Good day, ladies and gentlemen, and welcome to the Q2 2018 Arbor Realty Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Paul Elenio, CFO. Sir, you may begin.

Okay, thank you Crystal, and good morning, everyone. Welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results from the quarter ended June 30, 2018. 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 risk 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 everybody for joining us on today’s call. As you can see from this morning's press release, we’ve had another outstanding quarter, which continues to demonstrate the strength of our brand and the value of our operating franchise. Our second quarter results were truly remarkable with many significant highlights and accomplishments, including producing core earnings well in excess of our current quarterly dividend. As we mentioned on our last call, we intend to pay a $0.25 quarterly dividend for the rest of the year and evaluate our earnings performance at that time to determine the timing of our future dividend increases, and based on our very strong six months results and our outlook for the remainder of the year, we feel we are creating a sizeable cushion of core earnings above our dividends and as a result we remain very confident in our ability to continue to pay out our current dividend, as well as grow it in the future. Additionally, we are very pleased to announce that in July, we received approximately $11 million from the settlement of a litigation related to one of our prior investments. This will be recorded as a gain in the third quarter, and as a result, we believe we will likely pay a special dividend by the end of the year of approximately $0.10 a share based on our current outstanding shares. Now, I want to discuss some of our significant second quarter accomplishments and the reasons why our earnings are so strong and will continue to grow and why we feel we can comfortably maintain our current dividend and evaluate opportunities to increase it in the near future. We continue to produce significant agency origination volumes that generates strong margins. We originated another 1 billion in agency…

Okay, thank you, Ivan. As our press release this morning indicated, we had a very strong second quarter with adjusted AFFO of $28 million or $0.31 per share, and our second quarter results reflect an annualized return on average common equity of approximately 13.5% and 12.8% for the first six months of this year. As Ivan mentioned, we continue to put up record results and we're very pleased with our ability to continue to generate core earnings in excess of our current dividend. Looking at our results for the Agency Business, we generated approximately $13.5 million of income in the second quarter on approximately $1 billion of originations and loan sales. The margins in our second quarter sales was 1.53%, including miscellaneous fees, compared to 1.71% following margin in the first quarter sales, largely due to changes in the mix and size of our loan products. And we reported commission expense of approximately 39% on both our first and second quarter gains on sales. We also reported $17.9 million of mortgage servicing rights income, related to $1.1 billion of committed loans during the second quarter, representing an average mortgage servicing rights rate of around 1.66%, compared to 1.88% on first quarter committed loans of $1 billion, mainly due to a shift in product mix in the second quarter resulting in lower servicing fees. Sales margins and MSR rates fluctuate primarily by GSE loan type and size. Therefore, changes in the mix of loan origination volumes may increase or decrease these percentages in the future. Our servicing portfolio also grew another 3% during the quarter to $17.1 billion at June 30 with a weighted average servicing fee of approximately 47 basis points and an estimated remaining life of approximately eight years. This portfolio will continue to generate a significant predictable annuity…

Thank you. [Operator Instructions] And our first question comes from Jade Rahmani from KBW. Your line is open.

Good morning. This is actually Ryan on for Jade. Thanks for taking the questions. Just first, I guess, given how strong your origination base has been in the past few quarters, particularly this quarter, can you give some color on the types of investments you've made, maybe the average yield or a spread of our LIBOR property types and geography on those originations?

Hi. This is Ivan. You can get a little granular, but in general it’s very consistent what we’ve done in the past in terms of spreads and property tax. We’ve had the benefit of lowering our borrowing cost and therefore being more competitive, but when I use the term it is more competitive, the entire industry has gotten more competitive. So, we're winning our share of business most of what we’re doing is multifamily, single debt as I have expressed before. Paul, you want to give some color on the facts?

Sure. Yes. As Ivan said, most of our product has been multifamily pretty consistent with where our portfolio has been. Of the $607 million of loans we originated on the balance sheet side, during the quarter, 95% of those were multifamily. We had one non-multifamily deal. And 94% of those were senior debt. We had one mezzanine loan during the quarter. Geographically, it’s not inconsistent with where our portfolio stands. So, it’s pretty much been very consistent with the geographic concentration in our portfolio in total. And from a pay rate or a spread of a LIBOR our pay rate, our all-in rate came in with fees just at about 6.95% on all those loans, and we did generate a leverage return of 13% on those loans, despite the very competitive market. As we mentioned, we’ve been getting huge economies of scale through our CLO and our warehouse executions with reduced rate. And we’ve been able to be very competitive in this market and still generate very strong levered returns on our investments.

