and the success we have had in growing our brand and expanding our market presence which has greatly enhanced the value of our franchise.

We’re also very excited and positive about our outlook going forward and our ability to continue grow our earnings and dividends while creating more diversity, stability and predictability to our earnings stream that are more long-dated and less sensitive to rate and market volatility.

We are dynamic, complete financial services operating franchise and one of the leading multi-family financing companies in the nation. We believe this provides with a tremendous advantage in the market and sets us apart from many other lenders and peers in our industry.

We also feel we should go on a higher trading premium and other mortgage rates at specialty finance companies due to our significant operating franchise and our ability to generate a more predictable, stable earnings base to support our dividend.

And we remain very focused and confident in our ability to increase our brand, grow our platform and franchise and to continue to increase the value to our shareholders. I will now turn the call over to Paul to take you through our financial results..

Okay. Thank you, Ivan. As our press release this morning indicated, we had a very strong first quarter on many fronts. AFFO for the first quarter was $27.4 million or $0.33 per share which translates into an annualized return on our average common equity of approximately 15% for the quarter.

As Ivan mentioned, we continue to put up record results from our agency platform which have been very accretive to our earnings and has allowed us to increase our dividends substantially. With our dividend increase to $0.18 a share this quarter or $0.72 a share annualized, we have now raised our dividend three times or 20% in the last year.

For the quarter, we generated approximately $13 million of income and approximately $13.4 million of AFFO from the agency business. A portion of the income from this business is subject to federal and state taxes inside of taxable REIT subsidiary.

For the first quarter, we recorded a current federal and state provision of $4.3 million resulting in effective tax rate of approximately 23% on our agency business pre-tax income.

We had a very strong origination quarter in our agency platform, closing $1.3 billion of loans in Q1 matching our record volume from the fourth quarter and as Ivan mentioned, we are very optimistic we will have a very record year in 2017.

For the quarter, $897 million was Fannie Mae DUS originations representing nearly a 100% increase in DUS originations compared for the first quarter of last year. Our first quarter sales volume was $1.36 billion, a 45% increase over our fourth quarter 2016 sales.

The margin on our loan sales for the quarter was 1.40% including miscellaneous fees compared to a 1.58% all-in margin on our fourth quarter sales. We recorded commission expenses of approximately 33% of our gains on sales in both the first and fourth quarters.

We also recorded $20 million of mortgage servicing rights income related to $1.2 billion of committed loans during the first quarter, representing an average mortgage servicing rights rate on committed loans of 1.74% compared to 2.05% in the fourth quarter committed loans. Sales margins and MSR rates fluctuate primarily by GSE loan type in size.

Therefore, changes in the mix of loan origination volumes may increase or decrease these percentages in the future.

Our servicing portfolio also grew another 7% during the quarter to approximately $14.5 billion at 3/31/17 with a weighted average servicing fee of approximately 48 basis points and an estimated remaining life of approximately eight years.

This portfolio will continue to generate a significant predictable annuity of income going forward in excess of $65 million growth annually. This annuity also significantly diversifies our revenue streams and provides us with long-dated, stable, predictable earnings that are mostly prepayment protected and less sensitive to rate and market cycles.

So clearly, we had a tremendous first quarter in our agency business and as Ivan mentioned, we are also very positive on our outlook for the remainder of 2017. [Audio Gap] balance sheet lending operations, we generate income of $10.1 million and AFFO of approximately $12.2 million in the first quarter.

We recorded $7.1 million gain on extinguishment of debt from the purchases some of our junior subordinated notes that were discount during the quarter.

We also recorded approximately 800,000 of income from our equity investments in the first quarter which is down from $1.8 million these investments last quarter as a result of less income associated with our residential mortgage banking joint venture due to a rise in interest rate.

And given the current interest rate environment, we are now estimating these equity investments to generate on average between $750,000 and $1 million of income a quarter going forward. We originated $146 million of new investments and experienced $190 million of run-off during the first quarter.

