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Edited Transcript of ABR earnings conference call or presentation 3-Aug-18 2:00pm GMT

Q2 2018 Arbor Realty Trust Inc Earnings Call

Uniondale Aug 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Arbor Realty Trust Inc earnings conference call or presentation Friday, August 3, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ivan Kaufman

Arbor Realty Trust, Inc. - Chairman, President & CEO

* Paul Elenio

Arbor Realty Trust, Inc. - CFO & Treasurer

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Conference Call Participants

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* Benjamin Ira Zucker

BTIG, LLC, Research Division - Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2018 Arbor Realty Trust Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Paul Elenio, CFO. Sir, you may begin.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [2]

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Okay. Thank you, Crystal, and good morning, everyone, and welcome to quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 30, 2018. 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.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [3]

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Thank you, Paul, and thanks to everybody for joining us on today's call. As you can see from this morning's press release, we've had another outstanding quarter, which continues to demonstrate the strength of our brand and the value of our operating franchise.

Our second quarter results were truly remarkable with many significant highlights and accomplishments, including producing core earnings well in excess of our current quarterly dividend.

As we mentioned on our last call, we intend to pay a $0.25 quarterly dividend for the rest of the year and evaluate our earnings performance at that time to determine the timing of our future dividend increases. And based on our very strong 6 months results and our outlook for the remainder of the year, we feel we are creating a sizable cushion of core earnings above our dividend. And as a result, we remain very confident in our ability to continue to pay out our current dividend as well as grow it in the future.

Additionally, we are very pleased to announce that in July, we received approximately $11 million from the settlement of a litigation related to one of our prior investments. This will be recorded as a gain in the third quarter. And as a result, we believe we will likely pay a special dividend by the end of the year of approximately $0.10 a share, based on our current outstanding shares.

Now I want to discuss some of our significant second quarter accomplishments and the reasons why our earnings are so strong and will continue to grow and why we feel we can comfortably maintain our current dividend and evaluate opportunities to increase it in the near future. We continue to produce significant agency origination volumes that generate strong margins. We originated another $1 billion in agency loans in the second quarter and $2.1 billion for the first 6 months of the year. And based on our current pipeline, we remain confident in our origination volumes for the balance of the year.

Additionally, our servicing portfolio has grown over 40% in the last 2 years, while maintaining a servicing fee of approximately 47 basis points. This portfolio generates a very significant, long-dated, predictable annuity of income of around $80 million gross annually and growing, which is mostly prepayment-protected. This income stream from our servicing portfolio, combined with the fee income we generate from our originations, has created significant diversity and a high level of certainty in our income sources.

Our Agency Business also continues to benefit from the permanent reduction in corporate tax rates, which, as we have mentioned, will increase our AFFO by $0.04 to $0.06 a share annually.

With respect to our balance sheet business, we've experienced tremendous growth while other lenders continue to see reductions in their portfolio. We grew our balance sheet investment portfolio 48% in 2017 and another 18% for the first 6 months of this year on over $920 million in new originations, $607 million of which closed in the second quarter. This growth is well ahead of our expected pace. And the income generated from these assets is a significant component of our earnings. And with a strong pipeline, we are confident in our ability to continue to grow this income stream in the future.

We also closed our 10th and largest nonrecourse CLO securitization vehicle in the second quarter, with $560 million of assets and significantly improved terms, including reduced pricing, increased leverage and a 4-year investment -- replenishment feature, our longest reinvestable period to date.

The tremendous success we continue to experience in the securitization arena, combined with our ability to substantially reduce our debt cost of our borrowing facility has allowed us to achieve significant economies of scale and maintain our margins and generate levered returns in excess of 13% in a very competitive market and outperform our peers.

In the second quarter, we also effectively raised $80 million of fresh capital through a combination of common stock and debt issuances that were immediately accretive to our earnings and as the capital was used to fund a significant growth in our balance sheet business in the second quarter.

Additionally, in July, we executed a very successful trade, exchanging $230 million of convertible debt that had a blended rate of 5.86% for $245 million of new 3-year convertible debt to a fixed rate of 5.25%. This transaction had many significant benefits, including substantially reducing our interest cost, resetting both the conversion price and dividend protection on a new bonds on much higher levels and generating up to $35 million of additional capital to fund the growth of our business.

As we anticipate that after the new capital is fully deployed, this trade will increase our annual AFFO by $0.02 to $0.03 a share. The issuance of this new debt was also received very positively in the market, evidenced by pricing that was 100 basis points inside the spread on our last issuance and from the increase in our stock price, which has also increased outflow, liquidity and market cap.

