Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019 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]. Now, it's my pleasure to turn the call over, the conference over to your Chief Financial Officer, Paul Elenio. Please go ahead..

Okay. Thank you Carmen 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 and year ended December 31, 2019. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

And before we begin, I just want to inform you that Ivan is in transit due to some unforeseen travel issues this morning. His audio sounds clear, but to the extent that we lose him, I will pick up his prepared remarks and then we will get him back.

So before we begin, I need to inform you that statements made in the 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 will 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. We are very excited today to discuss the significant success we had in closing out 2019 as well as our plans and outlook for 2020.

As you could see from this morning's press release, we had an outstanding fourth quarter with tremendous operating results which continues to demonstrate the strength of our brand and the value of our operating franchise.

Additionally, the significant growth we have experienced in 2019 has provides with a very strong baseline of predictable and stable core earnings heading into 2020 making us very confident in our ability to comfortably maintain our dividend as well as grow it in the future.

Over the last five years, we have delivered annualized shareholder returns of approximately 30%, significantly outperforming our peers in each and every year.

And this performance, combined with the quality and diversity of our income streams along with the consistency of our earnings and low dividend payout ratio, clearly differentiates us, which is why we believe we can consistently pay the lower dividend yield at a substantial premium to our peer group.

Focusing now on out 2019 accomplishments, some of our more significant highlights include generating substantial growth in our core earnings allowing us to increase our dividend three times to an annual rate of $1.20 a share up from $1.08 per share, delivering a total return of 54% in 2019 and 175% cumulatively for the last five years with an annualized return of approximately 30%, achieving returns on equity of 14.5%, a 35% increase from last two years, producing record originations of $7.6 billion, a 12% increase from our record 2018 numbers, increasing our balance sheet portfolio 30% in 2019 to $4.3 billion, growing our servicing portfolio to $20 billion, an 8% increase from 2018 and a 48% increase over the last three years, continuing to be a market leader in the non-recourse securitization arena closing two new CLOs totaling $1.3 billion with improved terms and flexibility, achieving significant economies of scale with substantially reduced debt cost in all of our borrowing facilities allowing us to maintain our margin in a very competitive market, raising $450 million of accretive growth capital to fund our growing pipeline and increase core earnings and increasing our market capital approximately $2 billion allowing us to access growth capital more efficiently and effectively.

To highlight this incredible success further, I would like to talk about the growth we experienced in our business platforms. In our agency business, we grew our servicing portfolio 8% in 2019 and 20% over the last two years.

This servicing portfolio is now over $20 billion with a servicing fee of 44 basis points and having average remaining life of nine years, which reflects a 10% increase in duration over the last two years.

As a result, we have created a very significant predictable annuity income of $88 million gross annually and growing, the majority of which is prepayment protected and this growth in our servicing portfolio also continued to increase our annuity income from our escrow balances which is currently earning $16 million annually for a combined annual run rate of servicing income and escrow earnings of $104 billion, which represents approximately 40% of our total annual revenues.

We also produced significant origination volumes, closing $1.3 billion in agency loans in the fourth quarter and $4.8 billion for the year with strong margin in a very competitive market.

And with a diverse origination platform and strong footprint in the multifamily affordable housing market, we are confident we will increase our origination volumes in 2020.

In addition, as we talked about in our last call, we were active with our new Arbor private label product, which we launched as a result of the disruption in the agencies during the third quarter of last year, we closed $400 million of this product in 2019 and expect to close an additional $200 million to $300 million in the next few months and issue our first securitization of around $600 million to $700 million in the second quarter of this year.

We are pleased with our progress to date and believe this product further diversifies our lending platform and will also act as a mitigant against further changes and disruptions with the agencies. With respect to our balance sheet business, we have experienced tremendous growth in our loan book.

We grew this portfolio 24% in 2018 another 305 in 2019 on $2.8 billion in originations. Our balance sheet portfolio is now at $4.3 billion and the significant growth we experienced will continue to increase our run rate of net interest income growth going forward. And it is also significant [indiscernible] multifamily assets which.

And we also have a very robust pipeline which will allow us to meaningfully grow our loan book in 2020 and significantly increase our [indiscernible].

In our single family rental business, we continue to make progress in developing our platform. We have closed approximately $150 million of SFR product to-date and we are pleased with the opportunities we are seeing to meaningfully grow this business in the future and our pipeline continues to grow significantly.

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

We also continue to have tremendous success through our securitization expertise and our strong banking relationships and substantially reduced our debt costs, which has allowed us to achieve significant economies of scale and maintain our margins in a very competitive market.

In the fourth quarter, closed our 12th non-recourse CLO with $635 million of assets and significantly improved terms including reduced pricing, increased leverage and a three-year replenishment feature.

