Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2015 Arbor Realty Trust's 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 is being recorded. I would like to introduce your host for today’s conference, Mr. Paul Elenio, Chief Financial Officer. Sir, you may begin.

Okay. Thank you, Tyra, 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 and the year ended December 31, 2015 as well as the proposed acquisition of our managers' agency platform. 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 call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of the REIT business, the managers' agency business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of future performances of these businesses taking into account the information currently available to us. Factors that could cause actual results to differ materially from our expectations in these forward-looking statements will be 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. Additionally, in connection with the proposed transaction, we expect to file a proxy statement with the SEC. We will take a limited number of questions after our remarks today, but please be aware that the proxy statement has not yet been filed, there we are limited by disclosure rules as to what we can discuss in this call. We also plan to file other relevant documents with the SEC, regarding the proposed transaction. Investors are urged to read the proxy statement and other relevant documents filed with the SEC, if and when they become available, because they will contain important information. You may obtain a free copy of the proxy statement if and when it becomes available and other relevant documents filed by us with the SEC at the SEC’s website www.sec.com. Copies of the documents filed by us with the SEC will be available free of charge on our website at www.arborrealtytrust.com or by contacting Investor Relations at 516-506-4200. We and our directors and executive officers and other members of management employees may be deemed to be participants in the solicitation of proxies in respect to the proposed transaction. You can find the information about our executive officers and trustees in our definitive annual proxy statement filed with the SEC on April 10, 2015. Additional information regarding the interest of such potential participants will be included in the proxy statement and other relevant documents filed with the SEC, if and when they become available. You may obtain free copies of these documents from us at the sources indicated earlier. 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 incredibly excited today to discuss the acquisition of our managers' agency platform, as well as update you on the success we had in closing out 2015 and our plans for 2016. As you can see from our press release, we are extremely pleased and have reached an agreement to purchase our managers' agency business. We believe this will be a transformational transaction that will greatly enhance our ability to achieve our goal of becoming a world-class commercial real estate platform. The details of the proposed transactions were laid out in our press release. But to summarize some of the significant components, we are purchasing the managers' agency platform for $250 million, which can be adjusted based on changes in the size and value of the purchase service and portfolio on a closing date. The consideration is to be paid half in stock and half in cash with the ability to reduce the cash consideration component by $50 million through the utilization of a five-year seller financing instrument from the manager at the company’s option. The REIT currently has a 175 million of deployable cash on hand that will allow us to successfully execute this transaction without having to raise capital in this volatile market. This acquisition will also be immediately accretive to our earnings and dividend. In addition, the company has negotiated an option to purchase the management contract and fully internalize the management structure for $25 million, which can be exercised over a two-year period. The significant merits of this transaction are as follows: Immediately accretive to our earnings and dividends, and significantly increases with our core earnings run rate, provide significant diversification and greater predictability to our earnings streams through a long-dated prepayment…

Okay. Thank you, Ivan. First, I'd like echo Ivan's comments that we are very excited about today's announcement and believe this acquisition will be a transformational event and the key to our future growth and success. Before I take you through the accretive effect, we believe this transaction will have on our earnings and dividends going forward, I'd like to highlight a few details about the acquisition and proposed deal structure. As disclosed in our press release, the consideration of the acquisition will be half in the form of OP units and half in cash, including the ability to utilize up to $50 million of seller financing. As Ivan mentioned, we are very pleased with our strong liquidity position and currently have approximately $175 million of cash on hand. As a result, we expect to fund the cash portion of the consideration with our cash and potentially the seller financing option that is available to us. And as I will discuss in a moment, we believe funding a portion of this acquisition with our cash on hand will be immediately accretive to our earnings and dividends. Additionally, as the type of income generated from this business is not good REIT income, it is normally retained in a taxable REIT subsidiary, which is subject to corporate level taxes. However, we are currently working on creating a more efficient tax structure to the bifurcation of certain servicing income streams, which could result in greater accretion to our future earnings and dividends. Now, I would like to spend some time walking you through the accretive effect, we believe this transaction will have to our shareholders. As you are aware, we are currently paying an annual dividend of $0.60 per share. The acquired business is estimated to generate a range of approximately $45 million…

Thank you. [Operator Instructions]. Our first question comes from the line of Jade Rahmani of KBW. Your line is now open.

