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Arbor Realty Trust (NYSE: ABR)
Q1 2019 Earnings Call
May. 10, 2019 , 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen. And welcome to the first-quarter 2019 Arbor Realty Trust earnings conference call .[Operator instructions]. I'd now turn the conference over to Paul Elenio, chief financial officer. Please, go ahead.

Paul Elenio -- Chief Financial Officer

Thank you. 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 ended March 31, 2019.

With me on this 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 in our beliefs, assumptions, and expectations about 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.

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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 as of today of the occurrences of unanticipated events.  I'll now turn the call over to Arbor's president CEO, Ivan Kaufman.

Ivan Kaufman -- President and Chief Executive Officer

Thank you, Paul. And thanks everyone for joining us on today's call. As you can see from this morning's press release, we had a great start to 2019, with strong first-quarter results which continues to demonstrate the diversity of our operating platform, and the value of our franchise. As we mentioned on our last call, we're very pleased with the continued growth in our business, which provided us with a very strong baseline of predictable and stable earnings heading into 2019.This strong baseline, combined with our first-quarter success has allowed us to once again, increase our quarterly dividend by another 4% to $0.28 a share.

Our current stock price, we're now trading at a dividend yield of a price of 8.5%, which we believe is not reflective of our true value. Additionally, as promised, we did provide a chart in our last investor deck, which demonstrates a considerable growth we produced in our service and revenues, escrow earnings and that is interest income from our balance sheet portfolio last year.It also illustrates the quality and diversity of our income streams, which differentiates us from our peers and why we believe we should be consistently trade at a lower dividend yield than our peer group. Furthermore, our first-quarter growth also continues to increase our run rate of core earnings making us very confident in our ability to increase our dividend in the future.To highlight this further, I would like to talk about the growth we experienced in both our business platforms. In our Agency business, we grew our service portfolio another 2% in the first quarter, and 13% over last year, and is now at $18.9 billion.

This portfolio generates a servicing fee of 45 basis points and has an average remaining life of eight and a half years, which reflects a 10% increase in duration over the last two years. As a result, we have created very significant, predictable annuity of income over $80 million growth annually, and growing. The majority of which is prepayment protected. And this growth in our Servicing portfolio also continues to increase intuitive income from our escrow balances, further contributing to our growing annual run rate of core earnings. We also originated 850 million of agency roles in the first quarter.

This was slightly down from last year's first-quarter volume of approximately 1 billion, mainly due as we mentioned on our last call to some of this year's first quarter volume being pulled into the fourth quarter of last year from the sharp drop in the 10 year at year end. More meaningfully, our pipeline is very strong providing us with confidence in our ability to continue to grow our origination vying for the balance of the year. We're also very pleased in our ability to generate strong margins in our first-quarter loan sales despite the extremely competitive landscape. Any income streams for our agency platform continue to create significant diversity and a high level of certainty in our income sources.With respect to our Balance Sheet business, we've experienced tremendous growth on our loan book.

We grew this portfolio of 24% in 2018, and another 4% in the first quarter on 416 million originations. We have also seen a sizable increase in our pipeline over the last few months, which allows us to continue to increase our run rate of net interest income going forward.We had a very strong start this second quarter with 250 million of originations in April, and a result of our strong pipeline, we elected to raise 90 million or 5.75% unsecured debt to fund the equity portion of these loans. This was very attractive capital as it will be used to fund our pipeline of new investments and be immediately creative our core earnings. And again, the income generated from our loan book is a significant part component of our earnings.

And based on our strong pipeline, we remain very confident in our ability to continue as well as a strength. Now I would like to update you on the progress we're making in our Single-Family Rental business. We believe the Single-Family Rental market is as big as a multi-family market. and at this point, is very fragmented with a lot of unique financing opportunities available in that market. We continue to build out the infrastructure develop this platform, and we are very committed to become a leader in this space.

We believe this is a phenomenal business with enormous opportunities in both the bridge and permanent lending products. And we are very happy with the pipeline of opportunities we have seen already. We clearly believe that by bringing capital put in this business, we can quickly walk off our originations capacity and capabilities, and build this out to be a significant driver of yet another income stream, and further diversify our lending platform. Overall, we're very pleased with our first-quarter results, and then the continued growth in our business, which clearly demonstrates diversity and value of our operating platform.We're also very comfortable with the stability of our dividend and optimistic based on our baseline revenues, and the current status of our pipeline that we will be able to continue to grow our dividend.