And our market cap is now above the $1 billion threshold for the first time since we went public, which is a significant milestone that will allow us to access growth capital more efficiently and effectively in the future as we grow our earnings. And again, for these reasons, we are very comfortable with our current dividend and our ability to continue to grow it in the future. And we've done a great job in diversifying our income streams in creating certainty and growth with our business.

We are also very pleased with the significant returns we have generated for our shareholders. We generated a total return of 25% in 2017 and over 35% to date already in 2018. These are truly remarkable results that consistently continue and outperform our peers. We also believe we remain an undervalued and an attractive investment opportunity at these levels. With $1 per share annual dividend, we are currently trading at a dividend yield of just under 9%, which is still higher than the peer group average that trades at just under an 8.5% dividend yield.

We clearly feel that we should be trading at a dividend yield below the peer group average as we are a complete operating franchise with a significant agency platform and have significantly and consistently increased our earnings and have more predictable, stable, long-dated income streams, and continue to build a substantial cushion of core earnings above our dividend, resulting in a lower dividend payout ratio and the ability to continue to grow our dividend into the future.

We also have the highest level of inside ownership in this space for the fully aligned dedicated senior management team owns 30% of the company. Furthermore, we feel strongly that given our significant operating platform and GSE business, we should be valued at a similar P/E ratio as other public GSE platforms, such as Walker & Dunlop, which would result in a stock price more in the range of $13 to $15 a share, generating shareholder appreciation of between 20% to 35% above our current levels, including our dividend.

Overall, we are extremely pleased with the progress we continue to make in growing our business and increasing the value of our franchise, and we remain very committed working extremely hard to continue to maximize the return to our shareholders.

I will now turn the call over to Paul to take you through the financial results.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [4]

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Okay. Thank you, Ivan. As our press release this morning indicated, we had a very strong second quarter with adjusted AFFO of $28 million or $0.31 per share, and our second quarter results reflect an annualized return on average common equity of approximately 13.5% and 12.8% for the first 6 months of this year. As Ivan mentioned, we continue to put out record results and we are very pleased with our ability to continuing to generate core earnings in excess of our current dividend.

Looking at our results for the Agency Business, we generated approximately $13.5 million of income in the second quarter and approximately $1 billion in originations in loan sales. The margins on our second quarter sales was 1.53%, including miscellaneous fees compared to 1.71% all-in margin in the first quarter sales, largely due to changes in the mix and size of our loan products. And we recorded commission expense of approximately 39% on both our first and second quarter gains on sales.

We also recorded $17.9 million of mortgage servicing rights income related to $1.1 billion of committed loans during the second quarter, representing an average mortgage servicing rights rate of around 1.66% compared to 1.88% on first quarter committed loans of $1 billion, mainly due to a shift in product mix in the second quarter, resulting in lower servicing fees.

Sales margins and MSR rates fluctuate primarily by GSE loan type and size. Therefore, changes in the mix of loan origination volumes may increase or decrease these percentages in the future. Our servicing portfolio also grew another 3% during the quarter to $17.1 billion at June 30, with a weighted average servicing fee of approximately 47 basis points and an estimated remaining life of approximately 8 years. This portfolio will continue to generate a significant predictable annuity of income going forward of around $80 million gross annually.

Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions. This accounted for $4.9 million of prepayment fees in the second quarter, which was up from $3.7 million in the first quarter. These fees were recorded in servicing revenue, net of a write-off for the corresponding MSRs on these loans. We also continue to increase our interest-earning deposits with nearly $500 million of escrow balances, earning slightly less than 1-month LIBOR. These balances provide a natural hedge against rising interest rates, as they will generate significant additional earnings power as rates increase. In fact, for every 1% increase in interest rates, these deposits could earn an additional $5 million annually or approximately $0.05 a share in additional earnings.

And as we discussed on our last call, the reduction in corporate tax rates from 35% to 21% will increase our after-tax earnings from the Agency Business and could contribute as much as an additional $0.04 to $0.06 a share to our AFFO for 2018.

We also had a very strong quarter in our balance sheet lending operation. We grew our investment portfolio another 13% to $3.1 billion on $607 million of new originations, net of $238 million of runoff. This growth is well ahead of our expected pace and continues to increase our core earnings run rate. And we remain extremely confident that through our deep origination network, we'll be able to continue to grow our balance sheet investment portfolio in the future.

