Good morning, ladies and gentlemen, and welcome to the First Quarter 2021 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] Also be advised that today’s conference is being recorded. [Operator instructions] And I would now like to turn the call over to your speaker today Mr. Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Chris. 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 March 31, 2021. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition liquidity results of operations, plans and objectives. These statements are based on our beliefs, assumptions and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update, or revise these forward-looking statements to reflect events, or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's, President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks to everyone for joining us on today's call. We're very excited today to discuss our outstanding first quarter results, and the significant success we've had in continuing to build on the tremendous momentum we created in 2020. As we mentioned on our last call, we've been the top-performing REIT in this space for almost five years in a row, and we're extremely confident that we would be able to continue that success in 2021. Our exceptional first quarter results continue to demonstrate our unique ability to consistently deliver, outsized returns in every market cycle, through our diverse operating platform. One of our primary goals for 2021 was to join the dividend elite club of 10 straight years of dividend growth. We are very pleased to have accomplished that goal by increasing our dividend to $0.34 a share this quarter. This is our fourth consecutive quarterly dividend increase and our 20th increase in the last 10 years, all while continuing to maintain the lowest dividend payout ratio in the industry. We built a viable operating platform focusing on the right asset classes, with very stable liability structures, an active balance sheet, GSE agency business, private-label program and single-family rental platform, and many diversified income streams that generate strong earnings and dividends in every market cycle. I can't stress enough, the importance of having multiple products with diverse income streams and that is why we believe we should consistently trade at a substantial premium to our peer group. To further highlight our incredible success, I would like to talk about the significant growth we experienced in the first quarter in all areas of our business, and how well positioned we are to continue this success going forward. As Paul will discuss in more detail, our first quarter…

Okay. Thanks Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $75 million or $0.52 per share for the first quarter. These results once again translated into industry high ROEs of approximately 20% for the first quarter which was up 50% from the first quarter last year and have allowed us to increase our dividend run rate to $1.36 a share. Our financial results continue to benefit greatly from many aspects of our diverse business model including significant growth in our agency and balance sheet business platforms that produce substantial gain on sales margins, long-dated servicing income and strong levered returns on our capital, the substantial income we continue to generate from our residential banking joint venture and the credit quality of our portfolio. As we mentioned earlier, we did another phenomenal quarter from our residential banking business. We recorded approximately $22 million of income from this investment in the first quarter which contributed approximately $0.13 a share on a tax-effected basis to our distributable earnings. The income from this investment was higher than we expected in the first quarter, mainly due to entering into an agreement with one of our key principles to purchase a portion of our future ownership interest at a premium which accounted for approximately $11 million of additional income allocated to us in the first quarter. As a result of this transaction, we will receive approximately 9% of all income from this business on a go-forward basis. The income from this investment continues to emphasize the diversity of our income streams and acts as a natural hedge against declining interest rates specifically earnings on our escrow balances. While this investment will continue to contribute to our distributable earnings going forward as expected, we are seeing some normalization in volumes and margins…

Thank you. [Operator Instructions] And our first question comes from Steve Delaney from JMP Securities.

Good morning, Ivan and Paul. Congrats on a strong report overall and especially the latest dividend hike to 34. I looked back at our model this morning and from air records and I think they're accurate. You've now doubled your dividend since the $0.17 paid in the fourth quarter of 2016, so just a bit over four years, so quite an accomplishment. As far as Q&A Ivan, I could tell the enthusiasm in your SFR and BTWOR initiative, could you just give us an update on that program in terms of -- I understand, it's carried in the structured business currently. But how large are the outstanding loans on the books at March 31? And how do the returns on these compare to your traditional bridge loan product? Thank you.

