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

Steve DeLaney - JMP Securities Jade Rahmani - KBW.

Good day, ladies and gentlemen and welcome to the Q2 2016 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I’d now like to introduce your host for today’s conference, Mr. Paul Elenio, Chief Financial Officer. You may begin..

Okay, thank you, Vicky. 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 June 30, 2016 as well as the acquisition of our manager’s agency business. 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. We are extremely pleased to have announced the completion of the acquisition of our manager’s agency platform on July 14. Additionally, as you can see from this morning press release, we also had a very productive second quarter generating strong operating results.

Before I touch on our second quarter highlights, I would like to spend some time talking about the significance of the agency platform acquisitions and how it will affect our outlook and business strategy going forward.

We are extremely excited to have completed the acquisition of this significant agency platform and we believe this transaction will be transformational for our franchise future, growth and success and the many significant benefits we will realize.

We have discussed these benefits in detail on our last call, but just to summarize again some of these benefits we will include immediate accretion for 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 origination business with high barriers to entry providing a national 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 within inside stock ownership in excess of 35%.

The agency business we acquired includes a leading national loan origination and servicing platform which originated over $3 billion on loans in 2015 and contained a servicing portfolio of approximately $12 billion, earning approximately 47 basis points of servicing fees with an estimated remaining life of approximately seven years.

The majority of the servicing portfolio is prepayment protected, which translates into a significant value asset, which will add diversity, duration and stability to our earning streams.

Additionally, the agency business for the first six months of this year has been very robust and we expect the second half of the year to be very strong as well, resulting in immediate accretion to our earnings and dividends. As a result, we are pleased to announce that we are increasing our second quarter dividend to $0.16 per share.

This represents a 7% increase over last quarter. This initial increase in our dividend is ahead of us even realizing the benefits of this acquisition [indiscernible] to take effect in the third quarter as we are extremely confident in the accretive effect we will realize from the significant agency platform.

We also believe that after we fully integrate the performance of this acquired agency platform over the next several quarters, we will be able to grow and continue to grow our earnings and dividends going forward.

The agency business also contains high barriers to entry with limitations on participants and strict approval standards to the GSE programs which we believe makes our product offerings and franchise even more valuable.

The business will also provide enhancements to our origination platform, expand our market presence, building our products and create longer duration assets. Now, I would like to focus on the REIT’s second 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.

We originated approximately $170 million of loans and experienced runoff of approximately $215 million in the second quarter, while there were few large loans that were expected to close in the end of the second quarter totaling approximately $65 million closed early in the third quarter.

This will result in a very strong third quarter originations volume and an addition to our strong pipeline which remains strong. Our second quarter originations had an average yield of approximately 7.3% and we generated levered returns in excess of 14% on these investments.

The third quarter has seen originations of approximately $160 million to date with an average yield of approximately 6.7% and only $35 million of runoff thus far.

Additionally, with a heavy focus on our senior multifamily loans, our portfolio is now comprised of 89% senior debt and 80% of that debt being big family assets, which clearly have proven to be the most resilient asset class of product type in all cycles.

And with the significant improvements we have made in financing facilities, we are generating strong terms on that capital in a very secure part of the capital structure. We also continue to produce impressive results from the investments we’ve made in the residential mortgage banking business in 2015.

Clearly, given the interest rate environment that business has picked up dramatically. As a result, we recorded $3.0 million of income from this investment in the second quarter combined with $1.6 million in the first quarter resulting in $4.7 million of income from this investment for the first six months.

We also generated $1.2 million of additional income in the second quarter from one of our equity investments, which was up significantly from the $200,000 we generated from this investment in the third and the first quarter.

And given the current market environment and recent performance, we now expect these full investments to generate a consistent annuity going forward of approximately $2 million to $2.5 million of income per quarter from the next few quarter, which is up significantly from our previous guidance of $1 million to $1.5 million per quarter.

***00-08 Additionally, we also recorded approximately $1.9 million of income this quarter related to fees that were due form us from the defaulted first mortgage note that we acquired back in the first quarter of last year.

If you recall, we recorded $6.7 million of income from this pay-off of this note last year and combined with the fees we are in this quarter we generated $8.6 million of income from this highly structured transaction.

