Arbor Realty Trust, Inc. (NYSE:ABR) Q4 2023 Earnings Call Transcript
Arbor Realty Trust, Inc. (NYSE:ABR) Q4 2023 Earnings Call Transcript February 16, 2024
Arbor Realty Trust, Inc. misses on earnings expectations. Reported EPS is $0.00041 EPS, expectations were $0.48. Arbor Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2023 Arbor Realty Trust Earnings Conference Call. 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 your call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
Paul Elenio: Okay. Thank you, Savannah, 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 and year ended December 31, 2023. 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 conditions, 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.
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 and closed out an exceptional 2023. In fact, 2023 was one of our best years as a public company despite an extremely challenging environment. We managed to increase our dividend twice while maintaining one of the lowest payout dividend ratios in the industry and generated a total shareholder return of 28% outperforming our peers. Additionally and very significantly, we're able to maintain our book value of our recording reserves for potential future losses, which clearly differentiates us from everyone in this space. In fact, as Paul will discuss in more detail later, we generated GAAP earnings in excess of our dividend in 2023 despite recording approximately 90 million in reserves and our distributable earnings were also well in excess of our dividend, providing one of the best dividend coverages ratios in the industry.
We're also very effective in refinancing loans off our balance sheet through our capital-light Agency Business. We generated 3 billion of multifamily runoff in 2023 and recaptured 56% or 1.7 billion of those loans in new agency product. Our agency platform gives us a tremendous strategic advantage, allowing us to continue to delever our balance sheet and generate significant long-dated income streams, which is a key part of our business strategy. We have been a significant player in the Agency Business for almost 20 years and now have been a top 10 Fannie Mae DUS lender for 17 years in a row coming in at number 6 for 2023, and it's extremely important to emphasize that our Agency Business generates over 40% of our net revenues, the vast majority of which occur before we even open our doors every day.
This is completely unique to our platform and is something we feel is not fully reflected in our valuation. On our last call, we gave guidance that the fourth quarter of last year and the first quarter and second quarter of this year would be the most challenging part of the cycle. We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter. As a result of this environment, we are experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second which is not a strategy that works well with us. Second, borrowers need to bring capital to the table to right-size their deals and raising capital is a lengthy process in today's climate.
Therefore, you will see defaults rise initially until are able to raise additional capital and then deals will often be recapped. We feel we have done a very good job to-date in collecting payments and have been highly effective in refinancing deals for our Agency Businesses as well as getting borrowers to recapitalize their deals and purchase interest rate caps where appropriate. In fact, we had 2.5 billion of loans with interest rate caps that were expiring over the last four months, of which 1.7 billion executed new rate caps will put cash up in lieu of caps, and we continue to work on getting new caps executed every day. We also have longstanding relationships with many quality sponsors that we've been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions.
As we are constantly receiving reverse increase in the market to purchase our assets as well, our goal is to maximize shareholder value. And very often, it's not just the value of the collateral, but the recourse provisions that we evaluate in determining how to approach each individual circumstance. The short-term nature of having a delinquent loan will not impact our decision-making process to achieve a correct economic result on a transaction. With that said, we've received a lot of public criticism in what we consider to be an extremely successful transition of assets to new ownership through the legal process or even through cases consciously. This is a very difficult and complicated work. And I said earlier, we expect to be extremely busy in the first two quarters of this year, managing through the most challenging part of this dislocation.
Additionally, we continue to focus heavily on maintaining a very strong liquidity position. We currently have over 1.1 billion of cash between 1 billion in corporate cash and 600 million of cash in our CLOs that results in an additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment as it provides us the flexibility needed to manage through the rest of the downturn and take advantage of opportunities that will exist in the market to generate superior returns on our capital. We have also done an excellent job in reducing our exposure to short-term bank debt and have no significant pending maturity to deal with on any of our warehousing facilities. We are down to approximately 2.8 billion in outstandings with our commercial banks from a peak of nearly 4.2 billion, and we have over 70% of our secured indebtedness and non-mark-to-market, non-recourse, low-cost CLO vehicles.
As previously discussed, these vehicles provide a tremendous strategic advantage at times of distress and dislocation, like the environment we are in today, due to the nature of that non-mark-to-market, non-recourse elements. In addition, they contribute significantly to providing a low-cost alternative to warehouse banks which in times like this have fluctuating pricing and leverage point parameters. Turning now to the fourth quarter performance. As Paul will discuss in more detail, our quarterly financial results are once again remarkable. We produced distributable earnings of $0.54 per share, excluding a one-time realized gain on an office property that we had previously reserved for. The results were well in excess of our current dividend, representing a payout ratio of around 80%.
