Arbor Realty Trust, Inc. Q2 FY2025 earnings call

Key Points

• Completed a $500 million high-yield unsecured debt offering, received BB rating from Moody's and Fitch.
• Issued $800 million build-to-rent securitization, a landmark for the single-family rental business.
• Took back $188 million of REO assets, with the REO book at ~$300 million as of June 30, expecting $400 million to $600 million in REO assets.
• Agency origination strong: $850 million in Q2, $1.5 billion in first half, with a strong July ($1 billion originations) and expected ~$2 billion in Q3.
• Balance sheet lending selective, closed ~$700 million YTD, with bridge loan production guidance $1.5B to $2B for 2025.
• Single-family rental business strong: ~$230 million new business in Q2, strong pipeline.
• Construction lending closed $265 million in first half, $144 million in July, with strong pipeline and expected to beat $250M to $500M production guidance for 2025.

In the second quarter, Arbor Realty Trust's distributable earnings were $0.30 per share. The agency business had $857 million in originations and $807 million in loan sales with a 1.69% margin, and mortgage servicing rights income of $10.9 million. The fee-based services portfolio was $33.8 billion at June 30. The balance sheet lending investment portfolio was $11.6 billion at June 30 with an all-in yield of 7.86%. Core investments were $11.5 billion with an average yield of 7.95%, and debt was $9.6 billion with an all-in cost of debt of 6.88%. Delinquencies totaled $529 million at June 30, down from $654 million at March 31.

Forward-Looking

• Bridge loan production guidance for 2025: $1.5 billion to $2 billion.
• Agency origination guidance for 2025: $3.5 billion to $4 billion.
• REO book expected to be $400 million to $600 million, viewing 2025 as a transitional year with potential growth in 2026 if rate relief occurs.
• Anticipated strong Q3 agency origination (~$2 billion).

Risks

• Prolonged elevated rate environment impacting agency originations and borrower ability to recap deals.
• Volatility in 5-year and 10-year interest rates making rate prediction difficult.
• Nonperforming loans and REO assets acting as a drag on earnings.

Q: Drop in net interest income, A: Reversals of paying accruals due to foreclosures; recorded net new paying accruals of about $10 million, reversed $5 million of paying accrual with $3 million on loans foreclosed.

Q: REO peak, A: Viewing 2025 as transitional, expecting REO to peak in next quarters, with proactive approach to move assets and accelerate resolution.

Q: GSE credit trends, A: Delinquencies in agencies peaking, borrowers at peak stress, next quarters reflecting peak with interest rates impacting resolution.

Q: REO losses, A: Details on properties, one asset flipped with deeper loss than reserve, another asset flipped with loss close to reserve value.

Q: Capital expenditure on REO, A: Budgeted, nominal for recent assets, with more heavy lifting assets needing repositioning but exact numbers to be determined.

Q: Agency dynamics, A: Fannie and Freddie competition, strong July originations due to market trends and loyal sponsors, pipeline strong for Q3.

Q: SFR vs bridge strategy, A: SFR market growing, competitive advantage with CLO for construction, bridge, and permanent lending, aiming to increase market share.

Q: Net interest income trajectory, A: Expected to bottom in next quarters, offset by portfolio growth and efficiencies from balance sheet improvements.

Q: REO fund launch, A: Evaluating, dependent on rate movement and core size, management discussing but premature.

Q: GSE impact and JV, A: Monitoring GSE changes, open to JVs for increasing agency origination, always looking to grow agency business.