Good morning, ladies and gentlemen, and welcome to the First Quarter 2022 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this period, you will need to press star one on your telephone. If you want to remove yourself from the queue, please press the pound key. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul El enio, Chief Financial Officer. Please go ahead.
Okay. Thank you, Leo. 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 March 31st, 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 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 with 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, which continues to demonstrate our unique ability to consistently deliver outsized returns through our diverse operating platform. As a result, we're able to once again increase our dividend to $0.38 a share, and this is our eighth consecutive quarterly dividend increase, representing 70% growth over that same time period. We believe it's now more important than ever to continue to stress the many advantages of our unique business model, especially in light of the changing landscape of higher interest rates, continued inflation, and the potential for another recessionary cycle on the horizon. We've built a premium operating platform that is focused on the right asset classes with a very stable liability structures.
We have a thriving balance sheet, GSE, agency, private label, and single-family rental business, as well as an industry-leading securitization platform that has allowed us to produce a long track record of exceptional performance with consistent earnings and dividends growth. We can't emphasize enough the value of having an annuity-based business model with multiple products that produce many diverse income streams. This has allowed us to consistently grow our earnings and dividends in all cycles while maintaining the lowest dividend ratio payout in the industry, creating a substantial cushion between our core earnings and dividends. There are significant differentiating factors from the rest of our peer group, most of which have a monoline business, have struggled to maintain their dividends, and have very little upside for future dividend growth, especially considering an anticipated recessionary environment.
This is why we strongly believe that we're in a class by ourselves, and we should trade at a substantial premium at a much lower dividend yield than anyone else in our peer group. Turning now to our first quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.55 per share, which is well in excess of our current dividend, representing a payout ratio of around 70%. In our balance sheet business, we had another outstanding quarter. As one of the top multifamily balance sheet lenders in the industry, we continue to see opportunities for significant growth. As a result, we grew our balance sheet loan book another 17% in the first quarter to $14.2 billion on $2.8 billion of new originations.
We also have a very robust pipeline, which gives us great confidence in our ability to continue to meaningfully grow our B-loan book for the balance of the year. Again, these balance sheet loans create significant value for our platform, as they're not only accretive to our current earnings and dividends, but also allow us to build a pipeline for two to three years of new GSE agency and private label loans that produce an additional long-term dated income streams, ensuring the long-term growth of our platform and creating high-quality earnings and dividends for the future. We've consistently been a leader in the CLO securitization market, and as our financing and high-quality balance sheet portfolio with the appropriate liability structures continues to be one of the key business strategies.
We were very successful in continuing to access the CLO securitization market in the first quarter, closing another $2 billion CLO. The utilization of these vehicles has contributed greatly to our success by allowing us to appropriately match fund our assets with non-recourse, non-mark-to-market long-term debt and generate attractive levered returns on our capital. Again, we are very focused on the right side of our balance sheet with approximately 60% in the first quarter from the sharp increase in interest rates. However, more importantly, we're seeing a significant uptick in our pipeline as the market is adjusting to the changing rate environment, and we expect to be able to close the gap substantially by the end of the year and produce relatively similar agency volumes as compared to the prior year. In fact, April's origination volume was much stronger, with $475 million of loan closings.
Our GSE agency platform continues to offer premium value as it requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flow. Additionally, our $27 billion GSE agency servicing portfolio, which has grown 6% in the last year, is mostly prepayment protected and generates approximately $120 million a year in recurring cash flow. This is in addition to the strong gain on sale margins we continue to generate from our originations platform, which will continue to contribute greatly to our earnings and dividends. As we mentioned on our last call, we also closed our fourth private label securitization totaling $490 million in the first quarter, which continues to demonstrate the strength and diversity of our versatile lending platform and tremendous securitization expertise.
We've also built a growing single-family rental platform with a current pipeline well in excess of $1 billion, which makes us optimistic about our ability to continue to scale this business going forward. We're a leader in the build-to-rent space, which provides us with the opportunity to originate construction, bridge, and permanent loans in the same transaction. Like our balance sheet business, this platform provides us yet another path to future transactions that will produce additional long-dated income streams. In summary, we had another tremendous quarter allowing us to once again increase our dividend. We strategically built our platform with multiple products that produce many diverse income streams, which provides us with a future annuity of high quality, long-dated, recurring earnings.
