Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 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, this conference is being recorded.

I would now like to introduce your host for today's conference, Paul Elenio, Chief Financial Officer. Please begin, sir..

Okay, thank you, Norma. 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 June 30, 2019. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to 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 outstanding quarter which continues to demonstrate the diversity of our operating platform and value of our franchise.

We are very pleased with the growth in our business, which has consistently increased our baseline of predictable and stable earnings allowing us to once again increase our quarterly dividend to $0.29 a share, which represents our second increase this year and reflects annual run rate of $1.16 per share, up from $1.08 per share.

Additionally, the significant growth we experienced in the second quarter continues to increase our run rate of core earnings making us very confident in our ability to comfortably maintain our current dividend as well as grow it in the future.

And based on our new dividend and yesterday's closing price, we are trading at a dividend yield of approximately 9.5% which we believe is not nearly reflective of our true value.

The quality and diversity of our income streams along with a consistency of our earnings clearly differentiates us from our peers, which is why we believe we should consistently trade at or lower dividend yield than our peer group. To highlight our success further, I would like to talk about the growth we experienced in both our business platforms.

In our agency business, we grew our servicing portfolio another 3% in the second quarter and 14% over last year, and is now at $19.5 million. This portfolio generates a servicing fee of 44 basis points and has an average remaining life of nine years, which reflects 11% increase in duration over the last two years.

As a result, we have created a very significant predictable annuity of income of $85 million growth annually and growing. The majority of which is prepayment protected.

And this growth in our servicing portfolio also continues to increase the annuity of income from our AFCO [ph] balances further contributing our growing annual run rate of core earnings. We also had a very strong originations quarter closing $1.3 billion in agency loans.

And our pipeline remains strong providing us with confidence and our ability to produce significant origination volumes for the balance of the year. We are also very pleased in our ability to continue to generate strong margins on our loan sales despite the extremely competitive landscape.

And these income streams from our agency platform continues to create significant diversity and high level of certainty in our income sources. With respect to our balance sheet business, we have experienced tremendous growth in our loan book.

We grew this portfolio 24% in 2018 and another 20% already for the first six months of this year on record second quarter originations of $1 billion. Our balance sheet portfolio is now a 3.9 billion and significant growth we experienced in the second quarter will continue to increase our run rate of net interest income going forward.

It is also significant to note almost 80% of our portfolio is in multifamily assets which is clearly one of the safest and best asset classes. We also have a very robust pipeline which will allow us to continue grow our loan book for the balance of this year.

And as a result of the strong pipeline, we elected to raise 105 million of fresh capital in the second quarter for our common stock issuance which will be immediately accretive to our core earnings as this capital will be used to fund our growth.

And again the income generated from our loan book is a significant component of our earnings and we remain very confident in our ability to continue to grow this income stream.

In the second quarter, we closed our 11th and largest non-recourse CLO securitization vehicle with 650 million of assets and significantly improved terms including reduced pricing increase leverage in a three-year replenishment feature.

The tremendous success we continue to experience in the securitization arena combined with our ability to substantially reduce our debt costs in all of our borrowing facilities has allowed us to achieve significant economies of scale and maintain our margins in a very competitive market.

Updating you now on a single-family rental business, we continue to make tremendous progress in developing our platform and building out the appropriate infrastructure as we remain committed to becoming a leader in this space.

We're very pleased with the talent we've been able to attract with the continued growth we've seen in our pipeline of opportunities by leveraging off of our existing originations capacity and capabilities.

We believe this is a phenomenal business with and enormous opportunities in both the bridge and permit lending products, and we are confident that will build this out to be a significant driver of yet another income stream and further diversify our lending platform.

Over the past few years, we have outperformed our peers delivering consistent annual shareholder returns of approximately 30%.

We are complete operating platform with a significant diversified income streams most of which are long dated included income from our serving portfolio, escrow balances, balance sheet business and single-family rental investments.

We are also leaders in the CLO securitization arena and continue to generate significant efficiencies from the right side of our balance sheet. We feel we are significantly under value given the stability and diversity of our income streams and that we should be trading substantially higher than our current market price.

And we believe there is significant opportunity for additional appreciation in our stock price to our shareholders. I will now turn the call over to Paul to take you through the financial results..