Although as Ivan mentioned, we are expecting very strong origination volumes in the second quarter due to the timing of a few large loans to close in April and we do expect to realize net growth in our portfolio in 2017 similar to our growth in 2016.

Our investment portfolio was approximately $1.7 billion at March 31 with an all-in yield of approximately 6.45%, which is up from a yield of around 6.39% at December 31, mainly due to an increase in LIBOR during the quarter.

And with our primary focus in multi-family bridge loans, our portfolio now consists of 92% bridge loans and 80% multi-family assets.

The average balance in our core investments was flat quarter-over-quarter and the average yields on these core investments was also flat at about 6.39% for both the first and fourth quarters, largely due to an increase in LIBOR which is offset by more accelerated fees from early run-off in the fourth quarter.

Our total debt on our core assets was approximately $1.38 billion at March 31 with an all-in debt cost of approximately 4.51% compared to a debt cost of around 4.45% at December 31, mainly due to an increase in LIBOR during the quarter.

The average balance in our debt facilities was down to approximately $1.37 billion for the first quarter from approximately $1.44 billion for the fourth quarter, primarily due to the timing of moving certain assets into our CLO vehicles during the first quarter.

And the average cost of funds in our debt facilities decrease slightly to approximately 4.51% for the first quarter compared to 4.55% for the fourth quarter excluding one-time expenses related to the unwind of one of our CLO vehicles in the fourth quarter, mainly due to the maturity of our remaining interest rate swaps in the first quarter, partially offset by an increase in LIBOR.

Overall, net interest spreads in our core assets on a GAAP basis increased slightly to 1.88% at this quarter compared to 1.83% last quarter and our overall spot net interest spread was flat at 1.94% at both March 31 and December 31.

Additionally, we currently have approximately $175 million of undeployed capital that when fully utilized, should increase our net interest spreads over time.

Our average leverage ratio on our core lending assets including the trust preferred and perpetual preferred stock as equity was down to approximately 67% this quarter compared to 71% last quarter and our overall debt-to-equity ratio on a spot basis including the trust preferred and preferred stock as equity was 1.4:1 at March 31 compared to 1.3:1 at December 31.

Our OREO assets generated NOI of approximately $585,000 in the first quarter, the bulk of which was from the hotel property we own in Florida. As we discussed before, this property’s income is seasonal in nature with the majority of the income occurring in the first quarter.

We now project that we will produce NOI in 2017 of approximately $250,000 to $300,000 from this OREO asset resulting in a loss for the balance of the year again, due to the seasonal nature of this property’s income. And lastly, operating expenses were up slightly quarter-over-quarter excluding commission expenses on our agency loan sales.

This was mainly due to our annual non-cash restricted stock awards issued to our employees and directors as well as increases in our staffing on the agency business as a result of the significant growth we have experienced at our loan volumes and servicing portfolio. 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.

Chelsea?.

Thank you. [Operator Instructions]. And our first question comes from the line of Steve DeLaney with JMP Securities. Your line is now open. .

Thank you and congratulations guys on a strong start to 2017. .

Thanks. .

Hi, Ivan. I would like to start with the obvious synergy that exists between being in the bridge loan business and being in the agency permanent financing business. So pretty good pay off activity in 1Q, 13 loans 190. Can you comment on what percentage of those may have been multi-family? Obviously 80% of the portfolio is.

And were there any specific instances Ivan where you were able to convert one of those bridge loans into an agency loan for that particular borrower?.

Yeah, we’ll go through the first quarter and get back to you with exact data but we do capture meaningful percentage of what’s in the portfolio. As you know, when we originated the bridge loan, and if it’s multi-family, we originate it with the intention of taking out on the agency side and most of the time it’s successful.

The time we’re not successful is when the owner operator is so successful with the asset, he sometimes sells it and there’s no refinance opportunity. But our conversion rate is a majority at the time in general. .