We are also the premier multifamily originator in this space, and we are invested in the right asset classes with very stable liability structures, which positions us extremely well to succeed in every market cycle and gives us great confidence in our ability to continue to significantly outperform our peers. I will now turn the call over to Paul to take you through the financial results.
Okay. Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $93 million or $0.55 per share. These results translated into industry-high ROEs of approximately 18%, allowing us to once again increase our dividend for the eighth consecutive quarter to an annual run rate of $1.52 per share. Our financial results continue to benefit greatly from many aspects of our diverse annuity-based business model that allows us to produce multiple income streams from a single investment, giving us confidence in our ability to continue to generate high quality, long-dated, recurring earnings in the future. In our GSE agency business, we originated $761 million in GSE loans and recorded $1.1 billion in GSE loan sales in the first quarter.
We generated margins on those GSE loan sales of 1.39% in the first quarter compared to 1.52% in the fourth quarter. As we mentioned on our last call, with the change in the interest rate environment, we do expect margins to be more normalized in 2022 in the range we previously guided to of 1.30%-1.50%, depending on the mix of our product.
We also recorded $15 million of mortgage servicing rights income related to $975 million of committed loans in the first quarter, representing an average MSR rate of around 1.57% compared to 1.88% last quarter, mainly due to having a greater mix of Fannie Mae loans in the fourth quarter versus the first quarter, and those loans contain higher servicing fees. Our servicing portfolio was approximately $27 billion on March 31st, with a weighted average servicing fee of 44 basis points and has an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward around $120 million gross annually, which is relatively unchanged from last quarter due to the continued increased runoff in our portfolio.
As a result of this runoff, prepayment fees related to certain loans that have prepayment protection provisions continue to be elevated, with $16 million in prepayment fees received in the first quarter compared to $20 million in the fourth quarter. In our balance sheet lending operation, we grew our portfolio another 17% to $14.2 billion in the first quarter on volume of $2.8 billion. Our $14.2 billion investment portfolio had an all-in yield of 4.74% at March 31st, compared to 4.62% at December 31st, mainly due to increases in LIBOR and SOFR rates, largely offset by higher rates on runoff as compared to new originations during the quarter.
The average balance in our core investments increased substantially to $13 billion this quarter from $10.5 billion last quarter, mainly due to significant growth we experienced in both the first and fourth quarters. The average yield on these investments was 4.86% for the first quarter compared to 5.03% for the fourth quarter, mainly due to higher interest rates on runoff as compared to originations in the first and fourth quarters, partially offset by the effect of higher SOFR and LIBOR rates in the first quarter, net of the impact of LIBOR floors on our portfolio.
Total debt on our core assets was approximately $12.9 billion at March 31st, with an all-in debt cost of approximately 2.81%, which was up from debt cost of around 2.61% at December 31st, mainly due to increased LIBOR and SOFR rates. The average balance on our debt facility was up to approximately $12 billion for the first quarter from $9.4 billion in the fourth quarter, mostly due to financing the growth in our portfolio. The average cost of funds on our debt facility was flat at 2.65% for both the first and fourth quarters from slightly higher average interest rates, offset by reduced pricing from our CLO vehicles and warehouse facilities.
Overall net interest spreads in our core assets decreased to 2.21% this quarter compared to 2.38% last quarter. Our overall spot net interest spreads were also down to 1.93% at March 31st from 2.01% at December 31st, due to yield compression on new originations as compared to runoff and from debt cost increasing more than asset yields as a result of rising interest rates and LIBOR floors that are still in effect on certain loans in our portfolio. However, it's important to note, as the current LIBOR and SOFR curves are predicted to continue to increase, any further increases in these rates will produce a net positive increase to our net interest income spreads on our balance sheet book due to rates being above the average LIBOR floors in our portfolio.
In fact, all things remaining equal, a 1% increase in rates would produce approximately $0.05 a share annually in additional earnings. Additionally, as rates rise, we will begin to earn more income from the significant amount of escrow balances we have from our agency business and large balance sheet loan book, which will also increase our earnings going forward and is unique to our business model. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. Leo?
Thank you. As a reminder, to ask a question, please press star one on your telephone. To withdraw your question, please press the pound key. We do ask that you please pick up your handset to allow optimal sound quality. We'll take our first question from Steve DeLaney, JMP Securities. Please go ahead.