And just switching gears to the servicing portfolio. It seems like that has really fueled a lot of growth in your earnings over the past two quarters. So, I was wondering if you guys could give us any color on the profitability of servicing in your book, may be in terms of the operating leverage for when you're growing your portfolio over time and maybe what margins are over the cost of service primarily?

Sure. I can give you a little bit of color on how we view the profitability of the business. Obviously, the servicing portfolio as you mentioned has been growing significantly as we’ve been originating significantly more than what’s been burning off in the portfolio, which is something that has really helped the growth in that portfolio. Our average servicing fee has held up really nicely, comes down a little bit over the last couple of quarters and that’s just due to a change in mix. Little bit more Freddie and Fannie in a few quarters and then that goes up and down depending on volume and demand. But overall, we’ve been very, very pleased with many components of our servicing portfolio, one being the size and being able to maintain that. Two being, the weighted average servicing fee, the duration of the portfolio with an excess of eight years, which is also very important. Most of that servicing portfolio as we’ve talked about is pre-payment protected, and then on top of that we have all the escrow balances that have been associated with the growth in that portfolio, which continue to rise as interest rates rise. So, it’s been a very profitable business as you mentioned for us across our pretty will contained you do have to add some values every time you grow that portfolio, but you do get economies to scale as you grow. We're sitting at a $17 billion portfolio for a fee not far off from being 20 billion soon and that obviously offers even more reduced cost in economies of scale. As far as cost for loan, we’re probably not much different than a lot of other people. We pretty much fall in the range of $2500 to $3000 across the loan. That’s pretty much all the facts about that side of the business.

Great that's really good color. And just lastly, given the big push, the big push it seems from the GSEs for their uncapped business originations, can you say approximately how much of your GSE business is in those uncapped categories? Maybe particularly what percent falls in, say, affordable housing, which also is a big push?

I don't have the exact percentage. It varies from quarter-to-quarter, we can get back to you on that. But as we spoke about in the past, we're one of the leading small balance lenders, which is that falls outside of the cap and we’ve always been a leading provider to the agencies and probably the biggest supplier of affordable, as well as small balance loans. In the past, it’s run historically about 50% of the business we deal with them is outside the cap, but we will get back to you on where we are year-to-date.

I don't have the numbers in front of me either, but that sounds right, is it anywhere between 50% and 60% of our business is outside the cap.

Great. Thanks for taking the questions guys.

Thank you. And our next question comes from Steve Delaney from JMP Securities. Your line is open.

Good morning, and congratulations on hitting a billion-dollar market cap, that’s a nice milestone for any public company. So, Ivan you and Paul both mentioned an item of $0.04 to $0.06 improvement in the annual earnings and that was rapidly taking notes, but I got the $0.02 to $0.03 on the convert roll-down, but remind me what was the $0.04 to $0.06 improvement in earnings related to?

Yes, sure. Steve it’s Paul. So, we mentioned this on our last call when we – when the new tax laws came out there was a permanent reduction in the federal corporate rates from 75% to 21% as you know. And what we said last quarter is that, compared to 2017, because that’s when we had the higher rates that we thought that rate reduction because our agency business is so strong and compelling. We thought that rate reduction would generate $0.04 to $0.06 in AFFO for 2018 over 2017 and it appears to be doing that already in the first couple of quarters through the reduced rate.

Okay great. So, this is not…

That’s actually the result of the Agency Business being TRS.

Yes, correct. Understood. That’s helpful. Because I thought you were referring to a 2019 versus 2018 number, which I think is which you were referring to with the convert item.

Yes, that’s correct.

It’s really important, next year. Okay. Very helpful. Ivan, could you give us an update on producer headcount, may be at 6.30 [ph] and sort of on a year-to-date or year-over-year basis, would you approximate your net growth and producer headcount might be if any?

Our producers are remaining pretty consistent. We have not lost anybody. I think for this year, we actually – we’re now looking to add anybody. We were working on, I guess, I think we have somewhere in the mid-20s Paul, we had about 26 producers overall.

Yes. I think it’s 25 to 26. That’s right.

And our ambition was really working through a lot of the new people. The people who have come on in the last two or three years and making them more effective, and we have enough producers to deal with our volume that was just rounding about and making them more productive, and that’s kind of what our outlook is at the moment.

It sounds like more of an approach of quality versus quantity, is that a good way for us to think about it? You know it’s not just a numbers game?