Hi, this is actually Ryan Thomas [ph] for Jade. Thanks for taking my questions.

Hi, Ryan

First of all, congratulations on the announced transaction. I know you are limited in the disclosure, but I think the color you were able to provide was helpful. Just regarding the total consideration, can you provide some color on how the overall purchase price was determined considering the value of both the servicing intangible versus the overall originations platform and theme?

So, Ryan its Paul. I just said we are very limited and what we can discuss as it relates to certain areas of the transaction until our proxy has filed but what I can tell you is that a selection of Independent Board Members was selected to form a special committee, which was led by our lead director, that special committee when out and hired both financial and legal advisors as you saw in our press release, they hired some large firms and they also hired firms to due diligence on the acquired business. So, we won't be able to tell you details of how the transaction was put together from a value perspective, but what I can tell is they ran a very significant process with extensive advisors and firms helping them. We will document all of that in our proxy, when it is filed and you'll get a much more robust view on how the value was created. However, from my chair and I think from Ivan certainly the way we look at it from the REIT, the servicing asset is worth, as we mentioned in excess of 200 million as of 12/31 so we do feel that there is not going to lot of consideration paid for the sizeable origination platform and also the management team. And the reoccurring earnings and what we believe to be extremely stable, less volatile, predictable earnings stream because of the sizable prepayment protection that comes with these Fannie Mae DUS loans that we have in the portfolio, which is the bulk of the servicing portfolio.

Okay, that's helpful. And then regarding and you helped with some color just now, but regarding the breakout of that portfolio outside of the Fannie DUS loans what are the primary other components of the portfolio and can you give any color on what type of growth or runoff, your 2016 guidance per se is assuming?

Sure. We'll again have to face high level, because we haven't put in our proxy the historical information that the acquired business and the forward-looking information. But, the portfolio of about $11 billion, as I mentioned does consist of largely Fannie Mae DUS loans, but we do have a sizeable book of Freddie Mac loans as well. We are very active in the small balanced loan program of Freddie Mac and we've seen that business really take off for us. And we do have a fair amount, but not as much FHA and Ginnie Mae loans as well. As far as the projections going forward, we have seen substantial growth in this agency business over the last five years. We won't be able to give you color on where we think those numbers are going from a portfolio perspective, so as we mentioned in our prepared remarks, the pipeline is very strong in the business and so we do expect to have very good results in the business going forward.

Okay. And then regarding the internalization option, what type of framework is management taking towards this potential transaction? What is the likelihood of this coming to fruition and what are the remaining considerations that are on the table before management pulls the trigger on such a deal?

Yes. Ivan responding. So, the business that was born as a pretty self-contained business, there are certain supporting services that the management team has been providing to this business and all the businesses is consisting of some administration, finance, human resources, marketing, legal, structured finance, treasury and things of that nature. And I guess, the Board will make a decision sometime in the next few years whether it is appropriate for them to pull the trigger and acquire the rest of that team and pull them over. And that will be a board decision and they have two years to make that decision.

And Ryan just to clarify that it is a special committee decision as we laid out in our press release. So, it's an independent decision by this independent special committee.

Okay. Thanks. I'll jump back in the queue. Thanks for all that color.

Thank you. Our next question comes from Steve DeLaney of JMP Securities. Your line is now open.

Hi. Good morning. Thanks. And I also extend my congratulations. I know this has been a long time coming to get to this point, strategic benefits or obvious. Ivan I think what I learned today on this call that helped clarify the valuation for me, which where your comments on the MSR portfolio and I believe you said the average servicing fee was 47 basis points. We work with some of the other public agency servicers and we see figures average servicing fees much smaller. Could you comment on why your average fee is higher? Does this have something to do with small balance loans versus larger loans? Any color you could give around the 47 bps would be very helpful to me. Thanks.