So, we think the build-to-rent space is a phenomenal space and I'm intent on dominating that space and personally active in relationship building. What we like about the business is it has three components. The first one is the construction element, which is a little bit more complicated it requires a balance sheet and real entrepreneurial capability. And that's the initial phase. We're generally pricing those loans to leverage returns of low to mid-teens, but that's just the beginning of the story. The real benefit is transitioning them to a bridge loan and they look very much like a multifamily loan and give us the same kind of returns. And then we exit those through our private label program or sometimes through the agencies. So we get what we call a free bite to the apple with each product and it creates long-dated revenue streams. The other aspects are just doing scattered sites, floating rate loans or fixed rate loans. That's a little bit more of a competitive market and we're fairly active in that as well. Relative to what's on the balance sheet and what's in the pipeline, Paul I'm going to transition that to you on what we've done year-to-date.

Yes. Sure. And thanks Steve for the compliments, I think what we've accomplished has been extraordinary as well. As far as where the numbers land on the balance sheet and kind of the different pieces as Ivan laid out, we've got several pieces of this business. We have a permanent side of the business as you know. Some of that is fixed rate loans which we did have a little bit of a sale this quarter on some inventory we had in our balance sheet. That will go through the agency business because it's being sold kind of into the market as individual sales and we'll carry that for our agency business. It hasn't been big yet but that's where that will go. The rest of the business the permanent variable rate loans that we're swapping out and pooling for securitization kind of like a CLO or a private label securitization that will end up on the structured side of the business and has. And then you've got the build-to-rent and the bridge loans. So all that being said where we're at is, we have about $190 million sitting in our balance sheet business which is comprised of bridge, funded build-to-rent and permanent execution that's variable rate. Keep in mind though, we've done about $350 million of build-to-rent deals and only about $40 million of that has been funded. So there's about $300 million that's unfunded that we've committed to and we disclosed in our filings but as we fund those advances, it will continue to add to the balance sheet portfolio on the structured side.

Got it. And the – we saw an increase in private label $152 million in the quarter or at least that's what – in terms of originations. Now are some of those single family rental fixed rate lines.

No. No those are – the non-fixed rate loans. And that's a good lead in because what you'll see and this is one of the benefits of the way we run our company is as you're fully aware from some of the other people you cover, there are – agency originations were quite soft in the first quarter. We look at it a little bit holistically. It's just a matter of where we're going to originate, whether it be originate, whether it be agency, whether it be private label, whether it be bridge. And depending on the appetite of the agencies we may do more private label or more bridge. And that's what makes our franchise so unique in the sense it's just a matter of which pocket the originations go into. Overall, we look at the overall not the particular segment.

Understood.

And the overall – and Steve, just to give some numbers to that, the overall for the quarter between the agency, private label and balance sheet, we did $2.5 billion of transactions this quarter. If you go back to this time last year in the first quarter, which was largely pre-pandemic, if you remember, we did about $2 billion. So we're up 28% over last year's numbers pre-pandemic. So this growth has been pretty exceptional.

One final thing Ivan. We're looking – it's early in the year but we are working with lower caps on the GSEs on multifamily – kind of awkward, but I call $70 billion lower than $80 billion. You know what I'm talking about. But Fannie Mae, totally blew through in the first quarter, it did $21.5 billion versus $17.5 billion so $4 billion over. I'm thinking, as we get into the second half of the year, these seem pretty firm when they when collaborator put these in place, that he wanted them down and he wanted more affordable. Is this going to play into – I know the private label that you did was not necessarily focused on this. But could we see by the second half of this year another opportunity for you to aggregate private label multifamily and do a second CMBS transaction?

Without a question. I mean, while the first quarter was strong, it was really as a result of a strong January. The agencies backed off and February and March were actually much lighter than anticipated. And that's when we started gaining a lot of momentum on our private label. So we've gained considerable momentum and I think it will be an active part of our business for all of 2021. And also we don't see that backing off. We see the agencies having cap issues. We see a greater level of affordability which you know we play in very big. So we think our private label is going to be a great part of our story.

Thank you both for the comments.

Thanks Steve.

And our next question comes from Lee Cooperman from Omega Family Office.

Thank you. I hesitate to add any complements to supplement the prior questioner. But, let me just say that I've been involved with the company. I actually see the IPO in very heavily for the last decade. I have to complement you on the movement into multiple product lines, the CLOs that you managed to issue. I think you've been very masterful in running the company. What should I worry about? What worries you at night? What keeps you up?