Our $3.1 billion investment portfolio had an all-in yield of approximately 7.40% at June 30, which was up from a yield of around 7.28% at March 31, mainly due to an increase in LIBOR. The average balance in our core investments increased to $2.9 billion for the second quarter from $2.7 billion for the first quarter due to the significant growth we experienced in the first and second quarter. And the average yield in these investments was 7.40% for the second quarter compared to 7.08% for the first quarter, largely due to an increase in LIBOR.

Total debt on our core assets was approximately $2.8 billion at June 30, with an all-in debt cost of approximately 4.93%, which was down from a debt cost of around 5.09% at March 31, despite an increase in LIBOR. This was mainly due to the significant reduction in interest costs we've experienced from improved terms in our warehouse lines, our new CLO execution and the replacement of our higher cost unsecured debt with newer lower cost unsecured debt we issued.

The average balance in our debt facilities increased to approximately $2.5 billion for the second quarter from approximately $2.3 billion for the first quarter, primarily due to financing our first and second quarter growth. And the average cost of funds in our debt facilities appears to increase to approximately 5.46% for the second quarter compared to 5.33% for the first quarter, but that's mainly due to $2.9 million of noncash fees we expensed related to early payoff of our debt in the second quarter versus $2.4 million for the first quarter and from an increase in LIBOR during the quarter.

Overall net interest spreads in our core assets on a GAAP basis increased to 1.94% this quarter compared to 1.77% last quarter, mainly due to an increase in LIBOR, combined with reduced debt cost. Our overall spot net interest spread also was up to 2.47% at June 30 from 2.19% at March 31. And with approximately 89% of our portfolio comprised of floating rate loans, we will see an increase in net interest income spread as interest rates continue to rise in the future.

Additionally, as Ivan mentioned earlier, we believe the execution of our new convertible debt issued in July at substantially lower rate will increase our annual AFFO by $0.02 to $0.03 a share after full deployment of the additional capital received.

And lastly, the average leverage ratio on our core lending assets, including the trust preferreds and perpetual preferred stock as equity was up to approximately 78% in the second quarter from around 76% in the first quarter. And our overall debt-to-equity ratio on a spot basis, including the trust preferreds and preferred stock as equity was up to 2.5:1 in June 30 from 2.3:1 at March 31, mainly due to more efficient execution on our financing facilities, including the new CLO we issued during the quarter.

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. Crystal?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jade Rahmani from KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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This is actually Ryan on for Jade. Just first, I guess, given how strong the origination fees has been in the past few quarters, particularly this quarter, can you give some color on the types of investments you've made, maybe the average yield or a spread over LIBOR property types and geography on those originations?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [3]

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This is Ivan. Paul, you can get a little granular, but in general, it's very consistent what we've done in the past in terms of spreads and property types. We've had the benefit of lowering our bar across the net for being more competitive, but when I use the term more competitive, the entire industry has gotten more competitive. So we're winning our share of business. Most of what we're doing is multifamily, senior debt, as I've expressed before. Paul, do you want to give some color on the facts?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [4]

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Sure. So, yes, so as Ivan said, most of our products has been multifamily, pretty consistent with where our portfolio has been. Of the $607 million of loans we originated on the balance sheet side during the quarter, 95% of those were multifamily. We had one non-multifamily deal and 94% of those were senior debt. We had one mezzanine loan during the quarter. Geographically, it's not inconsistent with where our portfolio stands. So it's pretty much been very consistent with the geographic concentration in our portfolio in total. And from a pay rate or a spread over LIBOR, our pay rate, our all-in rate came in with fees just at about 6.95% on all those loans and we did generate a leverage return of 13% on those loans despite the very competitive market. As we mentioned, we've been getting huge economies of scale through our CLO and our warehouse executions with reduced rates. And we've been able to be very competitive in this market and still generate very strong leverage returns on our investments.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [5]

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And just switching gears to the servicing portfolio. It seems like that has really fueled a lot of growth in your earnings over the past few quarters. So I was wondering, if you guys could give us any color on the profitability of servicing in your book, maybe in terms of the operating leverage for when you're growing that portfolio over time and maybe what margins are over the cost to service primarily?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [6]