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

Paul Elenio -- Chief Financial Officer

Okay. Thank you, Ivan. As our first press release this morning indicated, we had a very strong first-quarter generating AFFO of $35.5 million or $0.33 per share. These results reflect an annualized return on average common equity of 14.5% percent which continues to increase consistently from the substantial portion of our earnings that are being generated by our growing Capital Agency business, and from the additional cost efficiencies we are experiencing as we continue to scour our Balance Sheet business.As I've mentioned, we're very pleased with our ability to increase our quarterly dividend, $0.28 a share reflecting a 12% increase from a year ago.

And we remain confident in our ability to increase our dividend in the future as our annual run rate of core earnings continues to grow. Looking at our results from our Agency business, we generate approximately $13 million of pre-tax income in the first quarter on approximately $850 million in originations, and $1.1 billion in loan sales. The margins on our first-quarter sales was 1.49%, including miscellaneous fees, compared to 1.13% all in margin on our fourth-quarter sales, mostly due to some large portfolio deals that we closed in the fourth quarter which generally have a lower margin. We also recorded $14 million of mortgage servicing rights income related to $847 million of committed loans during the first quarter, representing an average mortgage servicing rights rate of around 1.68%. Our servicing portfolio also grew another 2% during the quarter to $18.9 billion in March 31, with a weighted average servicing fee of approximately 45 basis points, and that's made the remaining life of eight point seven years.

As portfolio will continue to generate a predictable annuity of income going forward, around $84 million gross annually, which is up approximately $5 million on an annual basis from the same time last year. Additionally, early run off on our servicing book continues to produce prepayment fees, related to certain loans that have yield maintenance provisions, this accounted for $5 million in prepayment fees in the first quarter, which was down from $6 million in the fourth quarter. The earnings associated with our escrow balances also continue to grow, and contribute meaningfully to our growing recurring income streams. We currently have approximately $800 million of escrow balances, which are earning slightly less than one month LIBOR, and our earnings associated with these balances are up approximately $9 million on an annual run rate, as compared to the same time last year. And our balance sheet lending operation, we grew our portfolio another 4% to $3.4 billion, and based on our current pipeline, we remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the future.Our $3.4 billion investment portfolio had an all in yield of approximately 7.71% at March 31, compared to 7.66% at December 31.

The average balance in our core investments was up from $3.2 billion last quarter to $3.3 billion this quarter due to, our fourth quarter and first quarter growth. And the average yield on these investments was up slightly to 7.84% for the first quarter, compared to 7.76% for the fourth quarter mainly due to, an increase in the average LIBOR rate, partially offset by less accelerated fees from early runoff this quarter.Total debt on our core assets was approximately $3.1 billion at March 31,  with all and debt costs of approximately 5.22%, compared to a debt cost around 5.24% at December 31. The average balance of our deficit leaves was up to approximately $3 billion for the first quarter from $2.9 billion for the fourth quarter due to, financing our portfolio growth. And the average cost of funds in our deficit has increased to approximately 5.24% for the quarter, compared to 5.12% for the fourth quarter due to, an increase in the average library.

Overall, net interest spreads in our core assets were down slightly to 2.60% this quarter, compared to 2.64% last quarter mainly due to, more acceleration of fees from early runoff in the fourth quarter. And our overall spot and interest spread was up to 2.49% at March 31, compared to 2.42% at December 31.And lastly, the average leverage ratio in our core lending assets, including the trust preferred, and perpetual preferred stock as equity was flat at approximately 79% for both the first and fourth quarters. And our overall debt-to-equity ratio on a spot basis, including the trust preferred, and perpetual preferred stock as equity was up slightly to $2.41% at March 31, from 2.31% at December 31 mainly due to the $90 million of unsecured debt we issued in March.That completes our prepared remarks this morning. And I'll turn it back to the operator to take any questions you may have at this time.

Operator.

Questions & Answers:


Operator

Thank you. [Operator instructions]. And our first question comes from Steve DeLaney of JMP Securities LLC. Your line is now open.

Steve DeLaney -- JMP Securities LLC -- Analyst

Thanks. Good morning, and congratulations on a strong start to 2019. Apologies that I'm on the road. So my questions I would be pretty much big picture, because I haven't been through the weeds yet.

One thing we picked up in the first quarter, Fannie Mae of course has stepped up on small balance, and I believe they've raised their loan limit to $6 million. But we also heard they were being very aggressive on pricing. You're obviously a big player with Fannie but I've recalled that Arbor's like number one with Freddie, or has been with Freddie and small balance. So my question is, what is Fannie Mae's assertiveness here mean for your business both near-term and long run.