Good morning, Ivan and Paul. Thank you for taking my question. It strikes me a lot of positive things in your report, but it strikes me as if I had to pick one highlight in the quarter, it would be the structured business volume. You know, $2.8 billion took the portfolio up 16%. That wouldn't happen, that business wouldn't happen without your access to CLOs, I think you would agree. Could you talk a little bit about the latest CLO, I guess that's CLO 18, the $2 billion. And maybe talk a little bit about that execution compared to, say, the CLO 17 that you did late last year. Thank you.
Sure. Clearly the last CLO we did of $2 billion was very sizable. It was important for us given the volume. I think if you look in the, I think, Commercial Observer or one of the press, there was a CLO that was just priced. We really can't speak about it, but it's in there. We're an active issuer of CLOs. You know, the pricing of CLOs has changed with the market. The good news about the way we run our business, we're always on track as to where the market is and adjusting the pricing of our originations to match the CLO execution. Our CLOs, you know, continue to change, our pricing to our customers continue to change.
We always like to have somewhere between, you know, 50%-75% of CLO debt to total outstanding. We're currently sitting around 65%, which is a very comfortable rate relative to where we wanna be specifically in this cycle. We're well prepared with our CLOs and with our liability structures pretty much intact and very comfortable with our position.
Okay. The average for the spread there was LIBOR + 181, and that was flat to the CLO 17. Do you expect that is where the market is today and will kind of remain in that near a 180 basis points range on a weighted average?
No. No, not at all. The market's widened out considerably. In fact, we've raised our pricing to our consumers I think 5x since December. We've increased our pricing 5x to match where the market is. Basically, each price is an eight increase. We've also adjusted our credit guidelines considerably over the last nine months as well. If you take those five increases, we've increased our pricing five-eighths to almost three-quarters across the board. We've done it gradually to match how the market's moved. That's how our business runs. Usually there's a lag of a couple of weeks, but not that much of a lag. We're consistently taking, you know, new loan originations, pricing them accordingly to where the CLO market is. We're pretty aggressive about it. Some of the people in the market lag a lot more than we do. We're pretty much spot on given our, you know, level of volume and where we are in the market, and more specifically, a real clear knowledge of where the CLO market is executing to.
That's helpful.
Thanks, Steve.
Yes, Paul.
This is Paul. I just wanted to correct you. Yes, we had a 181 pricing on our last CLO, as you mentioned. The one before it was 168. Things have widened a little bit, as Ivan said, and continue to. As Ivan mentioned, we're totally in tune to what our levered return is. Because we're so active in the CLO market, we're able to adjust our pricing in order to get to that target levered return, which is something that I think is unique to our platform as we're so in tune to what that market is, and we're a market leader.
Great. Your SFR product and your BTR product, do I understand that you are putting those loans into the same CLO program that you do with your traditional bridge loans?
On the exit, but not on the aggregation aspect. When it comes to the construction, what we'll do is that's done on a separate line. Some of the loans on the bridge side, once they're stabilized, they'll be going to our CLOs with multifamily characteristics.
Got it. During the interim, because of the complexity of construction draws and everything, that's your take. In other words, your CLO is your take out once you're past your development construction period.
Once the units are up and running and get leased up, yes.
Yeah. Thank you both for your comments.
Thanks, Steve.
Once again, that is star one to ask a question. We'll move next to Stephen Laws of Raymond James.
Hi, good morning.
Hi, Steve.
Ivan and Paul, you know, you guys have both touched on this a number of quarters in a row and would love to get updated thoughts. I think, Paul, you touched a little bit on your prepared remarks. You know, kind of early repayments been running pretty high the last few quarters. Kinda curious what you're seeing there maybe in April or, you know, is the volatility and maybe changing macro outlook, you know, made some people more reluctant to pay those penalties to refi early?
Sure. Let me give you some numbers, Steve, and then I'll turn it to Ivan for the market color. You did mention I did address some of that in my prepared remarks. It still continues to surprise me that the level of prepayments we're seeing. There's still a lot of sale activity in the market. Prices are still elevated. We'll see where that goes with the changing environment. We did have another $1.25 billion of agency runoff in the quarter. That generated $16 million in prepayment fees. As I've said last quarter, we do think that slows down as interest rates rise. Obviously, naturally, yield maintenance burns off when interest rates rise, although we did say we thought it would be elevated in the first and maybe the second quarter, and we were right.