Yeah, Steve I don’t have the conversion rate in front of me but over 80% of the loans that paid off in the first quarter were multi-family assets. So as Ivan said, we do have a pretty high conversion rate I don’t have that number in front of me but we often do capture a lot of that, that refinance bit. .

And remember, if they don’t go with us, there are certain exit fees, if they’re going with other lender, so we don’t capture the opportunity, we do capture some of that -.

Interesting on that exit fee.

Is that only if it’s paid off before the contractual maturity or is that even if – is that maturity but they still don’t - with you?.

The exit fee is always built with Arbor. .

Wow. Okay, great. That certainly does soften the blow of losing it. And then switching over to FHA loans, you had pretty good volume, $138 million that was 10% and there was none in 4Qs.

So I guess the question is, is there anything new about your marketing approach or any particular recruiting efforts or is it simply more coincidental that you had a good slug on FHA in the first quarter?.

I think you’ll see consistently higher level of production with- we’ve invested substantially with our technical people and also in the education of our sales force.

So the pipeline’s bigger, the number’s bigger and it’s a very fragmented business and putting together that team takes a bit of time and I think we’re starting to benefit from the effort that we put in over last two years in building that team. .

And Steve, it’s Paul, elaborating more on Ivan’s comments, that we have spent a lot of time improving on that team and as you know that business it takes a lot of time to get through the process and you have about $400 million pipeline right now in FHA, some of that is early stage, some of that is approved in rate locks.

So it all depends on the timing and we did see a good slug in the first quarter of stuff that was in our pipeline for a while, finally close. And the one thing I do want to add is the reason we really like that business as well is that’s a significant margin business as well. .

Yeah, that’s what I guess – we had always understood that at least they had the potential and I guess has to do with how rates move or something before you deliver. But it definitely sounds like it has the potential to have the highest profit margin in any of the three government entities. .

Yes. .

Okay, great. I think that’s it for me. Congratulations and we’ll look forward in seeing how the next quarter plays out. Thanks. .

Thanks, Steven. .

Thank you. And our next question comes from the line of Jade Rahmani with KBW. Your line is now open. .

Good morning. This is actually Ryan Tomasello on for Jade. Congrats on the strong quarter. .

Thanks, Ryan. .

In terms of the multi-family market overall, I was wondering if you could provide us with your high level views on demand, credit and transaction trends.

What’s your take on the notable slowdown we’ve seen in multi-family investment sales for the overall market? And how do you see that potentially impacting your business either on the structured or agency side?.

I think the idea from a credit side is to proceed with caution. We’ve had an unprecedented run-up in rent, so over the last seven to eight years. Assets are trading at very tight cap rates.

Although there are a lot of financing options available, whether it would be variable rates in 5, 7 and 10 year terms, there’s been a little bit of push up in rates from this time last year. But, we’re proceeding with caution. Our business is still robust. We’ve taken a little bit of conservative state.

Our small loan business which is a little bit more resilient, created a little bit higher cap rate and it doesn’t experiment the same level of run up in rent as the A market. It’s a little easy to work with. We’re also seeing a lot of multi-family units come online this year and next year mostly in the A side of the market.

So I would say there is a lot of pressure on the A side of the market and for us, it’s proceeding with caution. .

Great. And then, can you talk about competition primarily on the structured balance sheet side of the business? We’ve seen a few of your public peers talk about increasing competition of the past two quarters.

Are you seeing other players into the market in your space in particular, and how have loan spreads trended over the past few quarters?.

So, there’s no question about the fact that and you’re seeing in public markets that there are few new issues. Every day there is a new debt fund and the competition is fierce. The advantage that we have is we have an active originations at work where very granular in our approach.

We manufacture and generate our own profit, very active sales force and very deep network relationships. Many of the funds that are out there are active bidders on loans. So if loans come to market through an investment banker or a broker, you can have 5, 10, 15 people bid on that project.