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

And as I 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 a long-dated prepayment protected servicing income from a significant agency servicing portfolio.

Overall, we are very pleased with our second quarter results and our ability to continue to successfully execute our business strategy and significantly grow our dividend. We’re also extremely excited about the agency business acquisition and believe will be transformational for our platform and most importantly very rewarding for our shareholders.

I will now turn the call over to Paul Elenio, to take you through the financial results..

Thank you Ivan. As Ivan mentioned, we are extremely pleased to have completed the acquisition of the agency business, which we believe will be transformational for our platform.

The acquisition includes a significant servicing portfolio as an estimated fair value of approximately $225 million which will generate a significant predictable annuity of income going forward in excess of $55 million, annually.

Additionally, the agency business results for the first six months have been extremely strong generating approximately $35 million of pre-tax income and approximately $20 million of pre-tax cash flow through June 30 and as Ivan mentioned earlier, this business is expected to have a strong second half of the year as well.

We’ve also increased our total equity post acquisition from roughly $565 million to an excess of $700 million and based on yesterday’s stock price have increased our market cap to over $500 million including the newly issues OP units creating a larger balance sheet, a more efficient vehicle to access capital in the future.

And although we will give you more color and detail on the acquired agency business results on our third quarter earnings call, we are very positive and enthusiastic about the contribution we believe this platform will have on our earnings and dividends going forward and as a result we elected to increase our dividend for the second quarter to $0.16 a share.

Now I would like to talk about the second quarter financial results for the REIT. We had a very strong quarter generating AFFO of $12 million or $0.23 per share excluding depreciation expense, non-cash stock compensation expense and $750,000 of expenses incurred during the quarter related to the acquisition of our manager’s agency platform.

As Ivan mentioned, we were also able to continue to generate significant additional income streams recording $4.4 million of income from our equity investments in the second quarter, which represents a significant increase from the $1.9 million we generated from these investments last quarter.

Additionally, we also recorded approximately $1.9 million of income, related to residual fees that were due to us from a discounted note we acquired and settled back in the second quarter of last year, $2.5 million was recorded in other interest income and $600,000 was recorded in compensation expense related to this deal.

Looking at the rest of the results for the quarter, the average balance in our core investments was flat at $1.64 billion for both the first and second quarters.

The yield on these core investments increased to 6.76% for the second quarter from 6.25% for the first quarter largely due to $2 million more in accelerated fees from early run-off in the second quarter.

In the weighted average all-in yield on our portfolio was down to around 6.11% at June 30, 2016 compared to 6.27% at March 31, 2016 due to higher yields on runoff in the second quarter. The average balance in our debt facilities was also up to approximately $1.22 billion for the second quarter from approximately $1.22 billion for the first quarter.

The average cost of funds in our debt facilities increased slightly to approximately 4.24% for the first quarter, compared to 4.19% for the first quarter, and our estimated all-in debt cost decrease to approximately 4.01% at June 30, 2016 compared to around 4.09% at March 31, 2016, mainly due to the increased use o four warehouse line during the quarter, which carry a lower interest rate.

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

Again largely due to significantly more accelerated fees from run-off in the second quarter compared to the first quarter and our overall spot net interest spread decreased to 2.10% at June 30 from 2.18% at March 31, mainly due to higher yields in our second quarter run-off.

Our overall leverage ratios on our core lending assets including the trust preferred and perpetual preferred stock as equity were up slightly to approximately 66% this quarter compared to 64% last quarter due to a significant amount of the second quarter runoff occurring and our replenishable CLO vehicles, the cash of which has not yet been as of June 30, 2016.

And our overall debt to equity ratio on a spot basis including the trust preferred and preferred stock as equity was 1.5 to 1 at both June 30 and March 31. NOI related to our OREO assets decreased approximately $450,000 compared to last quarter, due to the seasonal nature of income related to a hotel property that we own.

We project that we will produce NOI in 2016 of approximately $1.2 million to $1.4 million on our OREO assets. $1.6 million of which was already realized in the first two quarters, resulting in a slight loss for the balance of the year again due to the seasonal nature of our hotel property.

Additionally, we did complete the sale of our remaining multi-family OREO portfolio for a gain of $11 million and recorded $11.2 million impairment charge on our one remaining hotel asset in the second quarter. And we now have two remaining OREO properties on our books with a net carrying value of approximately $20 million.

