Good morning, ladies and gentlemen, and welcome to the Third Quarter 2022 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Shelby, 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 ended September 30, 2022. 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. As you can see from this morning's press release, we had another tremendous quarter as a diverse business model continues to offer many significant advantages over everyone else in our peer group. We have a premium operating platform, with multiple products that generate many diverse income streams, allowing us to consistently produce earnings that are well in excess of a dividend. This has allowed us to once again increase our dividend to $0.40 a share, representing our 10th consecutive quarterly dividend increase with 33% growth over that time period, all while maintaining the lowest payout ratio in the industry. We've also strategically built a platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to thrive in this economic downturn. We invested in the right asset class, with a lot right liability structures, highlighted by over 8 billion and non-recourse non-mark-to-market CLO debt representing nearly 70% of unsecured indebtedness with pricing that is well below the current market. We also have no significant short-term debt maturities and a wall capitalized with currently around 600 million in cash and liquidity, providing us with the unique ability to remain offensive and take advantage of the many opportunities that will exist to generate superior returns with our market capital. Additionally, a dividend is well protected, with currently the lowest dividend payout ratio in the industry. And we cannot emphasize enough the depth and experience of our executive management team, including our best-in-class dedicated asset management function that allowed us to successfully operate our business to multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing rate in our space for several years now.…

Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings $105 million or $0.56 per share, which is up from $94 million, or $0.52 per share last quarter. The increase was largely due to substantially more net interest income on our floating rate loan book, and from higher earnings on our escrow balances to the increase in rates, along with a few onetime losses recorded in the second quarter on some one-off loan sales. And our third quarter results translated into ROEs of approximately 18%, and once again, our quarterly distributable earnings have substantially outpaced our dividend with a dividend to earnings ratio of around 71%, allowing us to increase our dividend for the 10th consecutive quarter to an annual run rate of $1.60 a share. As Ivan mentioned earlier, we are well prepared for this downturn, and our model offers many strategic advantages, giving us great confidence in the quality and sustainability of our earnings and dividends. In our GSE/Agency business, we originated and sold 1.1 billion in GSE loans in the third quarter. We generated margins on these GSE loan sales of 1.3% in the third quarter compared to 1.59% in the second quarter, mainly due to a greater percentage of FHA loan sales in the second quarter, which have a much higher margin, as well as some overall general margin compression given the current rate environment. We also recorded 17.6 million of mortgage servicing rights income related to 1.2 billion of committed loans in the third quarter, excluding 300 million of balance sheet loan sales, representing an average MSR rate of 1.51% compared to 1.48% last quarter. Our servicing portfolio was approximately 27.1 billion at September 30th, with a weighted average servicing fee of 42.4 basis points, and as an estimated relating remaining…

[Operator Instructions] We'll take our first question from Steve Delaney with JMP Securities.

I would congratulate you on another great quarter, but I think the fact that ABR shares are up 9% this morning, says it much better than I could, but congratulations. Nice to see the response. So, obviously, a lot of talk about the CLO market that had been a very important tool and building your bridge portfolio. We know what's dislocated right now. We're starting to read just in the last four to six weeks about Freddie and their Q-Series shelf, that seems to frankly, I hadn't heard about it until the last couple of months. And you hear about K-Series, obviously, but Q, I don't know what Q is. But I think a deal got done in October. I'm just curious, if for you for Arbor in the business you do. Is that program viable as an alternative to your normal CLO shelf?

Sure. So let me respond to that, Steven, once again, thank you for your positive comments and a great relationship that we've enjoyed over the years. We're a Freddie Seller/Servicer, we've evaluated the Q-Series and it is a viable program. It is really geared towards affordability to enhance their affordability numbers. And we think it's an important program because it offers the ability to access securitization to the government for those type of products. So, that's right now wheelhouse. So, it's something that you don't be surprised if we're a participant in that program.

Great to hear. And we're going to be talking about affordable I think in a couple of weeks at our conference, hopefully. But I was glad I think if anybody was going to be involved that with your relationship with Freddie that you probably would. Paul, jumping over to you. When you were talking about your CLO, I think you were talking about reinvestment of CLOs, you mentioned a figure of 18%. Is that your estimated return on capital on reinvestment with fresh coupons going in?