It’s not just a numbers game, but we have a huge program over the last five or seven years where we’ve brought new people in, educated them, we put them into our culture, and it takes 3 years to 5 years to make these people effective and we have a very good core group and now we’re are just trying to maximize their capability and have them contributed to right level.

Got it. And you were able to – in the second quarter, on the agency side, you were able to maintain your originations roughly flat to last year despite a 50, 60 basis point increase in interest rates year-over-year, as you look out into the second half of the year, do you see the comparison year-over-year, do you see higher rates as being the biggest headwind to at least achieve flat year-over-year volume, is there anything else out there that would either help or hurt your originations other than the fact that we’re all living with higher interest rates?

I think the interest rate move as long as it's not drastic and it's gradual, won't have that much of an impact upon us, and what will happen over time is as interest rates move, perhaps there will be a little bit of a slight adjustments to offset that and in the valuation of the assets that are being sold. But a good percentage of assets were always being refinanced as, you know the nature of these assets are generally 5 years to 10 years. So that’s a consistent flow. In terms of our overall volume, we maintained our volume with the agencies and I believe that the agencies might have been off about 10% to 15%. So, we actually grew our market share a little bit relative to the rest of our peers.

Yes, I think Freddie Mac is up through June 8%, and Fannie Mae is down 13% after that terrible first quarter. So, if you grew when those two were essentially flat, combined or maybe down a little it’s you would have to take your share up for sure. So, all right, well great. That’s helpful colors, thanks and good luck for the second half of the year.

Thanks Steve.

Thank you. [Operator Instructions] And our next question comes from Rick Shane from JPMorgan. Your line is open.

Hi, guys. Thanks for taking my question this morning. Just one little subtle point. I’m noticing that despite the fact that the fees are stable on servicing and the durations actually extending that you're capitalizing the MSR at a slightly lower rate than you have been over time, I’m curious if that’s essentially because it’s going to lower the amortization going forward, actually basically sort of storing up potential earnings as opposed to taking it as much up front?

Hi, Rick. It is Paul. So, I think the MSR rates do fluctuate as you know, and it’s based on many factors. The biggest factor for this quarter is we did have a little bit more. If you can look at the mix in the press release of the originations, our Freddy business was a bigger percentage of the total business that was in the prior quarter and that’s historically because of the program. The servicing fee as well on that product. So that’s the main driver of why the MSR capitalization rate will be lower. But the mix change is all the time our pipeline is still very strong with Fannie. So, it depends on what we’re originating and when we’re originating and what servicing fees because the biggest driver to the capitalized MSR model is obviously the servicing fee and the duration. So, yes it has come down a little bit, it goes up and down. I don't think it will have an impact on future earnings though because it’s not that we’re capitalizing at a lower rate, and bringing in more over time, it’s just it’s being capitalized in a lower rate because of the product we are dealing and the size of the servicing fee.

Got it. And look, I see that in the numbers as well in terms of the mix, but even when I, so, if I look at the actual amortization on a dollar basis or on a percentage basis it is also drifted down a little bit over time, and so that’s what I’m wondering, is that rate driven or is that just being more conservative in terms of that assumption?

It may be a little bit of a driven, but it’s also driven by my commentary on prepayment fees. We have been seeing some premium prepayment in our portfolio as value still continues to be high and deals are still getting transacted, and we're getting some yield maintenance provisions each quarter. A little higher than last quarter, this quarter. And when you do that, you have to write-off the corresponding MSR, so that goes through the line item there to. So, that could have something to do with it as well.

Got it. Okay, that actually probably explains it. Thank you, so much.

You're welcome.

Thank you. And our next question comes from Stephen Laws from Raymond James. Your line is open.

Hi, good morning. Most of my questions have been covered already, but one, I look for a little clarity on the dividend, I think you guys have increased the dividend something like six to last 8 quarters or six to last nine, and now you're looking to pay a special year-end, can you provide any color kind of why you went along the route of a special dividend as opposed to another dividend increase, especially given the comments around things that should continue to drive earnings growth as we look into next year?

Paul, why don't you comment around the special dividend, and why we are doing it, and how it came about?

Sure. Just before we give that Stephen. I think, we made a decision last quarter and I thought we were clear on our call that we were going to issue a $0.25 quarterly dividend to the balance of the year. We bought it up a lot last quarter, felt very comfortable with that, felt very comfortable that we would have cushion in it, and we wanted to see what the balance of the year came out, and as you see the second quarter growth was substantial and we feel very comfortable that we can easily maintain that dividend. And we will take a look at that quarterly dividend at the end of the year as we get through the third and fourth quarter, with some of the items we’ve added in the new converts, and what our origination flow will be for the rest of the year and what our profitability will be. And then at that time we’re making assessments and as we mentioned in our commentary we felt confident we’ll be able to grow this dividend soon again. As far as the special dividend, we did have the one-time settlement that happened in the third quarter. It does increase taxable income and GAAP income for the REIT. So, it will need to be paid out in the form of a dividend. We’ve elected to do that in the form of a special dividend to not confuse the current core run rate dividend with an item that was more of a one-time event.