Additionally, as Ivan mentioned earlier, we recorded $6.3 million of income for the first six months from our equity investments, and we expect these investments to continue to produce approximately $2 million to $2.5 million of income a quarter going forward for the next few quarters.

This success continues to add to our core earnings capability 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.

And lastly as I mentioned earlier, we will have more detailed information available on our next call regarding the third quarter results from the acquired agency platform and we are very excited about the many benefits we expect to realize from this transaction including the ability to continue to grow our earnings and dividends in the future.

That completes our prepared remarks for this morning. And I will now turn it back to the operator to take any questions you may have at this time. Vicky..

[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 completing your merger. .

Thanks Steve..

Thanks. My first - thanks. We're hearing repayments payoff up really sharply across the board from all the commercial mortgage REITs this quarter. So, not surprised that you had a net decrease in the second quarter and I didn't hear you Ivan about the, $65 billion closing and in 3Q.

I guess just looking out over the second half of the year, as you see your existing portfolio and structural maturities and your pipeline, can you say whether you think you will have net growth in the bridge loan portfolio between now and year-end.

In other words, will originations succeed pay off as we see it today?.

I’ll have Paul hit on some of the numbers, but we think our originations are going to be up a little bit over the last year and we think overall we should be flat with a little bit of growth, but that could be adjusted depending on the competitive landscape that will take place over the next two quarters. Our pipeline is strong.

We are looking at a good quarter. And a lot also has to do with the CMS market, if the CMS market returns and our borrowers on some of our legacy assets have some options that exit then there maybe some additional payoffs, but we think we should be flat to some uptick. Paul you have any comments on that..

Yes, Hi Steve. So, Steve you are right, we did see a little more aggressive run-off this quarter than we were originally predicting at the end of the first quarter when the CMBS market had really not been there and I know you have see that across all the commercial REITs. We did growth the portfolio of $88 million for the first six months.

We are expecting to grow that more in the second half of the year. How much more is tough to tell because there are unexpected run-off if you come in and as Ivan said if the CMBS market really comes back that will certainly impact the ability to have – the lenders to have the ability to find financing elsewhere.

Having said that we did have a really good start to the third quarter, we did disclose in our commentary, in Ivan’s commentary that we had a $160 million of loans closed in July with only $35 million in net runoff. So, we’ve had a really good start to the third quarter from a growth perspective, but again very difficult to predict.

We do think our volume will exceed our run off in the latter half of the year and we do think it will grow more than the $88 million that we grew in the first six months, but we – time will tell on where this market goes. .

Okay, thanks. Appreciate it. Those comments. And my follow-up question. I noticed the impairment charge you took on the hotel real estate owned asset, I'm curious, you've had some Florida hotels for a long time and you referenced the seasonal NOI.

Is this a new legacy asset that you put into OREO or these the same hotels that you had in OREO for some time? Thanks..

Yes, Steve yes, it is Paul. So this was one of the legacy hotels if you recall several years ago we did take over six hotels in the Florida area, five of which we have sold since then over the last few years.

This is the last remaining hotel asset and as we went through the marketing process on selling those hotels in that area, we really gained a lot of market intelligence.

We went down and looked at this remaining asset and realized that based on the market intelligence we received and the type of asset it is that we needed to impair that asset this quarter.

However, having said that management looks at these OREO assets really in totality and we think we’ve done a great job with all our legacy OREO assets we are down to really one legacy asset and one new asset we took back about a quarter ago that we really like to value on.

And overall the last several years we have really done a great job managing those OREO assets, getting the NOIs up and liquidating them and turning it into cash to deploy into our core investments at higher levered returns, but overall the timing isn’t great, but overall we are still net positive on our OREO assets even after this impairment when it comes to gains in impairments.

So, we still think that in totality we have done a nice job at our OREO book..

Understand that, so the $20 million left just represents the two assets you just described. One legacy hotel and one more recent.

So that's as far as impaired loans?.

That’s correct..

All right. Thanks for the comments gentlemen..

[Operator Instructions] And our next question comes from the line of Jade Rahmani with KBW. Your line is now open..

Okay, thank you and good morning. .