Okay, thank you, Ivan. As our press release this morning indicated we had a very strong second quarter generating adjusted AFFO of $39 million or $0.34 per share.

These results reflect an annualized return on average common equity of 15% which continues to demonstrate the earnings power of our capital-light agency business as well as significant growth and cost efficiency we're experiencing as we continue to scale our balance sheet business.

And as Ivan I mentioned, we are very pleased with our ability to once again increase our quarterly dividend to $0.29 a share reflecting a 16% increase from a year ago and remain confident in our ability to increase our dividend in the future as our annual run rate of core earnings continues to grow.

Looking at our result from agency business, we generated approximately 20 million of pretax income in the second quarter and approximately 1.3 billion originations and 923 million in loan sales. The margin on our second quarter sales was 1.54% including miscellaneous fees up from 1.49% of an all-in margin on our first quarter sales.

We also recorded 19 million of mortgage servicing rights income related to 1.3 billion of committed loans during the second quarter representing an average MSR rate of around 1.44% compared to 1.68% rate for the first quarter mostly due to some large deals that we closed in the second quarter which generally have a lower servicing fee.

Our servicing portfolio grew another 3% during the quarter to 19.5 billion at June 30, with a weighted average servicing fee of 43.6 basis points and an estimated remaining life of nine years.

This portfolio will continue to generate a predictable annuity of income going forward around $85 million gross annually, which is up approximately $5 million on an annual basis from the same time last year.

Additionally, early runoff and our servicing book continued to produce prepayment fees related to certain loans that have your maintenance provisions. This accounted to $3.5 million in prepayment fees in the second quarter, which was down from $5 million in the first quarter.

The earnings associated with our escrow balances also continue to grow and contribute meaningfully to our recurring income streams. We currently have approximately $885 million of escrow balances, which are earning approximately 2%.

And the earnings associated with these balances are up approximately $7 million on an annual run rate as compared to this time last year. And our balance sheet lending operation, we grew up portfolio, another 15% in the second quarter to $3.9 billion.

And based on our current pipeline, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future. A $3.9 billion investment portfolio had an all-in yield of approximately 7.34% at June 30, compared to 7.71% at March 31.

The average balance in our core investments was up from $3.3 billion last quarter to $3.6 billion this quarter, due to our first and second quarter significant growth.

And the average yield on these investments was up to 8.24% for the second quarter, compared to 7.84% for the first quarter, mainly due to default interest collected on a second quarter loan payoff, as well as more acceleration of fees from early runoff in the second quarter. Total debt on our core assets was approximately $3.6 billion at June 30.

With an all-in debt costs was approximately 4.96% compared to a debt cost of around 5.22% at March 31, mainly due to lower costs debt from our new CLO that closed in the second quarter, as well as from reduction in LIBOR.

The average balance in our debt facilities was up to approximately $3.4 billion for the second quarter from $3 billion for the first quarter.

Again due to financing portfolio growth, and the average cost of funds in our debt facility increased to approximately 5.35% for the second quarter, compared to 5.24% for the first quarter, due to $1.2 million of non-cash fees that were accelerated from the early unwind of CLO IV, which was replaced with our new CLO during the quarter with much lower borrowing costs.

Overall net interest spreads and our core assets were up significantly to 289 this quarter compared to 260 last quarter, again, mainly due to interest in more acceleration of fees from early runoff in the second quarter.

And our overall spot and interest spread was down to 2.38% at June 30 compared to 2.49% at March 31, mainly due to higher interest rates on run office compared to originations during the quarter.

The average leverage ratio on our poor lending assets including the trust preferred, and perpetual preferred stock as equity was up slightly to 81% in the second quarter, as compared to 79% for the first quarter, due to the increase leverage we obtained in our new CLO and overall debt-to-equity ratio on a spot basis, including the trust preferred and preferred stock as equity was also up to 2.621 at June 30, from 2.4 to 1 at March 31, mainly due to the timing of the closing of our latest CLO vehicle.

Lastly, we also had a very strong quarter from our residential banking joint venture. This investment generated $2.6 million of income to us in this quarter compared to 800,000 last quarter, mainly due to the success we continue to have in building out the retail branch network and from the current interest rate environment.