Yes, so it's exactly that Steve, but we're saying is because we have these low costs locked in CLOs at 163 over and we all know where spreads have gone. And all the CLOs that are left have reimbursable periods. What we're doing is, we're -- loans are running off where originating new loans at higher spreads and financing them through those vehicles with the replenishable capital, and while we're doing that we're getting greater than an 18% levered return on those new investments that's exactly what's happening. And it's really meaningfully moving up the levered returns on our model. And I'm sure Ivan can comment, but very unique to our situation and the way we've structured our deals, and the way we had the foresight prior to the market dislocation to go out and do two securitizations this year, and really lock in those low costs.

Fantastic. And the replenishment terms on the two that you just did this year. How many months or years do you have left on those two to reinvest?

Yes, so let me give you some color. So, we have almost 10 billion of assets sitting in our CLOs with 8 billion of debt roughly about 82% leverage. One of the vehicles comes out of replenishment period this month. So, if we exclude that vehicle, we have, we'll call it, 7.5 billion of CLO debt and about 9.5 billion of CLO assets that are sitting in one, two, three, four, five, six, seven vehicles that still have replenishment, and of those seven vehicles. I would say about 2 billion of that debt comes out of replenishment in the middle to end of 2023, it's all staged. And another 5.5 billion of that debt doesn't come out of replenishment until middle to late of 2024. So, we have lots of time and room on a lot of these vehicles, which is really helping our returns.

That's fantastic. Okay, thanks. And one final quick question. I'm turning to the rest of the analysts. I haven't read that you did a deal in Brooklyn on 22 Chapel Street leading a recap. Commercial observer had a feature on it. I was curious that because that property, I think is an opportunity zone. Can you just comment on the attractiveness of that type of property for a developer and also the opportunity for the lender in terms of, I guess, in tax benefits to the developer? And how defensible when you look at that property? Is it more likely to perform better in economic slowdown in a recession, then maybe some high end properties that may not be absorbed as quickly? I'm just curious, your thoughts about that property as both as an investment and as a loan? Thank you.

I must say, I'm not familiar with the details of that transaction, which is unusual, which must be and must have been done in the normal course of business. So in general, anything that's affordable, there's just a huge demand for that product, anything in the New York area that's affordable. We don't project any real rent increases with this all regulated. But yes, very, very, very low occupancy changes is more likely utility, but I am not familiar with that particular one.

We'll take our next question from Stephen Laws with Raymond James.

I want to quickly touch-base. Paul, maybe a quick number, but repayment incomes and you talked about what you're seeing in repayment? So you guys, everyone has been expecting to slow, but they've remained stubbornly high, which we'll talk about early repayment income contributions for the quarter?

Yes. So in my prepared remarks, I had mentioned that we did see a fair amount of runoff in our Fannie Mae book this quarter, again, that we've seen, as you know, Steve, over the last several quarters, that runoff was about a $1 billion of transactions. And we had earned about $11 million in prepayment penalties. I think on the last quarter, I guided you that that should come down significantly. It was a little surprising to me that we had that much in repayment penalties, and I've done some work on it. And it really has to do with the fact that the market is lagging, right? There's a little bit of a lag on one rates and two on sales volume, and we did see a little bit more sales live in the second quarter than maybe we expected the market has changed since then. So, we are expecting that to start to really slow down given where rates are. And maybe more importantly, it's very binary. So, our Fannie Mae book has probably an average interest rate or coupon rate of about 4%. That doesn't mean we don't have 5% and 6% mortgages we do, and we have 3.5% mortgages that way to about a 4. And we're rates are today, the 5, 7 and 10 years above that, even though there's a lag if loans were to repay today, and I guess, my mind loan repayments will flow naturally given the environment. There really isn't much yield maintenance, if any, because it just goes away, right, because the rates are exceeding the coupon rate. So, it's a binary process. It hasn't happened yet, because things are on a lag. But we do expect at the start. Having said that, we did have 200 million, 200 million plus runoff in our book in October and we got about 3 million of prepayment fees already in October, I'm modeling maybe another million for November and December, so maybe we'll get to 4 million or 5 million. But I do think that after that, it gets to a very small number, maybe it's a million a month, maybe it's half a million a month, I don't know, but it's not 11 million. But on the flip side of that, what's happening when runoff slows and rates rise, our servicing portfolio is staying intact. And of course, we love that because those servicing fees are long-dated and it's an annuity. So, we'd rather have the servicing. And the other side, as we mentioned, our prepared remarks is our escrow balances will stay elevated, and where rates are going, our escrow earnings are substantial. I mean, look at the numbers. So that's a great hedge against rising rates. And I think that's how this plays out over the next few quarters.

