Arbor Realty Trust, Inc.
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Second 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. Please be advised that this conference is being recorded. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please begin, sir.

[Paul Elenio:]

Thank you, Brittany 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 June 30, 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.

[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 outstanding quarter with many significant accomplishments, including exceptional operating results which, continues to demonstrate our unique ability to consistently generate high quarterly earnings and deliver outsized returns in every market cycle. I can't stress enough the importance of having multiple products with diverse income streams, which allows us to consistently grow our earnings and dividends, while others in our space have experienced little or no growth at all. We have a much higher quality of earnings with consistent dividend growth and a very low dividend payout ratio, which is why we strongly believe we should consistently trade at a substantial premium and much lower dividend yield than our peer group. We also remain extremely well-positioned for continued success, giving us great confidence that we will produce outstanding results for the balance of 2021. Our tremendous operating results combined with our, strong outlook has allowed us to once again increase our dividend to $0.35 per share. This is our fifth consecutive quarterly dividend increase and our ninth increase in the last 12 quarters, all while continuing to maintain the lowest dividend payout ratio in the industry. We've built a premium 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, producing a long track record of exceptional performance with consistent earnings and dividend growth, as a result, we have been the top-performing REIT in our space for each and every one of the last five years. Before we dive into the details of our quarterly results and the significant growth we continued to experience in all areas of our business.

[Paul Elenio:]

Okay, thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $69 million or $0.45 per share. These results once again translated into industry high ROEs of approximately 17% for the quarter and have allowed us to increase our dividend to an annual run rate of $1.40 a share. And this quarterly dividend increase reflects our fifth consecutive quarterly increase and our 21st increase in the last 10 years. Our financial results continue to benefit greatly from many aspects of our diverse business model, including significant growth in our agency, private label, and balance sheet business platforms that produce substantial gain on sale margins, long-dated servicing income, and strong levered returns on our capital. The income we continue to generate from our residential banking joint venture and the credit quality of our portfolio. As we guided to on our last call, we did see some more normalized results from our residential banking business joint venture as volumes and margins returned to more normalized levels. We recorded approximately $5 million of income from this investment in the second quarter, which contributed approximately $0.03 a share on a tax-effective basis to our distributable earnings. And based on the current market conditions, we expect this trend to continue for the balance of the year, resulted in estimated income from this investment of between $4 million to $5 million a quarter going forward. Our adjusted book value at June 30 was approximately $11.35, adding back roughly $61 million of non-cash general CECL reserves on a tax-effective basis. This is up approximately 5% from $10.86 last quarter, largely due to our second quarter capital raises. The significant earnings we generated in the second quarter in excess of our dividend, as well as from the successful recovery of $7.5 million reserve on a hotel asset during the quarter. And as a reminder, we have very little remaining exposure to the asset classes that have been affected the most by the recession, such as retail and hospitality. Our total exposure to these asset classes is approximately $100 million or about 1% of our portfolio, which we believe we have adequately reserved for giving us great confidence that our adjusted book value accurately reflects the impact of the recession. Looking at the results from our GSE agency business, we originated $925 million on loans and recorded $1 billion on loan sales in the second quarter.

[Operator:]

And we will take our first question from Steve Delaney with JMP Securities. Your line is now open.

[Steve Delaney:]

Good morning, Ivan and Paul. And it's getting redundant, but have to say, congrats on another excellent quarter. The thing that struck me this quarter looking over the results is, not only are you doing the basic blocking and tackling, but the level of sophistication, tapping the capital markets for various transactions just continues to improve. So, props on all that.

[Ivan Kaufman:]

Thanks, Steve.

[Steve Delaney:]

Speaking of the capital markets transaction and I think all of us have been interested in your private label program that you started last summer or that you had your first transaction. Can you comment a little bit, you mentioned better execution, but could you comment a little bit maybe specifically like where you saw AAAs go out relative to swaps? And I think the thing that is I'd really like to know is, how do you estimate what your pre-loss return might be on the approximate 8.5% bps that you're holding onto? Thanks.

[Ivan Kaufman:]

Sure, I don't have it in front of me exactly, where we executed the AAAs so we can furnish that to you, but - we have very, very good execution. Our first private label deal came out during the initial aspects of COVID. It was the first of our brand. This is our second deal. And of course, we'll be a serial issuer based on our pipeline. And the more we issue the better our execution. So, we're really pleased with where we're trading. And we're really pleased with the reception and it's both our name and reputation in the multifamily market. The fact that we're a big CLO issue, there's a lot of crossover buyers and we expect our execution to get better and better each time. And then we're even evaluating whether we want to do a public deal, which even improves our execution given the flow that we have. So, we're optimistic about our market participation relative to the expected losses….