And this success continues to demonstrate the diversity of our income streams and the value of our operating franchise. That completes our prepared remarks for this morning. I will now turn it back to the operator to take any questions you may have at this time.

Norma?.

Thank you, [Operator Instructions]. Our first question comes from Steve Delaney with JMP Securities. Your line is now open..

Thank you. Good morning, guys, and congratulations on the strong quarter. I'd like to start with the bridge portfolio that record of 1 billion, I mean, that's quite a move up from the last record which looks like it was 780 -- 186 million in 4Q, '17. So didn't just skip by a little bit, you nailed it.

What I'd like to know is we get an average loan size about $25 million, is there anything some big lumpy loans, anything really large in there that cause the volume to be so much higher than it had been previously?.

So, hey, Steve, thanks for coming..

Yes..

It's Ivan. We had one large loan in there.

I think it was -- what was it, Paul, about 250 million?.

265 million..

265 million, which was really a number of multiple properties, but what really happened overall was with our execution and lowering our borrowing costs, [indiscernible] maintain our margins, and be a little bit more competitive in the market.

And we also made a little bit of an aggressive move, because a lot of our loan book has LIBOR floors, and we felt that we'd pick up a lot of income in the future, and have a real nice opportunity if we were a little aggressive in the last quarter. And as LIBOR would drop, we would be able to enhance how margins going forward.

So it's a little bit of a strategic decision stimulated by the fact that we are able to have very good execution in the CLO market..

Got it? And is that the largest bridge loan that Arbor has ever made?.

I think it's the largest bridge loan that we've made, but it consists of multiple properties, I think….

A portfolio of financing, yes..

-- and what portfolio, and for us, it was not just the bridge loan what was attractive, what's attractive is that will be executing that portfolio into either Fannie and Freddie or the CMBS market over a 24-month period?.

Interesting..

So not only we will have the opportunity to have this spread income, but we will be able to have potential servicing and gain on sale in the future. So it was another strategic move on our part..

Steve, I've --.

And we noticed. Yes, Paul..

It was our biggest bridge loan and it is collateralized by 56 properties in multiple states..

Wow! Okay. Thank you. That's good color. And obviously, we noticed possibly because of the large loan, possibly just because of new loans versus old loans, that the weighted average coupon fell by about 37 basis points down to 734, about 494 over LIBOR, spot LIBOR at June 30.

Just curious if the trend and spreads if you're continuing to see pressure, and if you could comment, sort of on what the general range of spreads over LIBOR that you're currently able to achieve on your new bridge loan production?.

Sure, I think spreads are generally in the 275 to 350 range..

Okay..

And that's down from maybe 3 to 375. And that's offset by reduced borrowing costs. But as I said, a lot of that is mitigated by having a higher LIBOR floor. I think that spreads probably will make maintain that level, but the LIBOR as you know, is dropping..

Yes..

And our outlook is -- it's down to about two in a quarter now. I think we wouldn't be surprised to drop to 200 to 175 over the next six months. So I think that'll keep spreads a little bit where they are. I don't see that much of a tightening, maybe 25 basis points at best..

Got it. And then just one final thing from me, Chris was looking at this credit risk rating table in the 10-Q. And we noted that the land bucket appeared to be moved up to special mentioned from a previous weighted average rating of substandard.

And on the other hand, the self-storage sector was moved down to special mentioned from pass watch, I was just curious you can give us any color on kind of what's going on in those buckets.

If they were any significant movements, they are in particular loans?.

Yes. I don't think. Hey..

On the self-storage, I can comment on I mean, what you're seeing, which is typical, is anything that can be exited to more permanent financing is being exited. So you're perhaps seeing a movement on the self-storage where, the best stuff is moving out, the stuff in the middle is still maturing and it'll be moved down over time.

And I probably just want to trend this on….

I see. Got it..

And on the land side, Steve it's just the product of that's a weighted average rating for all the land deals and we did a land deal I think in the first quarter, which is brand new and performing well. So it just picked up the weighted average to a better rating for that bucket..

Got it. So just sort of the transitioning of stuff and when you get weighted averages and something large moves, I get it, I get it.

So but generally speaking, would you say that in the quarter that were, were there any material new credit problems that you identified that you have some concern about?.

No, we are quite comfortable..

Yes, not at all..

Thank you both for your comments. I appreciate it..