Ivan Kaufman -- President and Chief Executive Officer

I'm afraid definitely, has been much more aggressive and I felt that my form up. We were instrumental in helping them develop that platform and have consistently been producing a significant percentage. Fannie Mae has put a greater effort into it. They will grow that business a little bit more, and I think they'll compete to some extent with Freddie Mac, but they're a little bit more effective on that 10-year product.

I think between the two of them, Freddie did a billion last year. Fannie Mae may do to $2 billion to $3 billion. So maybe there's another 10% within that market, we'll do more with Fannie. I think last year, we were also one of the leading providers with Fannie, and we'll continue to do so.

So that market will continue to grow, and as you know, that's also excluded from the Cap. And if there's any pressure on the Cap, that component that will continue to grow.

Steve DeLaney -- JMP Securities LLC -- Analyst

It sounds like it's just more opportunities to serve a broader way as clients too given that the difference in product focus etc. So thank you for that. I'm sure you'll get other questions about this on credit. We are definitely starting to see some cracks.

I think this is the first quarter as the commercial REITs have reported that, I can think of one that had no credit issue, but it seems like everybody's had something. Hotels in particular, seems to be being taken back right and left. I guess you haven't said anything about your portfolio and Chris has been through the Q. It doesn't sound like you have any necessarily any new credit issues to alert us to.

But just what you're seeing in the market in terms of, are you starting to see and hear of more foreclosures,  properties struggling, and I don't know whether it's a question of overbuilding or these value add people just basically overpaying and then the business plan is not working out. Stepping back for someone that's been in real estate so life, I'm just curious if this increase in foreclosures and lung problems whether that surprises you or you did see it coming.

Ivan Kaufman -- President and Chief Executive Officer

So, the fact is, we have seen it coming. And if you go back several quarters, we gave guidance this year on our agency platform to have flat growth over the last year. And we're doing that specifically for two reasons, number one is, we think credit is an issue, and we're being selective and cautious during this pivotal period of time. And you'll see other lenders perhaps, have growth in their agency book.

I think they're being aggressive on price and on credit. We've chosen to be conservative on credit, and also trying to preserve our margins which is a little bit unusual in a market that's volume driven and is very reflective of that issue. We do believe that there's a level of aggressiveness in the market. There's a lot of liquidity, and you have to proceed with extreme caution, and the extreme caution comes from the bars having the ability to stretch lenders out.

And most importantly is, a lot of new sponsors entering the arena and that being able to have access to credit without the track record and the credibility, and that's where we have a high level of concern. So I think it's justified in acknowledging that we're in a point in time in the cycle that we should be concerned. And what bailed people out and will bail people out is a rent growth continues. We've had 10 years of straight rent growth on the Multi-Family sector, fundamentals still look fairly good, specifically in the areas that we traffic which is the B and C market workforce housing where you can't reproduce that product, there's limited supply, and I've spoken about that in past.

Our concern would be more in the upper end, and the bailout did come last year for some people in the 10 year drop from 325 to 350, to 235 to 275. That made a big difference to people. But I would say, everybody should proceed with the high level of caution.

Steve DeLaney -- JMP Securities LLC -- Analyst

Thanks for the comments Ivan. That's all for me.

Operator

Our next question comes from Jade Rhamani of KBW. Your line is now open.

Jade Rhamani -- KBW -- Analyst

Good morning. This is Ryan Thomas on the line for Jade. Just given the changes at the FHFA with new leadership and the strong start we've seen to the year with the GSE volumes Ivan, I was just wondering if you're hearing anything on whether the FHFA plans to make any changes to the Caps over the next couple of quarters, and overall for the market where you expect marketwide volumes to potentially shake out for the year.

Ivan Kaufman -- President and Chief Executive Officer

I think that there is an expectation that the FHFA will recognize that it's a bigger market, and will adjust their Caps to a reasonable degree, and a market is a little bit bigger. With respect to us, I think we delivered to Fannie Mae as a percentage more product than any other lender, which was excluded from the Cap because we focus on small balance, because we focus on a workforce housing. I think we had 61% of our deliveries were outside the Cap, which is pretty good. We have a new leader in the FHFA, I'm not sure how--what his reaction is going to be.

He may not totally accommodate the market, but I believe they're going to acknowledge that the market's a little bit bigger, and accordingly should make the adjustments start to reflect a bit of a bigger market.

