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 today's conference is being recorded. I would now like to turn the call over to your speaker today, Paul Eleno, Chief Financial Officer.
Please begin, sir.
Thank you, Britney, 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 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. 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 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 5th consecutive quarterly dividend increase and our 9th increase in the last 12 quarters, all while continuing to maintain The lowest dividend payout ratio in the industry. We built a premium operating platform focused On the right asset classes with very stable liability structures and 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 5 years. Before we dive into the details of our quarterly results and the significant growth we continue to experience in all areas of our business, I want to highlight some of our more notable second quarter We had a very active and successful quarter in many areas of our business. We produced tremendous transaction volumes, Originating in excess of $3,000,000,000 in new loans and investments this quarter, including over $1,800,000,000 in balance sheet loan Originations, which is a new record and just as importantly, our pipeline is currently at all time highs.
As a result, we were very active in the capital market, Successfully raising approximately $400,000,000 of accretive capital in the second quarter to fund this growth. We issued $140,000,000 of common equity, dollars 175,000,000 of 5 year 5 percent unsecured debt and $230,000,000 of new 6.38 perpetual preferred equity, which will allow us to fund our growing pipeline of loans and investments and be extremely accretive of future earnings and dividends. In fact this capital was $0.08 to $0.10 accretive in our annual earnings run rate, allowing us to increase our dividend again this quarter. Every time we raise capital is to fund our growing balance sheet loan business, which is not only high accretive to our current earnings and dividends, that also allows us to build a pipeline for 2 to 3 years of new GSE agency loans by showing the long term growth of our platform and creating higher We are also very successful in continuing to access the CLO securitization market in the 2nd quarter, closing our 15th and largest CLO to date totaling $815,000,000 with very favorable terms and pricing. We have consistently been a leader in the CLO securitization market as financing our high quality balance sheet portfolio with the appropriate liability structures Continues to be one of our key business strategies.
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 very attractive levered returns on our capital and provide us with a rock solid balance sheet. And in the Q2, we're very pleased to have closed our 2nd private label securitization totaling $450,000,000 with very effective execution, which contributed greatly to our 2nd quarter earnings and Turning now to our 2nd quarter performance, as Paul will discuss in more detail, Our quarterly financial results were once again truly remarkable. We produced distributable earnings of $0.45 per share, which is incredible accomplishment And well in excess of our current dividend representing a payout ratio of around 78%. Our ability to consistently generate exceptional results and We continue to realize significant benefits from many areas of our diverse operating platform. Continued growth in our GSE agency produces strong margins and increased servicing fees, significant contributions from our private label program, Record growth and significant benefits from the size and scale of our balance sheet business as well as superior execution on our liability structures, Strong performance of our multifamily focused portfolio with very few delinquencies and substantial income from our residential businesses.
And these reoccurring benefits combined with our versatile originations platform, strong pipeline and credit quality of our portfolio It's just in a unique position to be able to continue to produce significant distributable earnings going forward as we're extremely well positioned for future growth and success. Our balance sheet business, we're seeing tremendous growth as Dealfolix continues to really exceed our expectations. We grew our balance sheet loan book another 18% in the 2nd quarter on record quarterly volume of $1,800,000,000 and have grown at 35% already this year $7,400,000,000 as of June 30. Our pipeline is also at an all time high, which will allow us to meaningfully grow our loan book for the balance This unprecedented growth has significantly increased our run rate of net interest income going forward. And again, very importantly, these balance sheet loans also substantial pipeline of future DRC Agency loan origination volumes and long dated servicing revenues further increasing our future earnings and dividends.
It is also very important to stress that over 90% of our book are senior bridge loans and more importantly, 87% of our portfolio is a multifamily assets, which has been the most resilient asset class in all cycles and continues to significantly outperform All of our asset classes in this cycle as well. Additionally, as we have mentioned in the past, We have very little exposure to the asset classes that have been affected the most by the recession such as retail and hospitality, We also have adequate reserves against our positions. During the height of the pandemic, we recorded a $7,500,000 specific reserve on one of our hotel assets and subsequently use our own capital to purchase remaining note at a discount. We worked very hard on the transaction and are extremely pleased to report the Successful sale of our position in the 2nd quarter allow us to reverse the full $7,500,000 reserve, collect approximately $3,500,000 of unpaid interest and free up approximately $16,000,000 of our invested capital that we will redeploy into our balance sheet lending business and generate strong levered returns on this capital. We have always prided ourselves on investing heavily in our asset management function.