That's helpful. Thanks very much for that, Paul. Ivan, investors continue to do a lot of work on loans and portfolios, and frankly, looking into sponsor quality. Can you talk about the typical sponsors of your bridge loans? How large they are? How well collateralized? You have any concentration amongst sponsor exposure with multiple loans and same people, maybe some metrics or general commentary around your typical borrower?

We tend to have borrower who do a significant number of transactions with us. And we generally traffic in the $25 million to say $150 million loan range, and it's not unusual to have a number of transactions with a specific sponsor, and there's a lot of tenure with us. We're not the lender, who would typically do a one-off loan to garner a piece of business. We generally like to do loans with somebody who we think we're going to have a long-term relationship. So that speaks to the kind of operated we have. We went through a period of time, and you could see it in the market where a lot of sponsors, especially the big ones, a very syndicated a wave, a mixture of all types of borrowers, but typically, where the borrowers who, a lot of family and friends money, they do have some institutional money, but it varies in revealing our portfolio. In fact, I met with one of our top sponsors where we have close to a billion of bridge loans with that sponsor this week, and I will tell you that, they're well capitalized. They've got access to capital. They're on top of the details of their specific loans, and have a good grasp on them. And, they, I believe, at least people, we have a generally really good operators who can execute very well, execution is really critical. And more significantly, we have a good enough relationship with them, if they run into an issue, we'd like to be able to sit down with them and figure out how to manage that issue with them. And so far to-date, looking at our portfolio, we're always ahead of schedule in terms of evaluating our assets and our sponsors, portfolio knock on wood is in great shape, it doesn't mean that we're immune to the complexities that exist in a rising interest rate environment and decrease real estate values. But it's how you manage the sponsors and how you have relationships are, more importantly, the kind of structures you have in your loans. I spoke about it repeatedly over the last number of years, that we have a lot of structure in our loans. It's not just the real estate. It's the provisions to keep our loans in order in terms of interest rate, replenishments, rebalance requirements and things of that nature. So, we don't just look at a real estate, we looked at a sponsor, we looked at a financial capability to sponsor and the commitment of a sponsor. And we put that all together in one potion, and that's how, with great asset management, we're able to keep our book in very good shape.

Appreciate the comment, Ivan and Paul. You guys have a great day.

We'll take our next question from Rick Shane with JP Morgan.

Thank guys for taking my question this morning. And I apologize this is going to cover more balance around a little bit call this morning. One of the things that we're starting to realize as we move through earnings season is that, sponsor behavior is increasingly influenced by exact what I would describe as exogenous factors. How they're financed on the debt side time and maturities type of financing? Within your portfolio, are you seeing that and how do you manage that risk so that you don't sort of get defaults or credit issues related to structure versus the underlying fundamentals of the properties?

Let's first start by recognizing that we're multifamily oriented well over 90% of our assets maybe higher on the multifamily side. It's also realized that we're senior lender, primarily. And we're not doing preferred equity, mezzanine, and things of that nature. So, those are big qualifiers. And we're also a cash flow lender. Those are the basic premises. The second is, as I've mentioned earlier, many lenders in this environment were very lacks on their documentation, and very lacks on their requirements in terms of sponsor recourse and responsibilities. We have been in this business longer than anybody at this point, we've been through multiple cycles, and documentation relative to our loans. And the liability of the sponsors is very straightforward, unlike other lenders. On top of that, we have default rates and our loans typically at 24%, where other people have very mild default rates. So I would say it's our experience in terms of how we document our loans, how we ask them manage our loans that puts us in a primary position. We also have the experience and the capability to take back and manage any asset. And we're not afraid to do that. We also have a deep pocket of sponsors who love to take on opportunities if there is a transition from an asset. So we have the depth, we have the distribution, we have the experience, and we have the capital to manage these particular circumstances and the right asset class. And that's what puts us in a great position. That doesn't mean we won't have our issues with our sponsors. And we always do. It's just a matter of how you're able to manage them. And where you have the leverage and typically, when sponsors have no recourse and no liability. Then they…