Good morning Jade..

Good morning. Can you say what [indiscernible] would have been for the quarter and maybe give some color on the split between Fannie Freddie and [indiscernible].

I think we've seen data on 2015 banning originations of about $1.9 billion last year?.

Yeah, I mean last year we did do about $1.8 in Fannie business. For the first six months of this year, we’ve done originations in the agency business of about $1.6 billion. We had a very strong first six months and I think about $1 billion or $1.1 billion of that was Fannie. So we are on pace to have a very, very strong year.

And those are where the numbers are circling right now. I can’t tell you what the balance of the year will be, but we do think the balance of the year will be strong as well and we are off to a very good start..

And in terms of gain on sale margin, some of the peers disclosed results, so we can use them as comps, but are there any comments relative to your business you’d care to provide? I mean, I think, for example, [indiscernible] reports roughly 200 basis point margin, which is almost an even split between origination fees and the MSR capitalization..

We are not at a point now, Jade, where we can give you that information. We just finished the acquisition on July 14. As I said in my commentary, we will give a lot more robust data around the performance of that agency business and what it means to us going forward.

Our margins can and will be different from other competitors at times depending on the asset that we are originating versus them and we just don’t have that information right now for you, but we will in the third quarter. .

Okay.

But it does apparent that your mix is weighted towards Fannie Mae, which tends to have higher margins than Freddie?.

Correct. What we do as we’ve mentioned in the past and Ivan can elaborate, we do a fair amount of Freddie Mac small balance loans and we are really growing that book and are very active in that product and that product has a decent margin on it as well.

Not – maybe it’s high as some of the Fannie stuffs, but it also doesn’t have the loss share component with it that that Fannie comes with.

Ivan, do you want to elaborate on the SBL?.

Just SBL program is a new program, which we’ve helped create with Freddie Mac and it’s similar more in terms of gain on sale and servicing fees to the Fannie Mae parameters that we will do reporting. And as Paul said, we will give you more clarification on that in the third quarter..

Just on annual G&A expense, can you provide any comments on what we might expect?.

You mean on a combined basis?.

Yeah, on a combined basis going forward..

Yeah, no, again, as we said, we’ve not given any guidance on this call and what this business will look like combined.

We’ve given you some sound bites and where we think combined equity has gone with the market cap is done, what the six month numbers were for the agency business, but we’ve not sat down and guided anyone to what SG&A or what those combined line items will look like because we need to incorporate this business and see where the efficiencies are once we get through that.

So we are a quarter away from having that kind of information..

And Paul – Steven is delaying his question on repayments accelerating, are you seeing that on the multifamily servicing portfolio, it doesn’t sound like it because of the prepayment protections in those loans, is that fair assumption?.

Yeah, we do – we do not see it at the pace that you see it on the short-term bridge line loans clearly. We do see run-off in the agency book. But as you mentioned, when it happens and it does happen, there is prepayment protection. So we are receiving a fee, that’s a [indiscernible] serving values. So when it happens, we do get paid for it.

It’s maybe gone up a little in the last year or so, but it’s not nearly as significant as repayments you see on the short-term bridge side..

And we also have an opportunity to recapture and refinance those loans as well giving us an additional earnings capability and longer term servicing annuity as well..

And just finally, you probably can’t say much, but I feel like I should ask.

The two year option to require the manager, that’s solely at the discretion of the [indiscernible] of ADR’s special committee or is the manager separately considering putting itself up for sale potentially to another entity?.

No, as you mentioned, it’s at the sole and absolute discretion of the special committee if they want to excise that option. They do have that option to excise. I don’t know if they will excise it or not. Again, it’s at their sole discretion and that’s how the transaction was structured..

So if someone came along and then willing to pay more than that $25 million that won’t create any reasons for the sale to go away from ABR?.

No, it’s a one way option for the – so that we could be able to buy the manager. So it’s a call option on their thought..

Great. Thanks so much for taking my questions..

[Operator Instructions] And I’m showing no further questions at this time. I’d now like to turn the call back over to management for closing remarks..

Okay. Well, thank you for your participation today. It was a great second quarter and we really look forward to further elaboration of our third quarter on the combination of the two activities. Enjoy the rest of the summer. Thank you..

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