Clearly, when you're growing a business, there's always a lot to worry about. But I want to reflect on one thing that we're one of the only companies in our space that didn't suffer any dilution going through the financial dislocation that just occurred.

You actually bought your stock back that…

We did. We did. Most people were getting rescue capital. So, we would keep an eye on our liquidity. We would keep an eye on our liability structures. Those are critical, because we always go through a downturn. And as long as you have the right liability structures in place and good credit quality, you'll manage with those dislocations. And we want to have as much liquidity as possible. I mean looking back on it Lee, I guess not having had to issue equity. I would have loved to have bought back more stock. So, for us we focus on our liability structures and we focus on our liquidity. And most significantly, we will focus on our ability to manage our portfolio which is outstanding. So, those are the things that we focus on so we don't lose too much sleep.

Well, congratulations on your performance. Stay well. I lose sleep because my prospect not because of Arbor Realty.

Thanks, Lee. Stay healthy.

Thanks, Lee. Take care.

And our next question comes from Charlie Arestia from JPMorgan. Please go ahead.

Hi. Good morning. Hi, Ivan and Paul. Thanks for taking the questions today. We've heard a lot recently about there being a lot of capital chasing after multifamily and industrial properties lately sort of a flight to quality post COVID broader unknowns around office and hospitality and more of the known issues with retail. Obviously multifamily is most relevant to Arbor by a wide margin. But, Ivan would love to get your view on what you're seeing out there in terms of competition for your core assets. If you're seeing that competition pick up recently as more of your peers have gotten more comfortable deploying capital than maybe a quarter or two ago.

The competition is fierce. I mean it's actually greater now than it was pre pandemic. And even a lot of the people who got hurt are back and being very aggressive. So, there's no question there's a lot of compression on our pricing, but trying to make that up on the debt side. And we do have a franchise. And so we do have a lot of momentum. We did bulk up in the fourth quarter and first quarter to kind of get ahead. So, we have good spreads in place. We'll work on our liability structures and keep an eye on credit. And I think one of the other things we're going to focus on very, very precisely is that for the loans we do put on our balance sheet, we're going to try and turn them as much as we can into agency and pick up the back end fees and reduce our risk on some of the loans on our books. But, make no mistake about it. It's an extraordinarily aggressive environment right now.

Understood. And look we're sitting here in the first week of May. Obviously agency originations came back down to earth a little bit this quarter. Curious, if you can give us a sense of where volumes might shake out for the year given what the pipeline looks like and you guys typically have pretty good visibility into that. I think we all realize that 2020 was certainly an unusual year, but wondering how 2021 volumes might compare to your pre COVID annual numbers.

So, as I mentioned a little earlier, the agencies while they had a great January they did back off their price and lost some market share. They're starting to get aggressive again. So, I think it's going to be a pretty good year. I'll let Paul comment a little bit on the numbers. We are seeing growth in our private label segment of our business, which when the agencies widen out a little bit then that segment will pick up. I think from a holistic basis, we'll probably do fairly consistently what we did last year. The mix may be a little different between private label and between the agency side. Paul, you want to fill in some of the numbers?

Yeah, sure. So Charlie good question and I'll give you some color. And as Ivan said the agencies were a little light in February, March and even into April, but our pipeline has gotten really, really big. So just some context around that. We did about 300 -- with private label, we did about $365 million of agency and private label in April, but we have over a $2 billion pipeline right now in agency and private label. So it's starting to pick up again. And our balance sheet business has grown dramatically as you've seen. And in the month of April, we did another $450 million of balance sheet product. We did have about $350 million of run off. There was a couple of deals that ran off a little larger. So the growth was about $100 million. But I guess the way we look at it is exactly the way Ivan's laid this out. We've got multiple pockets, multiple different products. And I think we will be higher than we were last year on total volume, but the mix will change, right, because we'll have a little bit less, maybe on the agency, a little bit more private label and certainly more origination volume on the balance sheet side. So that's the way we look at it. And again we have the ability to go in all different areas of our business lines. The unknown is runoff. And as Ivan mentioned, we're laser-focused on recapturing as much of the runoff as we can. We've always been a firm that's prided ourselves on portfolio retention. And on the balance sheet side, we've been doing mostly multifamily bridge loans of late. And in the last two quarters, we've recaptured more than 50% of the runoff on the balance sheet side into agency and APL product. So that's the way we manage the business. I think as Ivan said we'll probably come in right around we were last year. The mix will just be a little different and we're excited about.