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Sure. I can give you a little bit of color on how we view the profitability of the business. Obviously, the servicing portfolio, as you mentioned, has been growing significantly with as we've been originating significantly more than what's been burning off in the portfolio, which is something that has really helped the growth in that portfolio. Our average servicing fee has held up really nicely, come down a little bit over the last couple of quarters, and that's just due to a change in mix, a little bit more Freddie and Fannie in few quarters, and then that goes up and down depending on volume and demand. But overall we've been very, very pleased with many components of our servicing portfolio, one being the size and being able to maintain that. Two being the weighted average servicing fee. The duration of the portfolio was in excess of 8 years, which is also very important. Most of that servicing portfolio, as we've talked about, is prepayment protected. And then on top of that, we have all the escrow balances that have been associated with the growth in that portfolio, which continue to rise as interest rates rise. So it's been a very profitable business as you mentioned for us. Costs are pretty well contained. You do have to add some volumes every time you grow the portfolio, but you do get economies of scale as you grow. We're sitting in a $17 billion portfolio for a fee, not far often being $20 billion soon and that, that obviously offers even more reduced costs and economies of scale. As far as cost per loan, we're probably not much business different than a lot of other people. We flow -- we pretty much fall in the range of $2,500 to $3,000 of cost per loan. That's pretty much all the facts about that, that side of the business.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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Great. That's really good color. And just lastly, given the push, the big push it seems from the GSEs for their uncapped business originations, can you say approximately how much of your GSE business is in those uncapped categories? Maybe particularly what percent falls in, say, affordable housing, which also is a big push?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [8]

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I don't have the exact percentage. It varies from quarter to quarter, we can get back to you on that. But as we spoke about in the past, we're one of the leading small balance lenders, which is that falls outside of the cap. And we've always been a leading provider for the agencies and probably the biggest supplier of affordable as well as small balance loans. In the past, it's won historically about 50% of the business we do with them is outside the cap, but we'll get back to you on where we are year-to-date.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [9]

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Yes. I don't have the numbers in front of me either, but that sounds right. It's anywhere between 50% and 60% of our business is outside the cap.

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Operator [10]

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And our next question comes from Steve Delaney from JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [11]

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Congratulations on hitting $1 billion market cap, that's a nice milestone for any public company. So Ivan, you and Paul, both mentioned an item of $0.04 to $0.06 improvement in annual earnings and I was rapidly taking notes. But I got the $0.02 to $0.03 on the convert roll down. But remind me what was the $0.04 to $0.06 improvement in the earnings related to?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [12]

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Yes. Sure. Steve, it's Paul. So we mentioned this on our last call, when the new tax laws came out, there was a permanent reduction in the federal corporate rate from 35% to 21%, as you know. And when we said last quarter is that compared to '17, because that's when we had the higher rate, that we thought that rate will -- that rate reduction because our Agency Business is so strong and compelling, we thought that rate reduction would generate $0.04 to $0.06 in AFFO for 2018 over '17. And it appears to be doing that already in the first couple of quarters through the reduced rate.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [13]

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Okay. Great. So this is not...

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [14]

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That's the result of the Agency Business being TRS.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [15]

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That's right.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [16]

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Yes, correct. Understood. Okay. That's helpful, because I thought you were referring to a 2019 versus 2018 number, which I think is which you were referring to with the convert item.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [17]

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That's correct. The convert...

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [18]

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It's really important, next year. Okay. Very helpful. Ivan, could you give us an update on producer headcount maybe at 630 sort of on a year-to-date or a year-over-year basis? Would you approximate your net growth and producer headcount might be, if any?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [19]

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Our producers are remaining pretty consistent. We have not lost anybody I think for this year. We actually are -- we're not looking to add anybody. We were working on, I guess, I think, we have somewhere in the mid-20s, Paul, what about 26 producers overall?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [20]

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Yes. I think it's 25 to 26. That's right.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [21]

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And our ambition was really working through a lot of the new people. The people who have come on in the last 2 or 3 years and making them more effective. And we have enough producers to deal with our volume that was just rounding about and making them more productive, and that's kind of what our outlook is about.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [22]

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Sounds like more an approach of quality versus quantity. Is that a good way for us to think about it? It's not just numbers game.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [23]

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It is probably -- it's not just a numbers game. But we have a huge program over in the last 5 or 7 years, where we brought new people in, educated them, we put them into our culture. And it takes 3 to 5 years to make these people effective. And we have a very good core group. And now we're just trying to maximize their capability and have them contribute at the right level.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [24]