Sure. I guess the niche that however has and that both the REIT as well as the agency platform as we focused on small balance loans. Specialty is in the $5 million to $25 million areas with a very, very significant presence in the $1 million to $5 million areas. We are probably the number one provider of small balance loans in the country and we are the number one lender for the Freddie Mac in 2015. The smaller balance loans tend to have a little bit of a larger servicing number to them. It's an area that we find to be a little less competitive and therefore it works very well for us. The larger loans the larger you guess the small servicing fee. And that's how we get to larger number. In addition, our portfolio is very heavily weighted to Fannie Mae where it's a bigger servicing fee as opposed to Freddie Mac.

Right. And you have your loss sharing there as well which you need to be compensated for. I guess that to drivers if that two drivers to get to $200 million estimated value, Paul mentioned an average remaining terms of seven years and I think you've got some prepay protection around those loans. The other factor of course is the discount rate that you use to discount the forward cash flows. Can you comment on sort of a range of what is an appropriate discount rate for that type of an asset in your mind?

Yeah, Steve. It's Paul. We'll be careful because what we have disclosed in our proxy. But normally, I think in the industry you see ranges of discount rates anywhere from 12 to 13 all the way up to 15 depending on the type of portfolio. As you know, Steve unlike the resi business CPRs and PSAs don't play a huge role or as bigger role in valuation of servicing as they do in multifamily, because of the prepayment protection that's afforded with the Fannie Mae loans especially. So, the range of discount rate, we've seen a lot of different ranges there are firms that do this for living, you only see them in anyway from 12, 13 to 15 when valuing an overall portfolio. However, for large cash, this is very stable cash flow, very recurring cash flow and is prepayment locked out. So, that's very important component.

Steve also, I just want to know that these portfolios don't actively trade in the market. We wish they did, we would be active because what you have in the part of these portfolios is also a customer base and that customer base has a lot of value and it's not a lot of value put on a general transaction. But the customers that come with this great recurring opportunity in the future and the other thing in this kind of mark, a little low interest rates is very, very little value put on the escrow balance and the escrow balances in a rising market have significant economics. So, you have the discount rate, which people put different numbers on and that's mathematical where you have the intangibles of the customer base and then the factor of course is the hedge of the escrow balance in the event of rising rate environment.

And Steve as well as the portfolio grows, you obviously get huge economy scale from cost. So depending on the size of the portfolio you can see higher or lower values because of the efficiency of the cost structure.

That's all very helpful. Paul, can you give us some idea obviously the proxy in historical financials, can you give us some idea when you would expect to file that proxy with the initial proxy?

We are working very hard to do that, obviously the challenger on the proxy timing Steve as you can imagine is the forwarded financials of the acquired businesses, it's a private entity. So, we are working very hard. I can't give you a definitive date, but we certainly want to get it out, if we can over the next several weeks.

Okay. And I know I've taken time. I'll just wrap up with this. So, obviously the strategic benefits were in place and the way this is laying out is very helpful today that Paul that you gave us your accretion figures with some level of specificity. We had calculated this morning just on the - based on the OP units of 650, we had calculated booked value dilution of about $0.75 or about 8% and so your percentage increase in earnings and very important to me and I'm sure your special committee in trying to weigh those two factors and when we think about that I mean should we assume to that there may be some deal cost one-time charges professional fees it could be relatively significant that also will need to be factored into any type of book value dilution.

Yes, Steve. The guidance I gave today was obviously without those transaction cost because we view them as one-time. But certainly as we closed today in the prepared remarks we did incur about 3 million of expenses to-date obviously there would be more expenses when there is a deal close. So it would have to factor in at least to the current information I was trying to look at it on run rate going forward that those transactional cost of kind of one-time.

Got it. Appreciate your comments this morning. Thanks and congratulations on the deal.

Thank you.