Got it. Thank you both so much for the color.

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

Good morning. Hi, Ivan. Previous people say congrats on another strong quarter. I feel like that's -- every quarter it's a great run. You guys have done a lot of hard work. To follow-up on the previous comments Ivan, on the private label as you see that mix shift do you have enough track record in the private label side to your margins and gain on sale there? And if you see a decline in the Fannie business, which I think has some higher margins than the other is that going to be offset, or how do we think about that changing on a weighted basis as the mix shifts?

So the first private label securitization is always the hardest. And what we were really pleased about it was well-received. And we were a little nervous because with the pandemic hitting and potential credit issues, we didn't want any -- have a misstep. So we're very pleased to say that the portfolio performed perfectly and the market is really expecting us to come back to market. And I think that second execution is going to be even better than our first, which did very well. So we think it will do very well. Paul can comment more on the margin side of the business but we feel really comfortable that that's just another product in line with similar execution to how we have it on the agency side of the business.

Yeah. And Stephen I think that's right. It will change a little bit depending on market. We'll aggregate as Ivan said for another securitization. Obviously we're swapping out what we can to protect our spreads. And I've always guided this business from a low of 101.35 to a high of 101.50 on the margin. And I think that's where we've been coming in consistently. Could the private label business do a little better in some of our securitizations? Yes. But I think it will blend all to around there. If it surprises us on the upside, that's great. But I don't think the move in mix from agency to private label will change our margins dramatically overall on a weighted basis.

Great. That’s helpful. And two questions just around the higher rate, the move-in rates we've seen. First on the servicing side, how sensitive is that? How much duration is that at? If rates moved up would that extend the life of those cash flows even further and how much so, or is it less sensitive than what you might see on resi MSRS? And secondly, does it give you an opportunity to earn a higher return on your escrow balances? How is that invested? If so how much incremental return can you generate there?

Yeah. So Ivan I don't know if you want me to take that?

Go ahead, Paul you take it.

Yeah. I think that's right. The MSRs that we generate is substantially different as you know Stephen to resi, because most of what we're doing is 10 to 12 to 15-year paper that has yield maintenance provisions and lockouts to about six months prior to maturity. So this stuff is very sticky and that's what we love about this business. There are times people pay off early. You see we get prepayment fees. They make holes on the yield maintenance. But I think it's less rate sensitive as you said than resi. That being said, if rates move and it makes sense for somebody to redo a deal we'll be there to recapture that deal and we'll also get it on the back end on the maintenance side. The second part of your question was….

Escrow returns on the spread…

Related to Escrow. Yes. So we're sitting with about $1.4 billion in escrow balances right now. And clearly they're earning far less than they were earning in the past as you know because of where rates have gone. And we've had some natural hedges against that with the run-up in our resi business. But, yes, I mean if rates move up substantially, we're going to see an increase in our escrow balances. That could be offset by the fact that we've got certain loans in our portfolio with LIBOR floors that may not fully kick-in. But yes, clearly on the escrow side, you could see a real run up. I think we're earning about $5 million and annually on our escrow balances right now. That number was $15 million, $16 million, $17 million when rates were higher a couple of years ago. So there's obviously tremendous room for expansion there if rates were to run.

Yes. Great. Well that’s helpful. Color. Thanks for the comment, Paul. Appreciate it.

And our next question comes from Jade Rahmani with KBW. Your line is open.

Good morning, everyone. This is Ryan Tomasello on for Jade. Just in terms of the SFR business, clearly there's a nice opportunity there. I was curious, Ivan if you think that there will be an additional amount of investment required to build out that platform. I know you've already spent some capital in that space, but curious based on the outlook if you think you'd like to spend more there. And as a follow-up to that are there any interesting M&A opportunities to support the build-out of that SFR lending business? Thanks.