We are very pleased with the substantial cushion we have created between our earnings and dividends, which will serve us well through the balance of this dislocation. We believe our diverse business model uniquely positions us as one of the only companies in this space with the ability to continue to provide a sustainable dividend and just as importantly, at a time of tremendous stress, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from our peers. In our balance sheet lending business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency product allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams.
In the fourth quarter, we were able to again be highly effective with this strategy, producing another 800 million of balance sheet runoff, 465 million or 58% of which was recaptured to new agency loan originations. As a result, we recouped over 100 million of capital and continue to build up our cash position, which again currently sits at around $1.1 billion. With today's current interest rates, we will continue to chip away at converting loans to the agencies. But if the 10-year goes below 4% again, it will become more meaningful and every quarter of a point drop in rates from here will be even more impactful. As we touched upon last quarter, we also believe we are well positioned to step back into the lending market and done [ph] accretive opportunities continue to grow our platform.
We feel now is an appropriate time to originate some of the highest quality loans with attractive returns, allowing us to grow our balance sheet and build our pipeline of future agency deals. In our GSE/Agency Business, we had another great quarter and an exceptional 2023 despite elevated interest rates. We originated 1.3 billion in fourth quarter and 4.8 billion for the full year, representing a 7% increase over our 2022 numbers. This is a tremendous accomplishment in light of the fact that the agencies were down 25% to 30% in production year-over-year. We have done an excellent job in gaining market share and converting our balance sheet loans at the agency product which has always been one of our key strategies and a significant differentiator from our peers.
We also originated 300 million of five to 10-year fixed rate GSE/Agency alternative products through our private label business, bringing our total agency volume to 5.1 billion for 2023. Traditionally, January is a much slower month with the agencies, which resulted in us originating 250 million of loans. February numbers are looking much stronger. We have a large pipeline, setting us up for what we believe will be another very solid year in agency originations for 2024. And again, as Agency Business offers a premium value as it requires limited capital and generates significant long-dated, predictable income stream and produces significant annual cash flow. To this point, our 31 billion fee-based servicing loan portfolio, which grew another 4% in the fourth quarter and 11% year-over-year generates approximately $121 million a year in reoccurring cash flow.
We also generate significant earnings on our escrow and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning 5% and around 3 billion in balances, roughly 150 million annually, which combined with our servicing income annuity totals approximately 270 million of annual gross earnings or $1.30 a share. This is in addition to the strong gain on sale margins we generate from our originations platform, providing us a strategic advantage over our peers. In our single-family rental business, we had a very strong fourth quarter and a full year 2023 as we continue to dominate this space and become a lender of choice in the premium markets we traffic in. We had 200 million of fundings and another 470 million of commitments signed up in the fourth quarter and closed out 2023 with 1.2 billion of new commitments.
We also have a large pipeline and remain committed to this business as it offers us 3 turns on our capital through construction, bridge and permanent lending opportunities and generates strong levered returns in the short term, while providing significant long-term benefits by further diversifying our income streams. We're also very excited about the opportunities we think we can garner from our newly added construction lending business as we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid to high-teens returns. We continue to build up a pipeline of potential deals and now have roughly 44 million on new application, another 400 million in NOIs and a significant number of additional deals we are currently screening.
We believe this product is very appropriate for our platform as it offers us 3 turns on our capital through construction, bridge and permanent agency lending opportunities. Lastly, I would like to spend some time talking about the short reports that have been written on our company. One our loyal investors base to understand that these reports are written in a way that is purposely designed to drive down the company's stock price to achieve the desired goal of profit from a short position. As such, the facts, assumptions, predicated future events and marketing conditions as well as conclusions in these reports are exaggerated, laced with incomplete and inaccurate data, and slanted only to provide a negative view on Arbor and again, purely for personal gain.
And while we will not get into a back and forth on the information in these reports or have detailed discussions on any specific loans, what we will point out is that the show reports state that our CLO delinquencies were 16.5% in December and 26.6% in January, when in reality, the rate of 1.3% for December and 5.6% for this January and as of today. More importantly, the 30-day delinquency numbers are 0.9% for December and 1.2% for January as of today, which are the numbers the industry focuses on. This is a perfect example of using select data as of a point in time, does not contain the full picture or represent the industry's focus only to inject fear into the market for personal gain. We urge our long-term shareholders to know these one-sided self-motivated reports and focus only on our results and public disclosures and the fact that we've consistently outperformed our peers.
It is also very important to emphasize that a significant portion of Arbor's lending is multifamily focused, specifically in the workforce housing part of the market. As we all know, Fannie Mae and Freddie Mac have had a specific mandate to address the workforce/affordable housing needs, which is a major issue in the United States, making Arbor a great partner. This product requires a level of -- a high level of management, tremendous expertise, which we have been effective at for decades, because this product may not have the same curb appeal as other multifamily product types, we've been criticized for a core part of our business that we have been extremely effective at and we'll continue to fulfill a very important mandate for the federal agencies, as well as the social needs for society.