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

Hi, everyone. This is actually Ryan on for Jade. I've been just given the strong half of the year, first-half of the year for the GSE. I was hoping you can give us your thoughts on just your outlook for the GSE market overall, in the back half.

Have you seen any, either agency change pricing recently to manage the volumes and the caps? And do you think there's any chance that we see the caps adjusted considering the strong volumes here today?.

I think that they are definitely widening a price in step-by-step and I'll continue to do it to slow the volume a little bit that in many ways is beneficial to us, so I think it'll enhance our margins because as they compete on margins, that means we also have to compete.

And I think they -- my prediction is they will not be a rise in the cap at all, a lot of our business is on cap, so we're not as effective as other people, but I don't predict they'll be any rise in cap whatsoever..

Okay.

And then, just on the overall multifamily environment fundamentals, any changes with respect to your thoughts on the fundamental environment and underwriting and credit quality? I think I have in past quarters; you've alluded to an increasingly frothy environment and the need to continue sharpening your pencils?.

I think that my concern is the amount of liquidity in the market and the competition and thats what would cause it to be frothy with respect to the fundamentals of occupancy and they are still very solid, rent growth seems to be continuing.

We're not that active in the luxury end of the market, which I feel is the most vulnerable part of the market, we are more workforce house and DNC type housing and that market continues to be strong.

And cap rates are still, especially with a drop in interest rates still at very tight levels but maybe even a little tightening coming on our way given the drop in a 10 year..

And with respect to the New York City rent control legislation, could you give us your thoughts on what you perhaps might think would be the longer-term impact in the market from there from that on cap rates and values? And Paul, maybe if you can, let us know, if you Arbor has any direct exposure there and wondering if you've seen any transactions yet in that space, post the legislation?.

Sure, well, if you're dealing in the rent regulated side of the business, you're going to see some cap rate expansion, so you're not going to be able to see, significant increases in income.

So the way we've been looking at it, assets for trading and cap rates around 3.5 to 4 or probably 3.5 more with the opportunity to raise rents, improve apartments and get to a stabilized five cap. That was the way people buying. I think that you'll see rent regulated apartments being more like in a 4.5 cap.

So, just if you do the math, on an appraised value basis, you'll see a diminution of value for rent, people who were loaned to rent regulated apartments around 20%. That's the way for outlook. Paul will give you the numbers. We have very, very little exposure to the sector.

But Paul, you have a little, do you have some numbers?.

You are right, Ivan. We have, Ryan, we've done this map scrubbed our portfolio. We have a $3.9 billion balance sheet portfolio. As you know, we're an active multifamily lender in New York City, we have very little exposure to rent control, rent stabilized. In fact, right now, our exposure is probably under $140 million on that $3.9 billion.

It's probably two or three deals..

And anything in the servicing book?.

On servicing book, we've looked at that as well, it would just be the Fannie book, obviously. So in a Fannie book of $14.1 billion, we have less than $300 million of those types of assets as well..

And on the balance sheet book, do you have the LTV on those 140 million loans?.

I don't know, if I have that with me currently. Actually, I'm looking at --.

Yes, we don't see any significant impairment with respect to the Fannie Mae book that we have loans that are underwritten on current cash flow not a projected value. So, cash flow that exists has not been impacted.

It's really the future growth and I would be on the bridge portfolio, on our bridge portfolio loans that we have, it's not a majority of the units, it's partial units and buildings. The amount that we have is very negligible..

And I'm seeing in LTVs somewhere around 70%..

Great, thanks for all that color..

Thank you. [Operator Instructions] Our next question comes from Lee Cooperman of Omega Advisors. Your line is open..

Thank you. You guys have done a massive job of raising new capital, employing it intelligently. Ivan you seem very enthusiastic about the outlook. You feel your stock is very mispriced but we continue to raise capital. So I'm just curious how you look at the cost of capital embedded in your stock price versus the prospective returns of capital you see.

And obviously as part of that question is how do you feel about capital adequacy currently.

If somebody wants to buy $100 million of stock, right now at the last sale would you do it? Can you put that capital to use?.

Raising capital is a complex matter for us and various ways we've been able to raise capital. And we look at our loan book, we look at our other needs to grow the business and we look at the economies of scale by the way we grow our business and we look at what's in the pipeline.