Great. That's very helpful, Paul. Thank you.

Thank you. And our next question comes from Ben Zucker from BTIG. Your line is open.

Good morning guys and thanks for taking my questions. Starting on the structure side, based on your targeted leverage levels and cash on hand, how much capacity do you have to originate new loans as of today, just given the amount of capital markets activities that have taken place subsequent to quarter-end? I thought that might be helpful.

So, it is pretty interesting in the way we look at it, because we’re actually able to manage it as we go forward, because you can’t always predict your run off and you can't always predict your originations. We have ample capacity to continue based on where our pipeline is, and based on what our projected run-off is for the quarter. So, we’ve done a really, really good job. And with our volume, which is well in access of what we projected last quarter, as you know we've wanted the capital markets to fund some of those originations, but given the capital markets activity we have and what our projections, we feel fairly comfortable that we can manage our business in the near term. Paul you have any color on that?

I think that’s right. We’re sitting with a good amount of cash right now and capacity in our new vehicles with the CLOs that we just – the one we just closed with the ramp up feature and also restricted cash. So, we feel like we’ve got a nice runway of capital. We did go to the markets as Ivan mentioned, between the converts to debt and the comment and picked up some nice capital. And it all depends on run-off and run-off is unpredictable. We’ve done a great job, I think of being real good stewards of capital and only going to the markets when we knew it would be immediately accretive and we’d be able to grow our earnings and right now I think we're sitting in a really good spot with the items we’ve executed on the capital market side being able to have, like Ivan said, a nice runway, looking at our pipeline, looking at run-off. We’re in good shape right now.

We will just continue to have greater efficiencies on the CLO and the leverage side, which has allowed us to manage our business even better.

I definitely hear your comments there. I think given how much we've seen the structured portfolio growing, how much work you guys have done on the right side of the balance sheet, I don't even think we've seen the full earnings power of the structured segment. Yet, do you feel like you brought a little bit of pull forward business, just based of that really strong 2Q origination number and maybe people shouldn't get too aggressive in setting expectations for those kinds of numbers to continue?

I think last quarter was a particularly strong quarter, but our pipeline is pretty good. I don't think the last quarter was reflective of annualizing that, but I do feel pretty comfortable with our pipeline and having a certainly strong year.

Okay, great. And then just turning to the agency side, quickly. With respect to your GSE outlook, I know it's very tough to predict, but which GSE feels most competitive right now between Fannie and Freddie? It looks like Freddie was a little more aggressive in the first half and we heard the flattening yield curve push people to their fixed rate product. But I'm wondering if that dynamic is as pronounced for the smaller balanced loans that you guys trafficking?

Freddie is the leader in the small balance space. I’m hoping Fannie will step up its effort, but Freddie has made it a major insignificant part of their business and if you followed our calls over the last couple of years, we’ve actually helped create that program with them and are the leading provider in the small balance space. So, they will do a substantial amount. I believe they will do as much as 6 billion to 8 billion of small balance loans, which is probably four times what Fannie Mae will do. I am hopeful that Fannie Mae will up their participation in the small balance business.

And I guess, as a quick follow-up, the FHA HUD product, I know it's a little bit more of an auxiliary origination type for you guys. But I didn't see any volume in 2Q. Do you think that might come back in a little way in the second half of the year?

Yes, it’s Paul. It does ebb and flow. As you know, it takes time to get that product through two originations to the origination point. We have spent a significant amount of time in resources and building that infrastructure and building our team for that product and we’re real poised and have a really good team. Our pipeline is strong, and on the FHA side it has been a little slow in the beginning of the year, but lot of that could hit late. We do think we end up, probably equal to, if not better than the originations we did last year in FHA, but we do have a nice pipeline of FHA. It’s just ebbs and flows and takes some time to get through, but I think you will see it pick up a little bit in the second half of the year.

Well that’s great to hear and appreciate all your comments. Thanks guys.

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Ivan Kaufman for any closing remarks.

Okay. Well, thank you everybody for your participation today. It’s been a great two quarters so far this year and thanks for your support. Have a good day.

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 wonderful day.