This incredibly Successful workout further demonstrates the value of our unique franchise. We continue to experience growth in our GSE agency platform and we are seeing We originated approximately $925,000,000 in agency loans in the 2nd quarter at $1,300,000,000 including our private label business. We are also off to a very good start in the 3rd quarter We are expecting to close approximately $300,000,000 of agency loans and $400,000,000 of private label business in July. Equally as important, we have a robust pipeline giving us Confidence in our ability to produce significant agency and private label volumes for this balance of the year. Our GSE agency platform continues to offer Premium value as it requires limited capital to generate significant long dated predictable income stream, which produces significant annual cash flow.
Additionally, our $26,000,000,000 GSE Agency servicing portfolio, which has grown 20% in the last year, is mostly prepayment generates approximately $120,000,000 a year at growing recurring cash flow, which is up 25% From $95,000,000 annually last year. This is in addition to the strong gain on sale margins we continue to generate from our origination platform, which combined with new and increased servicing revenues will continue to contribute greatly to our earnings and dividends. We're also very pleased with the significant growth we're seeing in our single family rental platform. 2nd quarter, we closed another $110,000,000 of single family rental product, Currently have well over $1,000,000,000 of additional deals in our pipeline, making us very optimistic about the growth in this segment of our business. We also believe we are the leader in the single family built to rent space, which provides us with the opportunity to originate construction bridge and permanent loans in the same Again, we are very excited about the growth in this platform, confident this business will be a significant driver of yet another source of income, Further diversifying our lending platform.
In summary, we had an exceptional quarter, are well positioned to have another outstanding second quarter, 2nd half of the year, we have a very versatile operating platform that is multifamily centric with a strong pipeline, Providing us many diverse and growing business lines that position us exceptionally well for continued future success. We are confident that our superior multi tiered operating platform will allow us to continue to generate high quality earnings and dividends and preserve our long term standing as a best performing company in our space. I will now turn the call over to Paul to take you through our financial results.
Okay. Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $69,000,000 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 And this quarterly dividend increase reflects our 5th 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 Substantial gain on sales margins, long dated servicing income and strong levered returns in our capital.
The income we continue to generate from our business joint venture as volumes and margins returned to more normalized levels. We recorded approximately $5,000,000 of income from this investment in the 2nd 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 $4,000,000 to $5,000,000 a quarter going forward. Our adjusted book value at June 30th was approximately $11.35 adding back roughly $61,000,000 of non cash general CECL reserves on a tax affected basis. This is up approximately 5% from $10.86 last quarter, largely due to our 2nd quarter capital raises, The significant earnings we generated in the 2nd quarter in excess of our dividend as well as from the successful recovery of a $7,500,000 reserve on hotel assets 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 $100,000,000 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 $925,000,000 in loans and recorded $1,000,000,000 in loan sales in the 2nd quarter. The margin on our GSE Agency loan sales was up significantly to approximately 1.83% in the 2nd quarter from 1.47% in the 1st quarter, mainly due to a higher percentage of FHA loan sales in the 2nd quarter, which carry a much higher profit margin. Additionally, as Ivan mentioned, we were very active in our private label program, originating $377,000,000 of new loans in the 2nd quarter as well as completing our 2nd private label securitization totaled $450,000,000 with very effective execution, resulting in an all in margin for the 2nd quarter of 2.37% on our total loan sales. And in the 2nd quarter, we also recorded $26,000,000 of mortgage servicing rights income related to $1,200,000,000 of committed loans, representing an average MSR rate of around 2.20% compared to 2.53% last quarter, mainly due to a higher mix of FHA and private label loans in the 2nd quarter that contain a lower servicing fee.
Our servicing Portfolio did grow another 2% this quarter to $26,000,000,000 at June 30th with a weighted average servicing fee of around 46 basis points and estimated remaining life of 9 years. This portfolio will continue to generate a predictable annuity of income going forward around $120,000,000 gross annually, which is up approximately $25,000,000 or 25 percent on an annual basis from the same time last year. Additionally, prepayment fees related to certain loans that have yield provisions did increase this quarter to $4,200,000 compared to $2,700,000 from last quarter. We also continue to see very positive trends related to our GSE Agency business collections, which we believe reflects the strength of our borrowers and the quality of our portfolio. We only have a handful of delinquent loans outstanding and extremely low forbearance numbers in our portfolio through June 30.