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

Thank you. Congratulations, like everybody else is congratulating you. Just I think Steve it is last question just kind of highlighted you're issuing 19.23 million shares, the book value of 934 and I think that's been diluted to about 851 and you've set as the distribution could be accretive by 10% to 17%, I missed the pro forma impact, the last year the AFFO was 108, did you give a pro forma for the transaction what would happen at that number.

No, Lee, its Paul. I did not give a pro forma for '15 or '14 and those will come on our proxy. What I really did was said that if you just looked at our number at $0.60 and you added this on what would be the accretive effect to adding it on. So what that tend to 17% was accretive to our $0.60, I did not do a pro forma 15 or 14 number, that will be in our proxy.

Okay. But I assume that it will be an increased pro forma in the AFFO and the properties you're Injecting debt into the transaction, so you're getting so amount of leverage, so it’s fair to assume that AFFO will be higher by some amount?

Well, what I said - when you mean higher you mean historically on pro forma?

Yeah on pro forma like you said a dividend pro forma would be able to raise to $0.60, $0.70, I assume that’s because AFFO would also pro forma would be higher. I am not asking for the amount.

That’s correct, that’s absolutely correct.

Okay. And we have a large more diversified entity in some better lines of business that we have had on our own this should lead to a higher ROE, you mentioned 13% to 16%, if I apply 13 to 16 ROE to your 851 or pro forma book value that would suggest if we hit targeted ROEs of 13% to 16%, we have AFFO of like somewhere between a 1.10 and 1.40. We’re not getting in the forecasting game but over the next couple of years you think 13% to 16% ROE a new book value is the reasonable target for the complexion of the business that we now have pro forma of the deal?

Let me think about that I think my 13% to 16% we surely saying that the business we’re acquiring at the price we’re acquiring it, would generate a 13% to 16% ROE basically what I said in my remarks was if we gave a range of what we think of projected income for the acquired business would be and then I just divided that by the purchase price obviously you’d have to factor in how we’re paying the consideration. I'm not so sure I could tell you that in the future it would 13% to 16% on-off total capital basis I think that’s what you’re asking, Ivan I don’t know what your view is on that going forward.

Yeah, I think we need the time to put the proxy to get the information and give you the right critical data in our modeling to be accurate and although I’d like to speculate through the enthusiasm and the transaction that would be more specific when we have the right data to distribute.

Well, it shouldn’t be too far off because of the AFFO of 108 was achieved at a book value of 934, so that was like about 11% and since you’re buying better businesses more diversified businesses I would say low end 13% ROE reasonable I think Ivan justifies top selling a book value anyway so that’d be about $1.10 type of recurring earnings and we support even growth of distribution from the pro forma 60-60-70.

Yeah I think we as you said we can’t get into forecasting business, but one of the things I will say is everything you said was accurate except we do need to understand that in 2015 we did have tremendous AFFO as you mentioned and we had some large transactions and while we do those transactions as part of our critical business, recurring those transactions recurring can be lumpy, we did have some large gains and income from some of our structured investments during 2015. We’re projecting as we mentioned in our comments, an annuity going forward but not as large as the income we booked for 2015. It doesn’t mean we won’t have similar items like that but predicting that and when it will happen is a little difficult for us.

Yeah, we don’t put those into our core run rate.

Yeah, that’s right.

I understand, just remind me of the 51 so fully diluted shares pro forma for this deal, how many shares will you own Ivan in the 19.23 getting in the deal and then how much you own before?

Well, you’d end up with just over 35% because Ivan has roughly almost 6 million shares.

So, basically that's pretty good incentive to keep Ivan working, I like that.

Yeah. You’re going to keep me young and energized.

Okay, sounds good. Congratulations and all the best.

Thanks Lee.

Take care.

Thank you. And at this time, I'm showing there are no further participants in the queue, I would like to turn the call back to management for closing remarks.

Well, I just like to thank everybody for participating. I know it’s been a long time coming and we’re really pleased to be able to announce this transaction and talk about the merits of it and we’re extremely excited. We’ll get the information out to everybody as soon as it’s available and look forward to spending the time and talking about the story. Thank you everybody.

Thanks.