So on a build-out it's actually a pretty good question because we were initially building it out at a totally separate and dedicated unit. And we came to the conclusion that we can actually integrate it into our existing structure and have it aligned and part of our existing structure. And when it comes to the build-to-rent unit most of the operational structure and credit decisions are being made by the same bridge group. So we're able to create enormous efficiencies and the same efficiencies on the origination side. So it won't cost us as much. We actually adjusted that when we started. So there won't be that much incremental overhead other than on an executive level which we pretty much have a full complement of executives that we need to create that. In terms of acquisition opportunities I don't really see that many acquisition opportunities at the moment. We saw a few. We passed on them. We felt building them up better would be more interesting. I think it's more a commitment of our executive talent to create the relationships and the infrastructure which we're very, very pleased with our growth. As Paul mentioned earlier, we have a pipeline of almost $1 billion that we think we can close over the next 12 months. And that ramps up because a lot of the build-to-rent takes 24 months to deploy that money. And then even with the $1 billion that we put out it's going to take probably two years to get that money fully deployed. So we're pretty pleased with all the elements that we have in place at the moment.

Great. Thanks for that. And then Ivan in terms of -- or maybe for Paul rather in terms of the residential mortgage JVs just sifting through the puts and takes there with the volume normalization coupled with the partial sell-down of your stake what do you think is a meaningful baseline for our models over the next few quarters with that business? Just so that we're all on the same page here in terms of the reasonableness of expectations?

Sure. So this is the hardest thing we talk about every quarter right because this business has surprised us on the upside every single quarter. But yes, as I mentioned in my commentary we did have some excess income during the quarter from the sell-down of a piece of our interest. So if you normalize that it was probably $10 million, $11 million. There certainly has been some margin compression and some normalization of volumes as we all expected and we saw it in the public companies as well that you guys all follow. April was probably one of our lower points at this point. We don't have it fully closed yet, but it's coming in obviously pretty light. I think for me the way I look at this and hopefully it will surprise us on the upside is that they're doing anywhere from a low of $40 million to a high of $70 million a quarter in profit and our 9% represents anywhere from $4 million to $6 million of that. That's a normalized level for us. So it's $0.02 to $0.03 a share a quarter on a normalized level. I think that probably starts in the second quarter. Maybe it will be a little higher maybe it'll be a little bit a little lower in different quarters. But it's a good business. We like it a lot. We're obviously very big on the consumer direct and retail side of that business. We're driven by technology greatly in that business, so we can gain market share. And I think that's a pretty conservative number for us of $4 million to $6 million a quarter for our share and then hopefully it grows from there.

And then just one last question if I can. Just to give us an update around the seven NPLs that were unchanged quarter-over-quarter. Can you discuss the credit outlook there anything noticeable that has changed over the last few quarters? And maybe just a quick reminder on the major assets that comprised that pool? Thanks.

Sure. So we haven't really seen a change at all in our credit. In fact our credit saw is very, very strong. We've seen very few cracks both on the agency side and on the balance sheet side. So that number is quite impressive that that number is held in there. And a couple of the deals that we've talked about in the past that are on that NPL list as we've got a couple of student housing deals that we think will work out just fine and don't need reserves for. We've got one health care deal. And I think what's on there is also one multi-family deal. Again, we don't have a reserve on it but we're working through that product right now. So there's nothing really changed. It's a few assets a couple of student housing, one multi-family, one health care deal. We don't have many in the way of reserves against those assets maybe on that $60 million in net carrying we have about $6 million of reserves. But we haven't seen the outlook materially change on those assets and we're confident that we're adequately reserved. We're going to work out these assets and get some of them to perform and maybe even have a recovery down the road, but that's our view.

Thanks for taking the questions.

And with that, it appears there are no further questions over the line at this time. I'd like to go ahead and turn the program back over to Ivan for any closing remarks.

Well, thanks everybody for your participation. It's been a great first quarter. We're really optimistic about the year and what we've put together in our operating franchise and multiple income streams. Look forward to the next quarter and everybody's participation. Everybody have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.