Again, we thank you for your continued support. And now I will turn the call over to Paul to take you through our financial results.
Paul Elenio: Okay. Thank you, Ivan. As Ivan mentioned, we had another very strong quarter, producing distributable earnings of $104 million or $0.51 per share and $0.54 per share, excluding a $7 million onetime realized loss in an office property that we had previously reserved for. These results translated into industry high ROEs, again, of approximately 17% for the fourth quarter and 18% for the full year of 2023. Equally as important, we closed out 2023 with GAAP EPS of $1.75 a share which was in excess of our dividend, despite booking approximately $90 million of reserves for potential future losses. And of course, with distributable earnings of $2.25 a share that easily beat our dividend run rate, we provided a very strong dividend to earnings coverage ratio for our investors.
Our fourth quarter results were positively affected by a $5 million distribution from our Lexford investment, which was recorded in income from equity affiliates. We also had higher gain on sale income as our agency volumes are typically stronger in the fourth quarter and we continue to benefit from strong earnings on our escrow and cash balances from elevated interest rates. As Ivan mentioned, we do expect to continue to experience stress as we manage through the most challenging part of the cycle. As a result, we continue to build our reserves, recording an additional $23 million in CECL reserves in our balance sheet loan book during the quarter which was slightly offset by a $3 million recovery we had from a payoff of a nonperforming loan that we had fully reserved for previously.
As to be expected in this market, we also experienced a net increase in our delinquencies in the fourth quarter of approximately $115 million. And as discussed earlier, we are expecting that we will experience additional delinquencies over the next few quarters. Very important to emphasize that despite booking approximately $90 million in CECL reserves across our platform in 2023, $74 million of which was in our balance sheet business, we still grew our book value 2% to $12.80 a share from $12.50 a share last year. And we are one of the only companies in our space that has significant book value appreciation over the last 3 years with roughly 30% growth from around $10 a share to nearly $13 a share. In our Agency business, we had a very strong fourth quarter with $1.4 billion in originations and $1.3 billion in loan sales.
The margin on these loan sales came in at 1.32% this quarter, compared to 1.46% last quarter, mainly due to some larger deals in the fourth quarter. We were very incredibly pleased with the margins we generated in 2023 of 1.48%, which exceeded 2022 pace of 1.34% by 10%. We also recorded $21.1 million of mortgage servicing rights income related to $1.4 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.55%, compared to 1.16% last quarter, mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter, which contain higher servicing fees. Our fee-based servicing portfolio also grew another 3.5% in the fourth quarter and 11% year-over-year to approximately $31 billion at December 31 with a weighted average servicing fee of 39 basis points and an estimated remaining life of eight years.
This portfolio will continue to generate a predictable annuity of income going forward of around $121 million gross annually. And this income stream, combined with our earnings on our escrows and gain on sale margins represented over 40% of our 2023 net revenues. In our balance sheet lending operation, our $12.6 billion investment portfolio had an all-in yield of 8.98% at December 31 compared to 9.12% at September 30 due to a combination of an increase in nonperforming loans, and loans that had not made their full payments as of December 31 that we did not fully accrue for. The average balance in our core investments was $13 billion this quarter compared to $13.4 billion last quarter due to runoff exceeding originations in the third and fourth quarters.
The average yield on these assets increased slightly to 9.31% from 9.28% last quarter due to a slight increase in sulfur, which was offset by an increase in nonperforming loans in the fourth quarter. Total debt on our core assets decreased again to approximately $11.6 billion at December 31 from $11.9 billion at September 30. The oil in cost of debt was relatively flat at 7.45% at 12/31 versus 7.41% at 9/30. The average balance on our debt facilities was approximately $11.8 billion for the fourth quarter compared to $12 billion last quarter, and the average cost of funds on our debt facilities was 7.48% for the fourth quarter compared to 7.37% for the third quarter, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets decreased to 1.83% this quarter compared to 1.91% last quarter, and our overall spot net interest spreads were down to 1.53% at December 31 from 1.71% at September 30 again, due to an increase in delinquencies and nonaccrual loans during the quarter.
And as I mentioned earlier, we are expecting to experience additional delinquencies over the next few quarters, which could further reduce these margins. Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 18% in 2023 to a leverage ratio of 3.3:1 from around 4.0:1 last year. Equally as important, our leverage consists of over 70% non-recourse, non-mark-to-market CLO debt with average pricing of $1.70 over, which is well below the current market, providing strong leverage returns on our capital. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have at this time. Operator?
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