We were also very successful in the fourth quarter in exchanging our 5.25% convertible debt with a new three-year convertible debt issuance with fixed rate of 4.75%.

This transaction had many significant benefits including reducing our interest cost, resetting both our conversion price and dividend protection on the new bonds and much higher levels of generating up to $30 million of additional capital to fund the growth in our business.

Overall, we are extremely pleased with our 2019 results and the tremendous success we continue to have with our operating platform and greatly enhancing the value of our franchise. Our results have been truly remarkable and they consistently outperformed our peers.

We have created a strong baseline of diversified predictable core earnings heading into 2020 and we are also very excited about the future growth opportunities across our business lines.

It is also important to note that we have made a strategic decision to increase our cash balance, which is approximately $500 million with cash and liquidity on hand for operations.

We believe, at this point in the cycle, it is very prudent to have submission amount of cash available that will put is in a very offense position as we transition to a different part of the cycle.

And even with these high cash balances, we have been able to consistently grow our earnings and dividends and remain very confident in our ability to continue to grow our dividend in the future. I will now turn the call over to Paul to take you through the financial results..

Okay. Thank you Ivan. As the press release this morning indicated, we had a very strong fourth quarter and full year 2019.

As a result, AFFO was $42.1 million or $0.34 per share for the fourth quarter, excluding a one-time loss in the early exchange of our convertible debt securities of $7.3 million and $6.1 million in unrealized gains on hedges related to our private label business.

We have excluded the hedging gains related to our private label business from the AFFO since these loans have not yet been securitized or sold and the earnings process is not yet complete.

We intend to adjusted AFFO in the future, spreading hedging gains or losses associated with these loans in the quarter in which the loans are sold to properly reflect the true economics of these transactions.

We also generated ROEs of approximately 14.5% in 2019, representing a significant increase over the last two years which continues to demonstrate the earnings power of our capital light agency business as well as the significant growth and cost efficiencies we are experiencing as we continue to scale our balance sheet business.

As Ivan mentioned, we are very pleased with our ability to continue to generate core earnings in excess of our current dividend and remain confident in our ability to comfortably maintain our current dividend as well as grow it in the future. Looking at the results from our agency business.

We generated $37 million of pretax income in the fourth quarter on approximately $1.3 billion in originations and $900 million of loan sales. The margin on the fourth quarter sales was 1.55% including miscellaneous fees, up from 1.43% all-in margin on our third quarter sales.

We also recorded $28 million of mortgage servicing rights income related to $1.2 billion of committed loans during the quarter, representing an average MSR rate of around 2.32% compared to 2.02% rate for the third quarter, mostly due to a change in the mix of our fourth quarter loan production.

Our servicing for portfolio also grew another 8% in 2019 to $20 billion at December 31, with a weighted average fee of approximately 43.8 basis points and an estimated remaining life of 8.8 years.

This portfolio will continue to generate a predictable annuity of income going forward of around $88 million gross annually, which is up approximately $4 million on an annual basis from the same time last year.

Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $4.7 million in prepayment fees in the fourth quarter compared to $5.3 million in the third quarter.

In our balance sheet lending operation, we grew our portfolio up 30% to $4.3 billion on $2.8 billion originations in 2019.

The significant growth continues to increase our core earnings run rate and based on our current pipeline and deep origination network, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future.

Our $4.3 billion investment portfolio had an all-in yield of 6.68% at December 31, compared to 7.04% at September 30, mainly due to higher rates on runoff as compared to new originations during the quarter and from a reduction in LIBOR which was partially offset by LIBOR floors in a portion of our portfolio.

The average balance in our core investments was relatively flat at approximately $4 billion for both the third and fourth quarters despite our fourth quarter growth, mainly due to the timing of originations and runoff in the fourth quarter which tends to be later and the average yield on these investments was 7.18% for the fourth quarter compared to 7.31% for the third quarter mainly due to higher interest rates on runoff as compared to originations and from a reduction in LIBOR which was partially offset by more acceleration of fees from early runoff in the fourth quarter.

Total debt on our core assets was approximately $3.9 billion at December 31 with an all-in debt cost of approximately 4.35%, compared to a debt cost of 4.65% at September 30, mainly due to a reduction in LIBOR and from reduced borrowing costs on our new CLO in the fourth quarter.

The average balance in our debt facilities was up to approximately $3.76 billion for the fourth quarter from $3.52 billion for the third quarter, mostly due to senior unsecured notes that we issued in the fourth quarter and the average cost of funds in our debt facilities decreased to approximately 4.60% for the fourth quarter compared to 4.87% for the third quarter, due to a reduction in LIBOR and from lower borrowing costs associated with our new CLO which was partially offset by $1.4 million of non-cash fees that were accelerated from the early unwind of CLO VII in the fourth quarter.