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Got it. And you were able to -- in the second quarter, you were -- on the agency side, you were able to maintain you originations roughly flat to last year despite what a 50, 60 basis point increase in interest rates year-over-year. As you look out to the second half of the year, do you see the -- the comparison year-over-year, do you see higher rates as being the biggest headwind to at least achieve flat year-over-year volume? Or is there anything else out there that you would either help or hurt your originations other than the fact that we're all living with higher interest rates?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [25]

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I think the interest rate move as long as it's not drastic and it's gradual won't have that much of an impact upon us. And what will happen over time as this interest rate move perhaps that will be a little bigger than a slight adjustments to offset that in the valuation of the assets that are being sold. But a good percentage of our assets are always being refinanced as you know the nature of these assets are generally 5 to 10 years. So that's a consistent flow. In terms of our overall volume, we maintained our volume with the agencies and I believe that the agencies might have been off around 10% to 15%. So we actually grew our market share a little bit relative to our -- relative to the rest of our peers.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [26]

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Yes, I think Freddie Mac is up a little -- I think Freddie Mac is up through June 8% and Fannie Mae is down 13% after that terrible first quarter. So if you grew when those two are essentially flat, combined or may be down a little, that's you would have to take your share out for sure so.

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Operator [27]

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(Operator Instructions) And our next question comes from Rick Shane from JP Morgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [28]

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Just one little, subtle point. I'm noticing that despite the fact that the fees are stable on servicing and the duration is actually extending that you're capitalizing the MSR at a slightly lower rate than you have been over time. I'm curious if that's essentially because it's going to lower the amortization going forward actually basically sort of storing up potential earnings as supposed to taking in as much upfront?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [29]

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Sure. Rick, it's Paul. So I think the MSR rates do fluctuate, as you know, and it's based on many factors. The biggest factor for this quarter is we did out a little bit more. If you can look at the mix in the press release of the originations, our Freddie business was a bigger percentage of the total business as it was in the prior quarter. And that's historically because of the program, the servicing fee is well on that product. So that will -- that's the main driver of why the MSR capitalization rate will be lower. But the mix changes all the time. Our pipeline is still very strong with Fannie. So it depends on what we're originating and when we're originating and what servicing fees because the biggest driver to the capitalized MSR model is obviously the servicing fee and the duration. So yes, it has come down a little bit. It goes up and down. I don't think it will have an impact on future earnings though because, if not that we're capitalizing at a lower rate and bringing it in more over time, it's just -- it's being capitalized at a lower rate because of the product we are doing and the size of the servicing fee.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [30]

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Got it. And look, I see that in the numbers as well in terms of the mix. But even when I -- so if I look at the actual amortization on a dollar basis or on a percentage basis, it's also drifted down a little bit over time. And so that's what I'm wondering. Is that rate driven? Or is that just being more conservative in terms of that assumption?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [31]

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It may be a little bit rate driven, but it's also driven by my commentary on prepayment fees. We have been seeing some prepayment in our portfolio as value still continuing to be high and deals are still getting transacted and we're getting some yield maintenance provisions each quarter, a little higher than last quarter, this quarter. And when you do that, you have to write off the corresponding MSR. So that goes to the line item there too. So that could have something to do with it as well.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [32]

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Got it. Okay. That actually probably explains it.

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Operator [33]

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And our next question comes from Stephen Laws from Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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Most of my questions have been covered already. But one, I look for a little clarity on the dividend, I think you guys have increased the dividend something like 6 for the last 8 quarters or 6 for the last 9. And now you're looking to pay a special at year-end. Can you provide any color kind of why you went along the route of a special dividend as opposed to another dividend increase, especially given the comments around things that should continue to drive earnings growth as we look into next year?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [35]

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Paul, why don't you comment around the special dividend and why we are doing it and how it came about.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [36]

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Sure. So just before we give that Stephen, I think we made a decision last quarter and I thought we were clear on our call that we were going to issue a $0.25 quarterly dividend for the balance of the year. We brought it up a lot last quarter, felt very comfortable with that, felt very comfortable that we would have cushion in it and we wanted to see where the balance of the year came out. And as you see, the second quarter growth was substantial and we feel very comfortable that we can easily maintain that dividend. We will take a look at that quarterly dividend at the end of the year, as we get through the third and fourth quarter with some of the items we've added in the new converts. And what our origination flow will be for the rest of the year and what our profitability will be. And then at that time, we'll make an assessment. And as we mentioned in our commentary, we feel confident we'll be able to grow this dividend soon again. As far as the special dividend, we did have onetime settlement that happened in the third quarter. It does increase taxable income and GAAP income for the REIT. So it will need to be paid out in the form of a dividend. We've elected to do that in the form of a special dividend to not confuse the current call run rate dividend with an item that was more of a onetime event.