Jade Rhamani -- KBW -- Analyst

That's helpful commentary. And we've also heard from some industry sources that Fannie is trying to dial back their volumes a bit, given there strength in the first quarter and increased spreads. I was wondering if this is commiserate with what you're seeing currently in the market, and if that's true, if you expect a higher mix of Freddie going forward in the near term.

Ivan Kaufman -- President and Chief Executive Officer

I think both agencies are going to dial back, but we applaud them for what they're doing is to our benefit and it's the market's benefit. If they're going to dial back on credit, and they're going to dial back on pricing always for the new benefit. And it's in line with our strategy. So to the extent, they dial back servicing and guarantee fees we'll be a little stronger, and we would like them to and that's their initial signaling.

And that would be have a positive effect on us.

Jade Rhamani -- KBW -- Analyst

And then just following up on Steve's comments on questions on credit. We saw the new disclosure in the Q on your servicing portfolio, while still low, it does look like delinquencies did tick up modestly quarter-over-quarter there. I was wondering if you can just talk about how those metrics have trended historically, and with regards to your servicing portfolio in particular, if you are anticipating a modest seasoning of delinquencies to increase, as that collateral continues to season.

Paul Elenio -- Chief Financial Officer

Well, do not expect that with delinquencies are very, very low. The only real delinquencies we have are, on legacy assets that are in the special asset management, part of the servicing of Fannie Mae that we settle losses on. We have reserved roughly $3 million for specific reserves related to those loans and all of those loans have been outstanding a while it just has to do with timing of the presentation in the Q. But those loans about outstanding a while, and we don't really have any delinquencies to speak of outside those legacy assets that we have on our books for a while and are working through those loss shares.

But I've had enough as for on our balance sheet at this point. But overall, servicing portfolio, if credits been super benign, as you can see from the numbers and it's been performing quite well.

Jade Rhamani -- KBW -- Analyst

Got it. Thanks, for taking the questions.

Operator

Thank you. And your next question comes from Rich Shane, from JP Morgan. Your line is now open.

Rich Shane -- J.P. Morgan -- Analyst

Good morning, guys. Thanks, for taking my questions. Just a couple quick things. We noticed that the stock based comp expense was up on a percentage basis of overall comp.

I'm wondering if that-- I realize there's some seasonality related to vesting I'm wondering if that is a function of the stock price, or if there's a little bit of a shift in comp structure.

Ivan Kaufman -- President and Chief Executive Officer

No. It's more related to seasonality. We issue our restricted stock grants to our employees, and our directors in the first quarter of every year. So if you go back and look at the first quarter it may be up a little bit, because of the size of our staff, and the increase in our staff, and getting people to come on board and using some of that to attract our talent.

But for the most part, it should be pretty consistent with prior years. Again, up a little bit as we attract more talent and use our currency to do that, but for the most part, it's just a seasonality thing.

Rich Shane -- J.P. Morgan -- Analyst

Got it. The reason I asked the question is that, last year was about 8.6% of comp, this year it was about 11.8%. So that's what I'm trying to figure out if its--I realized there's a seasonality to it, but on a percentage basis, it also increased year over year.

Ivan Kaufman -- President and Chief Executive Officer

It has to do with as I mentioned, as we've attracted more talent to grow certain areas of our business. We've used that currency as a local call sign on bonuses to get people on, and that is growing a little bit. But again, I don't think it's materially different than the past, but that is some of the reason you're seeing that.

Rich Shane -- J.P. Morgan -- Analyst

The other thing we noticed was, that the MSR cap rate went down a little bit this quarter. Just curious what's driving that.

Ivan Kaufman -- President and Chief Executive Officer

Yes, it's just a little bit distorted, because you have to break apart the numbers. So on the committed volume, the committed loans we had in the quarter of $847 million, $100 million where CMBS conduit deal, so they have no servicing fee attached to them. So if you strip that out and do the MSR rate on the agency book, that was not CMBS. That ratio would've been about 1:91, and that's about what we projected it would be going forward.

And what I told you probably was on an unadjusted basis in the fourth quarter. So we just look at the numbers and dive into them, and you'll see that the CMBS volume was up in the first quarter, more than it was in the fourth or prior quarters. So it's just distorting the overall number. But on the non-CMBS agency product,it did come in about 1:91.

Rich Shane -- J.P. Morgan -- Analyst

Got it.That that makes sense. And then last question related to that increase that we've seen a steady increase on the CMBS conduit side. Is that going to be something we should continue to model in.

Ivan Kaufman -- President and Chief Executive Officer

No. I just think it's--as we service our borrowers from time to time, they have need for certain product, and we execute the product based on their needs. But I would not say that's a meaningful part of the business plan going forward.