That’s not a market we participate in, but we do see a lot of competition. We see it a little less on the smaller loan side which is where we are very active, but make no mistake about it, spreads have tightened a little bit. Clearly, our last securitization being as tight as it was has allowed us to remain competitive and still maintain our margins.

But it is more competitive and the advantage that we have is consistent originations at work, being able to work on smaller loans, having 10 year history with our borrowers. But as you get into bigger loans, it does get more competitive and those bids get much tighter. .

And then just turning to credit, were there any notable trends sequentially either in the structured or at risk agency portfolio? Maybe if you could talk about the impaired balance sheet portfolio which I believe is about $200 million and what the outlook is for those loans?.

I think on our last quarterly review of our agency book, our book is very strong. We’ve actually seen the NOIs that we’ve underwritten compared to where they perform, performance versus the underwritten are better and we have seen good trends in our portfolio. So we’re fairly confident in what we’re seeing, despite our concern with flattening rents.

So that is pretty secure. Overall, our transitional book has remained solid. I’ll let Paul walk through some of the notables. .

Sure. And Ryan, we haven’t really had a change in last several quarters in any impairment related items on our transitional book from a lending perspective, so it’s still standing around that, $187 million with roughly $83 million of reserves against it.

We don’t see any real movement, once in a while we get a recovery here or there or maybe put a little more here or there away, but there’s not been any meaningful move in those impaired assets over the last several quarters. .

Great. Thanks for that color.

And then just lastly, what’s management’s view towards additional M&A or other strategic initiatives? Is there a potential for acquisition on the agency side of other platforms and perhaps certain opportunities for the balance sheet business, and perhaps you can give us an update on the internalization option?.

Clearly, we’ve just absorbed this last acquisition to bring the company to where it is today and we’re real comfortable with that. We have a strong history of acquiring companies and build companies both organically and through acquisition.

We think if there is volatility in the market, we’ll give this management team the opportunity to grow by acquiring other businesses that are complementary to this business. And we’re clearly always in discussion on that.

If there is another agency platform that’s available, that becomes complementary to what we do here, we’re always on a look out for that. So I wouldn’t be surprised in our future if that’s another vehicle, a way for us to grow. .

Yeah, and Ryan on the management contract you asked about, we haven’t received formal notice yet from the Board that they would like to exercise their option but it’s always been the intention to think of both sides, to clean that up and get this company internally managed as quick as possible.

We can’t tell you exactly what date that will happen but we do expect that that’s the short-term horizon. .

Great. Thanks, guys and congrats again on the strong quarter. .

Thanks. .

Thank you. And our next question comes from the line of George Bahamondes with Deutsche Bank. Your line is now open. .

Hey guys. Good morning. So my questions were on the FHA business, few questions on competition and credit trends. Seems like you’ve ventured majority of what I was hoping to ask.

Just one more here, did you guys disclose the amount of loans that were close in Q? I know you had mentioned that, there were some timing issues there, I don’t know if I missed that during your remarks. .

Sure. So George, we did disclose in our prepared remarks that we had about roughly $85 million or $100 million of loans that were scheduled to close at the end of March for our transitional lending operation that sell over into the early weeks of April.

So that was what we disclosed and we did also disclose that we think based on the size of the pipeline, and that early jump that we do think the volumes will be up in the second quarter.

And although it’s hard to predict where run off will be by quarter, we are still projecting even with the light of first quarter that our overall growth for the year should be similar to what the growth we had in ‘16 on our transitional balance sheet side. .

Great. That’s helpful. That’s it for me, but if I have any questions, I’ll make sure to reach out to you. .

Thanks. .

Thanks guys..

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Mr. Ivan Kaufman for closing remarks..

Well thanks everybody for joining us on today’s call. Clearly our first quarter operating results were outstanding and we look forward to [indiscernible]. Thank you. .

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day..