Look, it's a very helpful response. And I appreciate the context. I think one of the things that we're starting to think about and hear more about is, both the recalibration of cap rates, coincident with some deflation in terms of, or more pressure in terms of rents, and sponsors starting to run into issues where their pro forma rent increases are less likely to come through. So that's the other thing we're just trying to understand as we go through all this, and it sounds like you're approaching it exactly the same way.

Yes, I think what's important to note on that, which is very relative. We've definitely had cap rates increase from let's say, four to five as a general number. But during that period of time, going back 15 months ago and 18 months ago, you've also had rents increased by 15% to 18%. So, to a large extent, you've had the rent increases, kind of catch up a little bit, and offset the change in cap rates. But you're right, we do not expect, under any circumstances to be that kind of rent growth going forward, at all. And we've been that way for quite some time. We've been -- our outlook starting about 9 to 12 months ago, was exactly that as rates went up, we started to look at exit cap rates and we started to really take a look at that if we are going into a recession, you're not going to see that kind of rank growth. So we're not expecting rent growth, right? If you're flat to up a little bit, that's fine. We are expecting in a recession different than everybody else, we're going to expect some economic vacancy because people can't pay their bills and pay them on time. You also have a record number of units being delivered on the multifamily side. So, you're going to see some concessions on the new product coming on board. So, all those are the headwinds that we're facing, you can't ignore them and you got to manage to them. So we're prepared for that. And that's our outlook.

We'll take our next question from Jade Rahmani with KBW.

Just wanted to confirm, are you expecting a flattish trend in transaction volumes for Arbor both on the GSE side and the bridge lending side?

So I think, on the on the GSE side, all has to do with two factors the way the tenure is and where cap rates go to, if cap rates adjust appropriately, and people can buy opportunities, and the tenure is the reasonable level of the yield curve. I think you'll see some decent purchase activity, we'll see that. So I would say going forward next year, I think we'll be in the range of what we did this year and maybe a little down. In terms of bridge activity, I think that's going to be dictated where we see the bottom, when we want to get aggressive. I think that it may be the first quarter and maybe the second quarter. But when we are close to the bottom, we will get extremely aggressive at that point in time. And it's either going to be in the first quarter or the second quarter, we're not sure when and then we'll resume a fairly active level. And it also depends on where SOFR is because, depending on where SOFR is and where people have to borrow will dictate where the bridge is. We do think there's going to be an extraordinary amount of opportunity to provide recapitalization capital very attractive returns and we're working on that very effectively. We think we can recap borrowers and get adjusted returns of between 15% to 20%, which would be a good use of our capital, and also composition people back into the agency business, if that, if that works well. So, I think a little patience right now. We've been really patient the last six months. We'll continue to continue to be patients with the first quarter and wait to where we feel the market has really adjusted. We think the market will overcorrect. We think a lot of the data that we're seeing is lagging and there'll be a point in time where we can get real aggressive. It's not right now.

Jade, it's Paul to tie these comments, which are on the longer term side, which is great. Just to help you with your model a little bit as we had mentioned in our prepared remarks. We did 250 million October and in the agency business, we did 1 billion in the third quarter. We still think we can come in similarly, maybe it's 950. Maybe it's a billion. I don't know where it comes in. But we're not thinking it's going to be materially different, just in the short-term. And in the balance sheet business, I think we did. October was a little bit later, I think we did 50 million a bridge and we did another 50 million of 60 million in fundings on our SOFR business. And we had about one at a runoff in October, which we recaptured into agency 50% of that runoff, which was great. That's our model. But I think we're projecting and we talked about in our commentary that we're looking right now at least in the short-term to match our runoff with new originations. So, we are expecting that to be flat in the portfolio for the fourth quarter whether that's 400 million, 500 million, 600 million a new volume. We're not sure yet, but we think the runoff is going to be equal to the originations at least in the short-term.

