Arbor Realty Trust, Inc. Q3 FY2025 earnings call

• Continued progress on the right side of the balance sheet with a new $1 billion CLO issued in Q3 with accretive terms, generating $75 million liquidity. - Successfully redeemed a legacy CLO, refinancing assets and picking up $90 million liquidity. - Realized a $48 million gain from the sale of a portion of the Lexford portfolio. - Agency business had a strong Q3 with $2 billion originations, second-highest production quarter in history. - Single-family rental business had solid originations and a strong pipeline. - Construction lending business saw growth with a large pipeline and upward revision of guidance. - Aggressively addressing legacy assets through modifying loans, taking REO, and bringing in new sponsors, though it may temporarily reduce net interest spreads.

In the third quarter, Arbor Realty Trust had several key segments. The CLO segment saw the issuance of a new $1 billion CLO with terms of 1.82% over, 89% leverage on a 30-month replenishment feature, generating $75 million of liquidity. The Agency business originated $2 billion of loans in the third quarter, the second-highest production quarter in history, with 10-month volume at $4.2 billion. The single-family rental business originated approximately $150 million in the third quarter and $200 million in October, with 10-month numbers at $1.2 billion. The construction lending business closed $145 million in the third quarter and $65 million in October, with 10-month numbers around $500 million and a large pipeline for future growth.

• Bridge lending production guidance adjusted to a more conservative level but has large deals in pipeline with confidence to potentially meet original guidance. - Agency business expects to easily surpass origination guidance of $3.5 billion - $4 billion and best year production number of $4.5 billion. - Single-family rental business confident in meeting internal guidance of $1.5 billion - $2 billion production for 2025. - Construction lending business revised guidance from $250 million - $500 million to $750 million - $1 billion for 2025 and expects meaningful growth in 2026. - Anticipates third quarter to be the trough in net interest income with improvement in fourth quarter and beyond as legacy assets are resolved.

• Prolonged elevated rate environment could continue to impact borrowers' ability to repay loans. - Uncertainty in the resolution process of legacy assets, which may cause fluctuations in quarterly earnings. - Potential challenges in REO disposal if market conditions do not improve as expected, affecting income and book value.

Q: Steve Delaney asked about the loan modification process, where we are in the cycle, and potential loan mods in the next couple of quarters.

A: Ivan Kaufman responded that modifications depend on borrowers bringing capital, with different markets reacting differently. There are peak delinquencies reflective of the cycle, with $500 million of delinquencies expected to be resolved within 45 days through recapitalization, modifications, or new borrowers. The company is aggressive in resolving legacy issues and has a diversified business with skill sets to manage through the cycle.

Q: Jade Rahmani asked about the $18 million accrued interest reversal and interest income run rate.

A: Paul Elenio explained that the $18 million was a one-time reversal related to delinquencies, with a onetime impact of $18 million and recurring impact of $4 million going forward. The third quarter was impacted by reversals and elevated delinquencies, but the fourth quarter and beyond are expected to see improvement as legacy assets are resolved. Interest expense was impacted by growth in portfolio and issuance of senior bonds.

Q: Richard Shane asked about the Homewood sale and related accounting.

A: Paul Elenio explained that the sale of the Homewood note resulted in a $1 million distributable earnings charge and a $9 million reserve reversal, with $7.5 million tax savings from the TRS. The loan had not been accruing interest, and the sale provides a performing loan at 10% going forward.

Q: Crispin Love asked about the trough in NII and interest income run rate.

A: Paul Elenio stated that the third quarter is expected to be the trough in net interest income due to one-time adjustments and reversals, with improvement in the fourth quarter and beyond as legacy assets are resolved. The company is confident that the third quarter is the peak in delinquencies and net interest income decline.

Q: Leon Cooperman made an observation about taking control of real estate and a question about capital use.

A: Paul Elenio responded that the company has a share buyback program and views the stock trading below book value as an opportunity. The company's experience in taking control of real estate shows that underwritten loans can withstand market challenges, and the company has the skill set to improve and dispose of REO assets effectively.