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Operator [37]

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And our next question comes from Ben Zucker from BTIG.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [38]

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Starting on the structure side, based on your targeted leverage levels and cash on hand, how much capacity do you have to originate new loans as of today, just given the amount of capital markets activities that have taken place subsequent to quarter-end? I thought that might be helpful.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [39]

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So it's pretty interesting the way we look at it because we're actually able to manage it as we go forward, because you can't always predict the runoff and you can't always predict the originations. We have ample capacity to continue based on where our pipeline is and based on what our projected runoff is for the quarter. So we've done a really, really good job with our volume was well in excess of what we projected last quarter. As you know, we went to the capital markets to fund some of those originations. But given the capital markets activity we have and what our projections, we feel fairly comfortable that we can manage our business in the near term. Paul, do you have any color on that?

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [40]

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Yes. I think that's right. We're sitting with a good amount of cash right now and capacity in our new vehicles with the CLOs that we just -- one we just closed with a ramp-up feature and also restricted cash. So we feel like we've got a nice runway of capital. We did go to the market, as Ivan mentioned, between the converts, the debt and the common and picked up some nice capital. And it all depend on runoff. And runoff is unpredictable. We've done a great job I think of being real good stewards of capital and only going to the markets when we knew it would be immediately accretive and we'll be able to grow our earnings. And right now, I think we're sitting in a really good spot with the items we've executed on the capital markets side being able to have, like Ivan said, a nice runway. Looking at our pipeline, looking at runoff, we're in good shape right now.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [41]

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We just continue to have greater efficiencies on the CLO and leverage side, which has allowed us to manage our business even better.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [42]

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I definitely hear your comments there. I think given how much we've seen the structured portfolio growing, how much work you guys have done on the right side of the balance sheet, I don't even think we've seen the full earnings power of the structured segment. Yet do you feel like you brought a little bit of pull forward business just based of that really strong 2Q origination number and maybe people shouldn't get too aggressive in setting expectations for those kinds of numbers to continue?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [43]

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I think last quarter was a particularly strong quarter, but our pipeline is pretty good. I don't think last quarter was a reflective of annualizing that. But I do feel pretty comfortable with our pipeline and having a fairly strong year.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [44]

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Okay, great. And then just turning to the agency side quickly. With respect to your GSE outlook, I know it's very tough to predict. But which GSE feels most competitive right now between Fannie and Freddie? It looks like Freddie was a little more aggressive in the first half and we heard the flattening yield curve push people to their fixed rate product. But I'm wondering if that dynamic is as pronounced for the smaller balanced loans that you guys trafficking?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [45]

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Well, Freddie is only a small balance base side. I'm hoping Fannie will step up its effort, but Freddie has made it a major and significant part of their business. And if you followed our calls over the last couple of years, we've actually helped create that program with them and are a leading provider in the small balance space. So they will do a substantial amount. I believe they will do as much as $6 billion to $8 billion of small balance loans, which is probably 4x what Fannie Mae will do. And I'm hopeful that Fannie Mae will up their participation in this small balance business.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [46]

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And I guess, as a quick follow-up, the FHA HUD product, I know it's a little bit more of an auxiliary origination type for you guys. But I didn't see any volume in 2Q. Do you think that might come back in a little way in the second half of the year?

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [47]

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Yes.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [48]

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Yes. It's Paul. Yes, it does ebb and flow as you know, it takes time to get that product through to origination -- to the origination point. We have spent a significant amount of time in resources in building that infrastructure and building our team for that product and we're real poised and have a really good team. Our pipeline is strong on the FHA side. It's been a little slower in the beginning of the year, but lot of that could hit late. We do think we end up probably equal to if not better than the originations we did last year in FHA, but we do have a nice pipeline of FHA. It just ebbs and flows and take some time to get through, but I think you will see it pick up a little bit in the second half of the year.

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Operator [49]

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And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Ivan Kaufman for any closing remarks.

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Ivan Kaufman, Arbor Realty Trust, Inc. - Chairman, President & CEO [50]

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Okay. Well, thank you everybody for your participation today. It's been a great 2 quarters so far this year and thanks for your support. Have a good day.

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Paul Elenio, Arbor Realty Trust, Inc. - CFO & Treasurer [51]

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Thank you.

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Operator [52]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.