Overall, net interest spreads in our core assets increased to 2.58% this quarter compared to 2.44% last quarter mainly due to the positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing costs from our recent CLO execution.

And our spot net interest spread was down slightly to 2.33% at December 31, from 2.39% at September 30, mainly due to higher interest rates on runoff as compared to originations, partially offset by a positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing cost in CLO XII.

And lastly, the leverage ratios in our core lending assets including the trust preferreds and perpetual preferred stock as equity was up to 83% in the fourth quarter from 80% in the third quarter due to our new unsecured debt issuance and increased leverage on CLO XII.

And our overall debt-to-equity ratio on a spot basis was flat at 2.5 to one at both December 31 and at September 30. That completes our prepared remarks for this morning. I will now turn it back to the operator to take any questions.

Carmen?.

[Operator Instructions]. And our first question comes from Steve DeLaney with JMP Securities. Please go ahead..

Good morning everyone and Happy Valentine's Day. It's probably not a bad thing for all of us to take one day to think more about love than mortgages. So Ivan, good to have you with us.

Can you share with us what your 2019 rankings were with Fannie and Freddie?.

I think we were once again for the 13th year in a row a top 10 Fannie Mae lender. I think our ranking came in at nine. We were the number one Small Balance Lender for Fannie Mae. And for Freddie Mac, I think we were the number three Small Balance Lender for the Freddie Mac small balance program..

That's correct..

Okay. Thank you. And then the new caps, everybody kind of focuses on the $20 billion a quarter, but you can only do $20 billion a quarter at 37.5% if that is affordable.

And can you comment on that affordable segment and the size of that and how the profile of your customer base versus maybe some other larger lenders might fit in and the prospects that your market share with the GSEs because of that 37.5% might have a tailwind and might go up in 2020?.

Well, we do have one of the largest percentages of the affordable in meeting the housing goals for the FHFA. So we are viewed very favorably. And we don't have to scramble like other lenders do when doing their part. On the other hand, we don't know what's going to happen in the third and fourth quarter if they are not meeting their 37%.

But we are being viewed very favorably and being treated very well..

Okay. Thank you. And you commented on the private label that you hope to do a securitization in the second quarter. You are $400 million at the end of the year.

What is sort of that target size to do a securitization?.

Well, our minimum target size is $350 million. That was the minimum target. And because the transaction costs get spread out over the volume, so getting to $700 million is a significant achievement for us above what we projected transaction costs to be more efficient..

Great. And that kind of cost, it kind of ties into my last question on that.

Can you give us a sense that the execution on that and the leverage, how you think the return on your equity in that private label CMBS might compare with the returns you are seeing today on your structured business?.

Well, I can't front run the market. We are not permitted to do that..

Understood..

But everybody who has goals can understand that credit spreads are tight significantly since we saw the origination process. So we are very optimistic in our very efficient execution and we are being viewed very, very favorably in the market for having a multifamily-only securitization.

And the risk retention part by maintaining our own BPs with what we are uniquely qualified to do based on our capital structure. You can look at various [indiscernible] from our investors. So fingers crossed. We are feeling very optimistic and comfortable and could set this platform off to really surge well ahead of most other platforms in the market..

And long duration cash flows as well. So thank you. Thank you for all those comments. Thanks Paul..

Thanks Steve..

[Operator Instructions]. And our next question is from Jade Rahmani with KBW..

Good morning everyone. This is Ryan Tomasello, on for Jade. Thanks for taking the questions..

Hi Ryan..

Hi everyone.

Just considering the potential tailwind that Ivan was just talking about and given the affordability component on the GSE side and coupled with the ramping of the SFR business on the structured side, can you give us a sense of what you are targeting for originations in 2020 in both of those business, maybe on a nominal or just kind of growth rate basis?.

So le me give you an overall on our outlook on the agency business. It is kind of consistent with my comments last year. What we decided last year was to give flat guidance to our prior originations and pretty similar in the future. And it's not so much that we can't originate more, but we have chosen to maintain our margin in our credit.

So we didn't grow our agency business as big as some of the other lenders did but that was by choice and design. So our guidance could be maybe slightly higher than what we did last year on the agency side. With respect to the SFR business, we are so excited about the opportunities there. It's an enormous market.

We are assembling and have assembled quite a staff. It's taking time and expense. And while it didn't contribute economically in the last year and probably it drained, we are expecting a positive contribution. We are closing about $150 million. That space is divided into three components, as we see it.

Single-family rental to build, which we feel we will be the dominant lender in and we are very active in that. We are creating the product in that space. We have a huge pipeline.