Rich Shane -- J.P. Morgan -- Analyst

Great. Thanks, so much guys.

Operator

Thank you.[Operator instructions]. And our next question comes from Lee Cooperman from Omega Advisors. Your line is now open.

Lee Cooperman -- Omega Advisors -- Analyst

Good morning. I have my congratulations to everyone else's. Very nice quarter, you did a great job in running the company. I have one question.

How do you feel about your capital adequacy. Do you think you need more money to run the business, or you have adequate capital to run the business as you plan to run it.

Ivan Kaufman -- President and Chief Executive Officer

I think a lot had to do with our pipeline and the likelihood of our pipeline closing, and the benefit is, as we get more certainty in the growth of our pipeline, we'll raise capital whether it be debt or equity to match what's occurring. So a pipeline is pretty robust, but the certainty of closing is what we evaluate. And that will dictate our capital leads. And clearly, when we're closing loans and getting you a low to mid-teens return it would be very creative, and we'll just pick the best combination, and we'll fuel our business at the proper time.

Lee Cooperman -- Omega Advisors -- Analyst

Thank you.

Ivan Kaufman -- President and Chief Executive Officer

Thank, Lee.

Operator

Thank you. And our next question comes from Jade Rahmani from KBW. Your line is now open.

Jade Rahmani -- KBW -- Analyst

Thanks for taking the follow up. Just wondering if you can discuss the internal approval process with respect to making loans and other investments with related parties in which management has an interest. We've noticed the $30 million that you committed to a related party investment fund, and there's also a number of other related party lending that the Q is. So just wondering if you can comment on the internal process with respect to that.

Ivan Kaufman -- President and Chief Executive Officer

We have a related party policy that is internal here. I don't have it in front of me. And ultimately, we follow a specific policy, and then it goes for board approval. And each and every transaction that is related party goes through our policy and through board approval.

And the transactions are evaluated by the board on a quarterly basis at their board meeting for performance, and adherence to those policies.

Jade Rahmani -- KBW -- Analyst

Okay. And then just..

Ivan Kaufman -- President and Chief Executive Officer

And it's done by the independent directors of the board.

Jade Rahmani -- KBW -- Analyst

Great. And then just one more on technology, one of your agency peers recently acquired a technology company to improve their underwriting and servicing efficiency. So I was wondering if you guys could highlight some of the investments Arbor is making in technology, and if given the size of the servicing book and the history there. If you see data as potentially something that you can monetize in the future through some license agreements or otherwise.

Ivan Kaufman -- President and Chief Executive Officer

So, we have no intention of monetizing our data through licensing agreements, they're proprietary and the secrecy and privacy of our bar is really critical to them and to us. But more importantly, this is a global approach and a macro approach for our firm. We've invested very heavily in senior and executive management in building out the infrastructure to have a complete technology approach from solicitation. Capture and the capturing of the data, and making sure it's consistent from the origination and sales process through underwriting, through closing, who's servicing and available throughout the organization.

To create the right information flow, the right data sources, and as significantly, as you focused on is the right efficiencies in terms of cost of doing business. And we have a five year plan here. And it's a very very significant component of the way we are growing our business.

Jade Rahmani -- KBW -- Analyst

And just one last housekeeping item. Paul, what was the commission expense in the quarter for the agency originations.

Paul Elenio -- Chief Financial Officer

The commission expense for the quarter was about 37.5%. As you know, it resets in the in first quarter at year end. You catch up and then figure out where it ends up. It was  up a little bit from last quarter obviously, because we're resetting into 2019, but also because our margins were up, so as our margins increased and we were able to hold strong margins the commission rate goes up as well.

But it was 37.5%.

Operator

Thank you. [Operator instructions]. And I'm showing no further questions. At this time, I'd like to turn the conference back over to Ivan Kaufman for closing remarks.

Ivan Kaufman -- President and Chief Executive Officer

Thank you, everybody for your time today. We're off to a great start for the year. We're very pleased with the way things are going, and the size of our pipeline, and I look forward for the rest of the year has been very positive. Have a great day, everybody.

Duration: 31 minutes

Call participants:

Paul Elenio -- Chief Financial Officer

Ivan Kaufman -- President and Chief Executive Officer

Steve DeLaney -- JMP Securities LLC -- Analyst

Jade Rhamani -- KBW -- Analyst

Rich Shane -- J.P. Morgan -- Analyst

Lee Cooperman -- Omega Advisors -- Analyst

Jade Rahmani -- KBW -- Analyst

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