It was elevated in the first quarter. In the second quarter, in April, we had $350 million of agency runoff in April, and we generated, you know, just over $4 million in prepayment fees from that. We do think it slows over time. When that happens exactly is hard to determine. Obviously, with rising interest rates, those numbers will be more challenging to have higher prepayment fees. You know, Ivan could give his view on where he thinks runoff goes given the state of the market and, you know, how people view those prepayment fees challenges.
Yeah. I think we'll have another robust quarter next quarter because there's still a lot of assets in the market for sale. However, the prepayment fees could come down a little bit as the yield maintenance is a little less because rates are a little bit higher. You know, multifamily values still seem to be maintaining themselves. The substantial gains that a lot of people have in their multifamily assets and a lot of people are monetizing those gains even if they have to pay prepayments because their gains way outweigh the prepayment factor relative to their you know total gain perspective. I do think they'll slow a little bit in the third and fourth quarter as the market kinda readjusts a little bit. You know, we're certainly kinda expect a reasonable quarter next quarter.
Great. Appreciate the comments this morning, Ivan and Paul.
Thanks, Steve.
We'll take our next question from Crispin Love of Piper Sandler.
Thanks. Good morning, everyone. My first one's on the origination trajectory in the structured business. I think last quarter, you were talking about $1 billion per month or a little bit less than that. Just curious if you could provide an update on what you're seeing currently, and then also how that could impact originations in the second quarter and throughout the year.
Sure. Well, clearly, we're the market leader on providing bridge debt in the multifamily sector. You know, even as we continue to raise our pricing, and I think we had two price increases over the last 14 days, we're still seeing originations at that similar level of about $1 billion a quarter, which is where we're kind of managing to. For the moment, we're in pretty reasonable shape in our pipeline. I think that through June, August, July, we're at that level. We haven't seen a slowdown as of this point. I think with the volatility of the 10-year fixed rate markets, I think people are still very interested in, you know, heading towards, you know, floating rate deals until they see the market settle out.
In addition, I think you still have at least another six months of resets and rents. People are buying all these properties and still bringing lagging rents to market, and there's like a 10% gap between rents a year ago and today. I think until you see that full turn of rents, the bridge product will be an attractive financing alternative, especially in this market volatility.
Yeah. Crispin, it's Paul. Welcome, by the way, and thank you for your participation. To Ivan's point, I'll just give you a couple of numbers for April because we have them. Obviously, we're in May. We did close $800 million of bridge product in the month of April. We did have $500 million of runoff in April. But as Ivan said, our clip and our pace is probably between that $800 million and a billion a month going forward. Now of the $500 million runoff we did see in our balance sheet book, we were able to recapture 35% of that in our agency product, which is great, and that's our model. As you know, that's what we strive for.
Of the $475 million of agency product we did in April, you know, about 35% of that $500 million that ran off in the balance sheet book, went right into the agency product. That's our model. That's great execution for us. That's what we strive for. Those are some of the numbers around April.
Great. Thanks, Ivan and Paul. That's helpful. Just one on gain on sale revenue. It seemed like it was significantly lower in the quarter sequentially. Can you speak to what drove that or if there are any non-core items there that's driving that or if there's just something that I'm missing there?
Sure. Let me take you through that. First of all, you gotta look at it, there's two line items, Crispin, on the P&L that you've gotta combine a little bit, and we do it in distributable earnings to help you guys on a rec. The gain on sale, fee-based services and gain on sale item did look really low, but then you gotta look at the gain from derivatives line. We had our APL securitization of $489 million in the first quarter. Obviously with where interest rates went, the assets were worth less, they're fixed rate assets, but the swaps were worth more. The swaps were usually in the money, the assets were less in the money.
You've got to take about $17.1 million of that $17.3 million on that line item and add it up to the gain on sale number. That puts you at about $19 million on a gain on sale, which is about a margin of 101.18%, and that's because the APL product gapped out a little bit, and we had a little less margin on that than we'd have in the past. On the agency business, if you strip out the APL on that $1.1 billion of agency, we did about a 101.39% margin, and that was compared to a 101.52% margin in the past.