And then we have the single-family bridge to securitization of the middle market, which is generally people who are buying anywhere between 25 to 250 units which we have developed a nice flow and we expect to grow to somewhere between $20 million a month in originations. We are currently operating about 410 million originations a month.

And more significantly, we are working now to figure out the biggest part of the market and we are assembling the team to do that as well where we can originate one-off single-family rental loans which is 80% of the market. So that business we have invested enormous amount of time.

As a management team, we have great history in building platforms to manufacturing capability. So we are extremely excited about it. And we think that's really where a tremendous amount of growth net additions will come in the future..

That's very helpful color, Ivan. And I guess just following up on the SFR business.

How long do you expect that ramping period to take, just given I am assuming the hiring that's necessary in just building out the infrastructure? And maybe you can give us a sense or remind us of how the returns might vary across those three different buckets that you laid out? And how that compares to kind of the typical traditional agency and structured transitional product you originate today?.

Yes. Jade, I think it's a little premature to have that kind of detailed discussion. But like any entry into a business, the margin is generally bigger and as you enter a business on a competitive basis, you gain a franchise value.

So I think as we go quarter-to-quarter, we will talk more about the growth in that business as its evolving and we are getting a footprint in it. So I think it would be a little premature but we are pleased with the margins we are getting and our relationship we are developing and the potentially opportunities..

And one last one, Ivan, just regarding the environment for multifamily overall. What are you seeing in terms of fundamentals and underwriting? Are you seeing any signs of deteriorating credit performance across the market? And what do you really see as the biggest risks for multifamily going into 2020..

So we think that and that's what we have given guidance of just very modest growth, if any, in the agency business, that there is an excess use of IO, their cap rates very compressed and the is very aggressive lending environment. We are seeing an increased in some taxes across many, many jurisdictions.

And we are using a lot of prudence to underwrite the expense side as well as understand that traditionally this level of amortization in assets tend to use caution while we are underwriting loans. So we put forward the appropriate measures to protect our origination side which affected the asset management side. We have deepened the [indiscernible].

We have added to that we will continue to work very aggressively to front run potential changes in the economic environment and manage our assets and our borrowings accordingly so we can grow well ahead of the curve to anticipate any changes in the environment..

Thanks for taking the questions..

Thank you. And our next question comes from Henry Coffey with Wedbush..

Yes. Good morning and thank you for taking my questions, letting me become part of this small crew here. And I do agree with Steve though. I thought it was nice to hear his voice. When we look at the data, Fannie, Freddie and recently the FHA have started tightening a little bit in the summer. And the FHA sort of jumped into this on the residential side.

When you look at the multifamily business, they are not as tempered, by past experience there, but have the GSEs started to tighten up a little bit? I mean given your own insight into what's going on, I am sure you are in active dialogue with them.

But I was wondering if you could give us some thoughts about that?.

My answer is, they have not. They have not at the moment. Their underwriting standards continue to be consistent with their prior year standards. So we will wait and see what they do. They have been pretty consistent along the line..

And then I am equally intrigued with the single-family business. It seems to be more of a private than a public market, which is good for you as a lender.

Are you looking at the full spectrum, which is what it sounds like? And can you give us some sense of what the lower end of the market looks like in terms of rates and expected losses and risk factors?.

Yes. Well, it is a private market and that's why we are uniquely positioned with our permanent capital, our securitization ability, our originations capability to really enter that market effectively.

The key to the biggest part of the market which is the aggregation of individual borrowers and individual units is where really I think margin is and the growth will come from. That's 80% of the single-family to rent market. So we are working really hard on the technology side to be able to originate that product effectively.

If we are successful, if we can combine that with the other originations we do on the single-family rental, we will have significant volume and scale to effectively access securitization market on a very consistent basis. So we are in the beginnings.

We do have the background and the capability, the franchise and the name and we think this is a real significant year for us to combine all the components that I mentioned earlier and build out those platforms. But we are making significant progress on the single-family rent market.

The single-family build to rent market, which we love, we are developing a very loyal customer base to our originations that work on the mid tier borrowers and now we want to build out the individual aggregation on the individual unit. So we are quite pleased.

As I mentioned earlier, I this it's a little early to give any kind of projections, but it's starting to begin to make a contribution for the firm's earnings even this year..

Listen, thank you very much and thank you for taking my question..

Thanks Henry..

And I am not showing any further questions in the queue. I will turn the call back to Ivan Kaufman for his final remarks..

Okay. Thank you everybody for your participation and it's been a phenomenal 2019. We are extremely optimistic about 2020 and we are very prepared even for a change in the cycle as we depend on our balance sheet and we have cash flow accumulating. We will have a very offensive position. So thank again and have a good day. Happy Valentine's Day everybody..

And with that, ladies and gentlemen, we thank you for participating in today's conference and you may now disconnect..