[Paul Elenio:]

Or - the return actually, pre-loss return.

[Ivan Kaufman:]

Yes, I think we calculate, holding the BPs is that anywhere between a 10% and a 12% return factor.

[Paul Elenio:]

That's right.

[Ivan Kaufman:]

The losses and prepayments and as you know, our loss history on our multifamily portfolio is nominal next to nothing. But that's all factored in, we carry it at the proper return and there are a lot of efficiencies by generating and holding our own BPs with the new Dodd-Frank rules and stuff that gives us a competitive advantage in the market as well.

[Steve Delaney:]

Yes. And I guess one of the benefits here. I mean obviously, you still do your CLO business but these are fixed-rate loans with longer duration than you would see in your bridge portfolio, right? I mean so, you're putting a 10% and 12% return, but it's something I think you probably are looking at a much longer life to that investment I assume than when you put a CLO together?

[Ivan Kaufman:]

Yes, it's an average life of probably nine years on a 10% to 12% coupon, which is very hard to get that kind of return for that kind of term. So, we're pretty pleased with that element of it and once again, the further long-dated income streams that we're getting not only on servicing, but on that portion of the BPs which we own, control, and created. Anything we create is what we consider to be a superior product and better risk-adjusted returns.

[Steve Delaney:]

Right, it sounds like based on the July originations, I think you mentioned or Paul did, $400 million. It would seem likely that you'll be doing at least one more of these before the end of 2021, I assume.

[Ivan Kaufman:]

We're optimistic based on our pipeline, and we kind of like the market, yes.

[Steve Delaney:]

And just one final thing, I'll leave the details to others, but obviously, a change at the top of the FHA in the last month or so. Any thoughts on maybe help what policy shifts you might expect over the next year or so from Sandra Thompson compared to Calabria, who I think we all know, was a bit of a hawk with respect to GSE risk-taking or volumes, that type of thing. So, just curious with your - what's your initial reaction was to that change? And whether, how it might impact your business one way or the other?

[Ivan Kaufman:]

Yes, I think it's good for the GSE business and for us. And in particular, there is going to be more and more of an effort on the affordable side and putting more money towards the affordable aspect of GSE business. And we think it's going to be a more favorable environment for firms like us and I think it will be more lucrative.

[Operator:]

And we will take our next question from Stephen Laws with Raymond James. Your line is now open.

[Stephen Laws:]

And to echo Steve's comments, these are very repetitive calls, but for good reasons. So congratulations on other continued growth and another strong quarter. And thinking about the SFR opportunities, what is the pipeline there? What is the competition like? It seems like a number of competitors continue to talk about opportunities there. And kind of as you stand today, when you put a new dollar to work, where do you think those ROEs can go as you scale that business?

[Ivan Kaufman:]

The SFR business is a very attractive business segment right now, especially to build-to-rent communities. We got in early. We got aggressive early and built up a nice pipeline, spreads have compressed quite a bit. But then again, our borrowing and our liability structure has gotten more competitive. What we like about the business specifically, on the build-to-rent, the construction component requires more expertise, not everybody is in it. Once you do the construction loan, you'll end up with a bridge loan and a takeout loan. We have locked up and have great relationships with a lot of the key players in the market and I think good players in the market. There is a lot of new entrants, you have to proceed with caution. Late entrants into the market is not always the best person to do business with. So, I think we're pretty pleased with the pipeline we have and we're pleased with the opportunities that we have and this price we have. There will be some compression because it is more competitive and we'll just be selective. We're just thrilled that we were early in, we're able to develop these great relationships, increase some borrower loyalty on our side of the coin.

[Stephen Laws:]

Thanks, Ivan. Paul, to touch on prepayment, I think there is some - I noted in the queue, there is some prepay income, but I think it was a historical comparison. So the portfolio growth, I'm not surprised, that's up. But can you talk about the expected repayments? And maybe early income from any early repayments as we think about the portfolio maturing in the next 6 to 12 months?

[Paul Elenio:]

So, Steve, you're right. Prepayments on the servicing side or run-off on the servicing side was almost double what it was last quarter. As you remember from last quarter, I thought last quarter was surprisingly light at around $400 million, came in around $800 million this quarter. And what was interesting - a little interesting phenomenon occurred, we did, as you mentioned, get a little bit more prepayment fees than I expected with that remodeled, and that we were getting over the last few quarters. And when I went and looked at certain of those transactions, it wasn't that people were refined away from us. Again, we're really laser-focused on retaining the business or someone is going to refi. We want to make sure we get that opportunity. But we saw a little bit in the second quarter and I don't know if it's a trend that will continue. It's hard to predict. Is there was a lot more sales volume at really appreciated values and people were fine writing those yield maintenance checks when they were getting significant increases in the value of their properties. So that was a little phenomenon we saw. Like Ivan's view, whether we think that continues? It's hard to predict, but that's kind of what we saw in the second quarter.