What I've said in my commentary is, given the change in interest rates, we do expect margins to be a little tighter, but some of it also has to do with mix. We had less FHA loan sales in the first quarter than we did in the fourth quarter, and that's just timing of when stuff originates and when we sell it. Obviously the FHA business, as we've commented in the past, is like a 104 business. That certainly can skew the margins. We also have the single-family rental business. We also have a permanent loan product where we originate fixed rate loans, and then we sell them into the market with no risk. We really didn't have any of those sales in the first quarter. Again, it's timing.
We had a few of those sales in the fourth quarter, and those were like a 102%, 103% margin. A lot of it is mix. On the general straight down the middle, Fannie, Freddie, the margins haven't really changed. It just has to deal with the mix, and that's why we guide to a 101.30%-101.50% margin going forward.
Great. Thank you, Paul. Thanks for the clarification there.
Once again, that is star one to ask a question. We'll move next to Jade Rahmani of KBW.
Thank you very much. Volumes continue to remain extremely strong in the market. At this point, do you think that's a function of investors rushing in to capture current interest rates before there's future increases or something else is driving that?
I think, you know, the multifamily sector seems to be, you know, one of the most resilient sectors and, I think there's just a lot of investor demand in this sector. We're seeing that also in the build-to-rent sector as well. You know, those are just two sectors that continue to drive a lot of equity. The sales from what I hear in the first quarter and to date are still extremely strong. I do believe there'll be a little bit of a reset as rates change and people take a step back and reevaluate. But we're pretty optimistic in terms of overall multifamily sales opportunities going forward for the balance of the year.
Maybe they'll cool off slightly, but even if they do cool off, they'll readjust and, you know, maybe you'll have a gap for about 60 days as the market resets to how they're gonna view, uh, interest rates and, you know, the potential for a recession.
Thanks. In that gap, do you expect there's gonna be multifamily cap rate widening? Could you put some parameters perhaps around the magnitude that you're thinking about?
Yeah. Contrary to everybody else, we've been very much anticipating inflation and a potential recession. We've underwritten cap rate expansion to about 50 basis points from where it is today. Heavily criticized for, but that's our position. We believe that, you know, as rates widen, and, you know, rent growth slows, you'll see, a bit of a widen on the cap rate side. Even if you have strong investor demand, you still need to have the kind of returns to their equity, and that's our perspective.
Thank you very much. On the $500 million of runoff you saw in April, 35% of those went into agency, so those refinanced from a bridge product into a fixed rate product with longer term duration. What did the other 65% do in your insight?
Yeah. Most of it. You're right, 35%, and most of that 35% was a large deal that we had on the bridge side that we were able to take out in the agency side, which is great. The rest of that, for the most part, were sales that walked away. We didn't recapture the rest of that because it was mostly as a result of the sales of properties which we don't always control the takeout on the sale.
Thank you. Just a strategic question. The platform, the company overall has grown tremendously over the last multiple years. There's a cohort of mortgage REITs that you could argue are subscale in the market trading at discounts to net asset value or book value. You know, would acquisitions, M&A ever be something of interest, or do you believe Arbor's just got this unique multifamily-focused platform that works well between the structured and the GSE business that not really interested in branching out?
Ivan, are you there?
Can you repeat the question? I fell off the call. I'm sorry. We're back on.
Yeah. It's an M&A question, mergers and acquisitions. You know, Arbor's grown tremendously over the last five years and has a strong niche within the multifamily, small balance as well as, bridge lending market. Would the company be interested in M&A in the mortgage REIT space to expand its overall footprint into other products, or is that not really a focus?
I think we've always had a history of M&A. We haven't done that much over the last couple of years, only because we think the pricing and the market has really been, you know, a little bit inappropriate to be accretive to the company. I think now, as we go into a different cycle, there may be some opportunities to expand our product lines and different ways we do business. I think given the strength of our balance sheet and our performance and our earnings and our position in the marketplace, there could be some opportunities if there's a bit of a downturn.
Thanks very much for taking the questions.
Thanks.
This concludes our question and answer session. I'm happy to return the call to Ivan Kaufman for closing remarks.
All right. Well, thank you everybody for your participation. It's been clearly another great quarter. We've had a great run and for a long period of time. It is a changing environment which we believe we're extraordinarily well positioned for, and we look forward to everybody's participation next quarter. Have a great weekend, everybody.
Thank you.
This does conclude the first quarter 2022 Arbor Realty Trust earnings conference call. You may now disconnect your lines, and everyone, have a great day.