So we do it very strategically and we try and be very stingy about when we do it and we make sure it's accretive. Right now we put the capital to use. I think we put it to good use.

We think it's going to be extremely accretive and depending on how the pipeline continues to come in and pay-offs are and that needs to grow our business will dictate what our capital needs are. So if you put $100 million in my hand today, I'd have to evaluate our ability to deploy that.

How accretive would be to our dividend and what it would do to our business, and these are things that we're consistently evaluating..

So what you're saying is if you do raise capital, you would do it on a basis where you will be accretive to the distribution looking at?.

We only do it where we feel it's accretive..

You've done a great job. So, a realignment, thank you..

Thanks Lee..

Thank you. And our next question comes from Rick Shane of JPMorgan. Your line is open..

Hey, guys. Thanks for taking my question. Two things, one is obviously we saw a nice pickup in gain on sale margin this quarter. I'm assuming some of that has to do with the move in rates during the quarter and the value of those loans going off.

It is noteworthy though that in the quarter, your loan sales are choosing your commitment exceeding your loan sales by more than any other quarter we can track. That suggests that there is a lot of dry powder to sell in the third quarter.

Should we continue to see the strength in the gain on sale margins on those incremental loan sales given the movement in the rates?.

So hey Rick, it's Paul. So you're right in one aspect that if you look at the -- and the best measure for that is look at the held for sale balance, so you're right. We did have a significantly more committed loans and sales which tells you that our June was a significant quarter. We have $600 million sitting in held for sale.

So we did have a very, very strong June agency month. So that'll dictate that plus whatever we close in July and August will dictate what your sales volume is.

As I said in my commentary, we've been unbelievably impressed with our ability to maintain our margins and actually have our margins grow considering how competitive it is, it's a product of many things and Ivan will comment on the market but it's also a product of size as well.

And in the second quarter at the end of the quarter, we did some larger deals. And that's why you saw that my MSR rate had dropped quarter-over-quarter because we had done some larger portfolio deals in June. Those normally will come with a little lower margin but they also come with a lower commission.

So based on what I see of June, the margin may come in a little bit. I don't know what July and August are going to show but that's kind of the indicator that we see based on where margins will go and I'll let Ivan comment on what he thinks the market is showing..

So in prior calls we spoke about our strategy to have similar volumes on our agency business as we did last year and most of the market was going to be showing increases in volume -- we could have shown increases in volume but we elected to manage our margins, manage our volume, and manage our staffing.

And I think that is a very good reason as to why we have been able to maintain our margins. Very often people fight fully charged. And when you fight fully charged, you want to do business that lasts. And it doesn't affect your incremental business. It affects your entire business.

And as a firm, we decided not to go heavily [ph] charged, not to worry about whether we are the eight, seventh, or sixth or fifth largest lender, but to maintain integrity of our margins, our staffing, and not get sloppy. And I think that is a lot of to do with why we were able to maintain it.

And as Paul mentioned, in the loan sizes which we traffic, there is a little less sensitivity on the margin side. As you go to bigger loans, they become more competitive and people are willing to work for a lot less. So, I put those two factors together and our ability to maintain our margins in a competitive environment..

Got it. That's helpful.

So -- I am hearing -- the way I am understanding this is volume should be -- loans sold in the third quarter should be particularly strong given the strength of June volumes, but probably unfair to read through that you would see further margin increases likely given the larger loan sizes in the month of June, a little bit of compression from the good number -- particularly high numbers you saw in -- on day one sale in Q2?.

Yes, that's right, Rick. And as far as your first comment, June was the first month, so we wanted to believe our seva [ph] and we will be very strong in the third quarter, but we got to see where July and August come in, but we got off to a great start with June being strong as it was..

Great. Thank you for the clarity guys. Appreciate it..

All right..

Thank you. At this time, I am showing no other questions in the queue. I'd like to turn the call back over to Mr. Ivan Kaufman for closing comments..

Okay. Well, thanks everybody for participating today. It was another fantastic quarter. And as I mentioned in my scripted remarks, the pipeline is strong with a lot of momentum. And we are very optimistic about the balance of the year. Everybody have a weekend and the rest of the nice summer. Take care..

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone have a wonderful day..