[Operator:]

And we will take our next question from Rick Shane with JPMorgan. Your line is now open.

[Rick Shane:]

Thanks for taking my questions this morning. Actually, just one quick detail. You guys have gone through everything thoroughly. When we look at the capitalization rate on the MSR for the quarter, it was down a little bit sequentially. Just curious, when looking at the fees and duration of the servicing rights, I don't see any change there. So, I'm just curious what's driving that? Is that a more conservative assumption or are we missing something?

[Paul Elenio:]

Rick, it's Paul. Thanks for the question. Good to hear from you, again. No, as I mentioned in my commentary, it was just mix. In the quarter, we had more committed loans because that's how we do our MSR capitalization is on committed loans. We had more committed loans on the private label side and on the FHA side of the business. So, they drove higher margins, but they also drove lower MSR rates only because the FHA deals and the private label deals have like a 20 basis point servicing fee, and Fannie is up in the 50s. So, it's just a matter of mix. If that mix changes and it likely will over time, it will be more normalized. It just happened to be a specific quarter where we had more mix in the lower servicing fee earning assets.

[Rick Shane:]

And when we think about the private label, there is nothing from a duration perspective that's materially different than the rest of the portfolio. I know there's a lot of protection on the agency business. I want to make sure I understand the private label business as well in terms of prepayment protections?

[Ivan Kaufman:]

It's the same, if not greater prepayment protections. So, we'll have some options on some of the agency business to offer, less penalty towards the end of the term. This is a little bit longer in duration, I would say. It's probably 10% to 15% longer in duration.

[Operator:]

And we will take our final question from Jade Rahmani with KBW. Your line is now open.

[Ryan Tomasello:]

This is Ryan Tomasello on for Jade. Ivan, I was wondering if you can just discuss your general outlook for GSEs - the GSEs in the second half of the year in terms of volumes and overall performance?

[Ivan Kaufman:]

I think the GSE business can be stronger in the second half than it was in the first half out of the gate, specifically, in the second quarter the GSEs also I think they we're dealing with digital collaborative issues. It's my feeling based on lower interest rates and then wanting to meet their volume target that will be a little bit more on GSE originations in the first half. Basically, everybody's loading up right now, building up their pipeline and I think you'll see a little bit more activity. And I think some of the barriers that Calabria was bringing to the table, I think are being stripped away at this point. That's kind of the existing regime, which has been in place constant probably will go back to a little bit of the historical way of operating. So, I'm very optimistic to GSE business for the balance of the year will be as strong if stronger than the first half of the year.

[Ryan Tomasello:]

Thanks. And can you talk about some of the technology initiatives that you have been investing behind specifically, in the small balance lending space? And I guess just overall, how you're thinking about technology investments generally across the Arbor platform going forward?

[Ivan Kaufman:]

I think the way we're approaching technology is, we have a goal of where we want to be in two or three years in terms of eliminating redundancy function as well as personnel functions, that's piece-by-piece. I think there's going to be a lot of advance in servicing side, on the origination side, and the way we use data. We have a three-year plan. We're doing it piece-by-piece, making improvements, technology improves, increase our ability to implement different processes and smooth out our workflow processes, but I believe we can maintain and grow our business, and remain very small and built our personnel, taking advantage of those different technologies, but it's not an overnight thing, it's progress made in each segment of the business and combining them all in to a whole process.

[Ryan Tomasello:]

And then final one for me regarding the private label business. I was wondering if you see an opportunity Ivan to partner with other non-bank lenders on private label CMBS issuance to scale volumes for that platform?

[Ivan Kaufman:]

I think that's something that we will look to do in the future. All we wanted to do is get our brand going, use our own originations. We do work with a lot of brokers, we can turn it up. We were always cautious of having too big of a pipeline very effectively. I think once we do our third one and if we end up flipping and doing public deals, and we will consider co-originated with a few others. At the end of the day, we will own and hold our own BPs, so we are very particular. We partner with one along originates, but we'll proceed with caution and we will land .

[Operator:]

I would now like to turn the program over to Ivan Kaufman for any additional or closing remarks.

[Ivan Kaufman:]

Well, thanks again for everybody participating with us and following us. And I guess a reoccurring theme from everybody and what we've been able to do is have did some dividend increases, which is really unique thing in our space. We're the only company, as I mentioned in the prepared statements, is not only have a stable dividend - why we think we should be participating in a premium. But more importantly, we have exhibited unprecedented growth - system basis. Thanks again for your confidence and look forward to our earnings call. Thank you very much and have a great day.