Loans and forbearance represent less than 0.3 percent of our $19,200,000,000 Fannie loan book and around 2.5 percent of our $4,700,000,000 Freddie Mac loan book, which is down substantially from March as we have had no new requests for forbearances in the last several months A significant amount of our loans have completed the program and are now current. In our balance sheet lending operation, we grew our portfolio 18 percent to $7,400,000,000 in the 2nd quarter on record quarterly volume of $1,800,000,000 Our $7,400,000,000 investment Portfolio had an all in yield of 5.33 percent at June 30th compared to 5.65% at March 31st, mainly due to higher rates on run off as compared to new originations during the quarter. The average balance in our core investments was up $6,600,000,000 this quarter from $5,900,000,000 last quarter, mainly due to significant growth we experienced in both the first and second quarters. The average yield on these investments was up to 5.85 percent for the 2nd quarter compared to 5.72% for the Q1, mainly due to receiving $3,500,000 in back interest from the successful workout of a hotel asset and for more acceleration of fees from early runoff in the second quarter, which was partially offset by higher interest rates on runoff as compared to originations in the Q2.
Total debt on our core assets was approximately $6,400,000,000 at June 30, with an all in debt cost of approximately 2.79 percent, which was down from a debt cost of around 2.9% at March 31, mainly due to a reduction in cost of funds from our new CLO vehicle and reduced rates in our warehouse and repurchase agreements during the Q2. The average balance on our debt facilities was up to approximately $5,900,000,000 for the 2nd quarter from $5,200,000,000 for the 1st quarter, mostly due to financing the growth in our portfolio and issuing $175,000,000 of new unsecured notes during the Q2. And the average cost of funds in our debt facilities decreased to 2.89% for the 2nd quarter from 2.99% for the 1st quarter. Overall, net interest spreads in our core assets increased to 2.96% this quarter compared to 2.73% last quarter, again mainly due to interest collected on the sale of our position in a hotel asset and more acceleration of fees from early runoff in the second quarter. And our overall spot net interest spreads were down to 2.54% at June 30 from 2.75% at March 31 due to yield compression on new originations as compared to runoff.
Lastly, the average leverage ratio on our core lending assets, including the trust preferred And perpetual preferred stock as equity was up slightly to 84% in the 2nd quarter from 83% in the 1st quarter. And our overall debt to equity ratio on a spot basis was flat at 2.9 to 1 at both June 30 March 31, excluding general CECL reserves. 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. Britney?
Thank you. And we will take our first question from Steve Delaney with JMP Securities. Your line is now open.
Thanks. Good morning, Ivan and Paul. And it's getting redundant, but I 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 Tapping the capital markets for various transactions just continues to improve. So, props on all that.
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 Typically, like where you saw AAAs go out relative to swaps. And I think the thing that 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
I don't have in front of me exactly where we executed the AAAs till we can 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, it will 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 Cielo issue, there's a lot of crossover buyers 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 Our execution given the flow that we have. So we're optimistic about our market participation. Relative to the expected losses or the return actually pre loss return.
Yes, I think where we calculate holding the B piece is at anywhere between a 10% and a 12% return factor in 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.
Yes. And I guess one of
the benefits here, I mean, obviously, you could 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% 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.
Yes, it's an average life of Probably 9 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 B piece, which We own, control and created and anything we create is what we consider to be superior product and better risk adjusted returns.
Right. It sounds like based on the July originations, I think you mentioned or Paul did $400,000,000 It Seem likely that you'll be doing at least one more of these before the end of 2021, I assume. We're optimistic. We're optimistic about
the start up pipe market that we can get back to market, yes.
Okay. 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 over the next year or so from Sandra Thompson compared to Calabrio, 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 how you what your initial reaction was to that change and whether how it might impact your business one way or the other?
Yes, I think it's good for the GSE business and for us and in particular there's going to be more and more of an effort on the affordable side and putting more money towards the affordable We think it's going to be a more favorable environment for firms like us and
And we will take our next question from Stephen Laws with Raymond James. Your line is now open.
Thank you. Good morning. And to echo Steve's comments, these are very repetitive calls, but for good reasons. And thinking about the SFR opportunities, What is the pipeline there? What's the competition like?