I was wondering also, if you're seeing any opportunities and M&A in the commercial mortgage REIT space? Thanks.

I think there will be, I think there's going to be a liquidity squeeze. I think people got a really, really aggressive on the originations even late in the cycle. When we were backing off nine months ago, people were thinking that was an opportunity to gain market share. And I think that was a real mistake. I think a lot of people have never managed CLOs before don't have asset management skills. And I think there could be some real opportunities. We're in a period now of capitulation, on cap rate changes in values and rent growth. It's interesting that we spoke about it on this call. We've been speaking about it for nine months. Everybody's been looking at us like we're nuts. And I definitely think we've had a different view than everybody else. There's a bit of a catch up. So, I think that will occur. I think there's going to be plenty of trouble with the people who have been extraordinarily aggressive the last nine months.

[Operator Instructions] We'll take our next question from Crispin Love with Piper Sandler.

I think telegraph last quarter, you pull back meaningfully and bridge multifamily originations this quarter. Was that primarily just your conscious decision there? Or was there a drop off in demand as well from borrowers just given for cap rates and debt costs currently for borrowers?

It was a conscious decision for a multitude of reasons. Number one, we had a significant pipeline earlier in the year, that we actually didn't close because we were required an adjustment to valuations based on the change in marketplace. So, that was an unusual thing that occurred. We had a garnered a significant pipeline, and the change in interest rates did not reflect the change and values. So that was immediate. That was a conscious underwriting decision. The borrowers didn't like it but numbers don't lie, facts are facts. So, we had a lot of fallout now exist in pipeline. We were very aggressive in changing our underwriting grids and our pricing to reflect the market. So, we step out of the market based on where we saw the market and where our competitors saw the market, those were two factors. And the third was an eye towards liquidity. We were very conscious of maintaining our liquidity and managing our liquidity and not putting out more money not knowing where the market was going. So that really led our direction. In addition, you have to look at the way our company is structured. At this point in time with these low liability structures that are in place, when we have runoff, and we can replace it with existing inventory it's better leverage on capital. So we don't have the necessity to go out right now, especially when cost of capital is higher. So if you take all those factors, it was a strategic direction of the Company to be exactly where we are today.

And then just one on credit quality, credit quality, it looks to be really stable in the quarter, technically no change in non-performing loans or the alliance. But can you speak a little bit to the credit outlook from your point of view? And if you're starting to see any issues, whether it be in bridge multifamily space, or elsewhere away from your portfolio, just especially considering your comments earlier items, that you're that you believe that we're just we're in the middle of a recession right now?

Yes, I think there's going to be stress in the system. And I think people are going to have access to capital to pay for higher debt costs and potentially put new caps in place when the old caps expire. I think there's a lot of benefit right now for existing caps in place. I had mentioned I met with a borrower who we have close to a billion dollars of loans, he has strike prices on his caps between 50 and 150 basis points. So he's well protected, right? So, there's a lot of that protection out there. When that protection wears off, either people are going to have to put lower caps in place, attract capital to buy lower caps, or somehow convert it to fix rates which are lower carrying costs and bring more equity to the table. That's going to be the point in time when borrowers have to reposition access, other equity. And the equity checks could be between 5% to 20% of the capital structure and be put in a priority position, that's going to be the point in time. And it's going to happen, it could happen a year from now. And all depends on where the yield curve is at that point in time of where we are in the cycle. But there's a little time for that, it'll leak in gradually. But I think that's where the stress will be. We put a very aggressive campaign in place when the treasury started going over to convert a lot of our floating rate book into some agency loans and fixed rate business. And we were fairly effective with that and the borrowers are very thankful for that. So, I think we will look at, where treasuries go, if there's a dip in treasuries, how to convert some of our portfolio and manage it day by day based on where the yield curve comes and the access to liquidity that our borrowers have.

It appears that we have no further questions at this time. I will now turn the program back over to Ivan Kaufman for any additional or closing remarks.

Well, let me conclude by thanking everybody for their participation. And once again, it was a remarkable quarter. And we do expect stress in the system, but the Company has multiple different revenue streams that act differently in different environments. And we're very pleased to have delivered the kind of results we have. So everybody, have a great weekend and have a great day. Take care.

Take care everyone.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.