It seems like a number of competitors continue to talk about opportunities there. And As you stand today, when you put a new dollar to work, where do you think those ROEs
The SFR business is a very attractive business Right now, especially the built to rent communities. We got in early, 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 built to rent, The construction component requires more expertise, not everybody is in it. Once you do the construction loan, you end up with a bridge loan or 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's a lot of new entrants you have to proceed with caution. Our late entrance 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 the spreads 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 and create some borrower loyalty on our side of the coin.
Thanks, Ivan. Paul, to touch on prepayment, I think there's some I noted in the Q, there's some prepay income, but I think it was Historical comparison, so with the portfolio growth, I'm not surprised that's up. But can you talk about the expected repayments and maybe early income For many early repayments as we think about the portfolio maturing in the next 6 to 12 months.
Sure. So Steve, you're right. Prepayments on the servicing side or runoff on the servicing side was almost double what it was last quarter. Yes. As you remember from last quarter, I thought last quarter was surprisingly light at around $400,000,000 came in around $800,000,000 this quarter.
And what was interesting, a little interesting phenomena occurred. We did, as you mentioned, get a little bit more prepayment fees than I expected With that, we modeled 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 refi ing Away from us, again, we're really focused, laser focused on retaining the business. So if someone's going to refi, we want to make sure we get that opportunity. We saw a little bit in the Q2 and I don't know if it's a trend that will continue, it's hard to predict, is there was a lot more sale volume at really appreciated value 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 Phenomenal we saw, I like Ivan's view of whether we think that continues. It's hard to predict, but that's kind of what we saw in the Q2.
And we will take our next question from Rick Shane with JPMorgan. Your line is now open.
Hey, guys. 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, 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 it a more conservative assumption or are we missing something?
Hey, 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 We had more mix in the lower servicing fee earning assets.
Got it. And when we think about the private label, There's 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.
Yes, it's the same if not greater prepayment Protection, so you have some options on some of the agency business to pay off with 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.
Terrific.
And we will take our final question from Jade Rahmani with KBW. Your line is now open.
Hi, everyone. This is Ryan Tomasello on for Jade. I was wondering if you can just discuss your general outlook for The GSEs in the second half of the year in terms of volumes and overall performance.
I think the GSA businesses can be stronger in the second half than it was in the first half. Out of the gate, specifically in the Q2, the GSA I also think you're dealing with individual Calabrio issues. It's my feeling based on lower interest rates and them wanting to meet their volume targets that there will be a little bit more I think there will be a little bit more activity and I think some of the barriers that Calabrio was bringing to the table, I think we're being stripped away at this point. Kind of the existing regime which has been in place on the tender Thompson Probably we'll go back to a little bit of the historical way of operating. So I'm very optimistic the DST business for the balance of the year
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.
I think the way we're approaching technology is we have a goal of where we want to be 2 or 3 years in terms of eliminating redundancy function That's piece by piece. I think there's going to be a lot of advance servicing side, on the origination side, and the way we use data, we have a 3 year plan. We're doing it piece different processes and smooth out our workflow processes. But I believe we need to grow our business and Very small and incremental personnel taking advantage of those different technologies for us to expect. But it's not an overnight thing.
It's progress made in each segment of the business and buying them all in tandem
Great. 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.
I think that's something that we will look to do in the future. We wanted to do is get our brain going, use our own originations. We do work with a lot of brokers. We can turn We always cautious of having too big of a pipeline very effectively. I think once we do our 3rd one and if we end up flipping and doing public deals and we will consider co originating with a few others.
At the end of the day, we will own and hold our own B pieces. So we're very particular. We partner with who underwrites the loan, And we'll proceed with caution as we fill out our process and our brand out.
Great. Thanks for taking the questions.
Thanks, Ryan.
And I would now like to turn the program over to Ivan Kaufman for any additional or closing remarks.
Well, thanks again for everybody participating and investing with us and following us. And I guess the reoccurring theme from everybody and what we've been able to do is This is in dividend increases, which is really unique thing in our space. We're the only company as I mentioned Shared statements that does not only have a stable dividend, why we think we should be trading at a premium, but More importantly, we have exhibited unprecedented growth on a consistent basis. Thanks again for your confidence and look forward to our next earnings call. Thank you very much.
Have a great day.