Arbor Realty Trust Inc Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2021 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Ashley, and good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the fourth quarter and year-ended December 31, 2021. 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 cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners, of course, should 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.

Thank you, Paul, and thanks to everyone for joining us on today's call. We're very excited today to discuss the significant success we had in closing out what was an exceptional 2021, as well as our plans and outlook for 2022, which we are confident will be another outstanding year. As you can see from this morning's press release, we had another record quarter, and 2021's results reflect one of our best years as a public company. It is very important to continue to emphasize the value of having multiple products with diverse income streams, which has allowed us to consistently grow our earnings and dividends in all cycles while maintaining a very low dividend payout ratio. We strategically built an annuity-based business model, creating multiple income streams from a single investment. As a result, not only do we generate strong risk-adjusted returns on our capital, which positively affect our current earnings, but more importantly, we are also building a much higher quality future earnings and dividend growth story by ensuring that our assets will provide us with multiple other products in the future. This is one of the major differentiators of our business platform, which is why we strongly believe we should consistently trade at a substantial premium and at a much lower dividend yield than anyone in our peer group. In fact, with the recent pullback in the market, we are now trading at a dividend yield of approximately 8.8%, which is actually higher than the yield of our peer group for the first time in several years. This is despite the significant advantages of our business model and a long track record of consistent dividend increases compared to our peers, most of whom have been unable to grow their dividends. We feel strongly that our current stock price in no way reflects the true value of our franchise, presenting investors with an unparalleled buying opportunity. As described in this morning's press release, our record fourth quarter results combined with a very positive outlook on the long-term growth of our platform has allowed us to once again increase our dividend to $0.37 a share. This is our seventh consecutive quarterly dividend increase and our tenth consecutive year with consistent dividend growth, putting us in a very elite class of companies all while continuing to maintain the lowest dividend payout ratio in the industry. We built a premium operating platform that is focused on the right asset classes and a very stable liability structure. We have a thriving balance sheet, GSE agency, private-label, single-family rental as well as an industry-leading securitization platform that has allowed us to produce a long track record of exceptional performance with consistent earnings and dividend growth. As a result, we've been the top performing REIT in our space for five consecutive years now in all the major performance metrics including earnings and dividend growth, ROE, and total shareholder return. We are very well positioned to succeed in every market cycle, which gives us great confidence in our ability to continue to have tremendous success going forward. Before we discuss the details of our quarterly results, I want to highlight some of our more notable 2021 accomplishments, which include generating substantial growth in our earnings, allowing us to increase our dividend by four times or 12% to an annual run rate of $1.48 a share delivering total shareholder return of 39% in 2021 and 221% cumulatively for the last five years with an annualized return of 26%, achieving industry-leading ROEs of 90% for each of the last two years, producing record originations of $16 billion, a 76% increase over last year, originating $10 billion of new balance sheet business, increasing our portfolio by 122% in 2021 to $12.2 billion, producing private-label originations of $1.4 billion, a 276% increase over the last year, growing our servicing portfolio to $27 billion, a 10% increase from 2020, and a 34% increase over the last three years, closing four non-recourse CLO securitizations totaling $5.2 billion and two private-label securitizations for $1 billion through our industry-leading securitization platform, and raising $1.7 billion of accretive capital to fund our balance sheet growth and increase our market cap to over $3 billion. Turning now to our fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.62 per share, which is well in excess of our current dividend, representing a payout ratio of around 60% for the fourth quarter and 70% for the full year 2021. In our balance sheet lending business, we have another outstanding quarter producing record volumes of $4.3 billion. We are a top balance sheet lender in the industry and are seeing tremendous growth in efficiencies as we continue to scale our platform. As a result, we grew our balance sheet book by 122% in 2021 to $12.2 billion on record originations of $9.7 billion, and we have a very large pipeline, which gives us great confidence in our ability to continue to meaningfully grow our loan book in 2022. These balance sheet loans create significant value for our platform as they are not only accretive to our current earnings and dividends, but also allow us to build a pipeline for two to three years of new GSE agency and private label loans that produce additional long-dated income streams, ensuring the long-term growth of our platform and creating high-quality earnings and dividends for the future. We have consistently been a leader in the CLO securitization market as financing our high-quality balance sheet portfolio with the appropriate liability structures continues to be one of our key business strategies. We are very successful in continuing to access the CLO securitization market in 2021, including closing our largest CLO to date totaling $2.1 billion in the fourth quarter, as well as closing another $2 billion CLO just last week. The utilization of these vehicles has contributed greatly to our success by allowing us to appropriately match fund our assets with non-recourse, non market-to-market long-dated debt, and generate attractive levered returns on our capital. We continue to experience strong growth in our GSE agency and private label business programs as well. We originated approximately $1.6 billion in agency loans in the fourth quarter and $1.9 billion, including our private label business. Equally importantly, we have a robust pipeline giving us confidence in our ability to continue to produce consistent agency volume in 2022. Our GSE agency platform continues to offer premium value as it requires limited capital and generates significant long-dated predictable income streams that produce significant annual cash flow. Additionally, our $27 billion GSE agency servicing portfolio, which has grown 10% in the last year, is mostly prepayment protected and generates approximately $121 million a year and growing in recurring cash flow, which is up 8% from a $112 million annually last year. This is in addition to the strong gain on sale margins we continue to generate from our originations platform, which combined with new and increasing servicing revenues will continue to contribute greatly to our earnings and dividends. Earlier this week, we were pleased to have closed our fourth private label securitization totaling $490 million, which continues to demonstrate the strength and diversity of our versatile lending platform and tremendous securitization expertise. We also had a great year in our single-family rental platform. We produced approximately $900 million of volume in 2021, including approximately $400 million in the fourth quarter. Additionally, we currently have over $1 billion of additional deals in our pipeline, making us optimistic about the growth opportunities in this segment of our business going forward. We are a leader in the build-to-rent space, which provides us with the opportunity to originate construction, bridge, and permanent loans on the same transactions. Similar to our balance sheet business, this platform provides us with a path to future transactions that will produce additional long-dated income streams. Reflecting on 2021, we had an exceptional year and clearly outperformed our peer group. We are the best-performing REIT for five years in a row, delivering a 26% annualized return over the same time period. We are also well-positioned for continued success in 2022 due to our unique multi-tiered annuity-based operating platform that provides us with a future annuity of high quality long-dated income trends, making us confident in our ability to continue to grow our earnings and dividends and significantly outperform our peers. I will now turn the call over to Paul to take you through the financial results.

Okay, thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $94 million or $0.57 per share, and $0.62 per share excluding a one-time realized loss of $8 million on a non-multifamily asset that we had taken a reserve on during the height of the pandemic. We also had a record year with distributable earnings of $2.01 per share in 2021, a 15% increase over our 2020 results. These results translated into industry high ROEs again of approximately 19% in 2021, allowing us to increase our dividend to an annual run rate of $1.48 per share, reflecting four increases in 2021 and seven consecutive quarterly increases representing a 23% increase over that time span. Our financial results continue to benefit greatly from many aspects of our diverse annuity-based business model, including significant growth in our agency, private label, and balance sheet business platforms that produce substantial gain on sale margins, long-dated servicing income, and strong levered returns on our capital. Additionally, as we’ve mentioned in the past, the credit quality of our portfolio has been outstanding. We have very few specific reserves left on a handful of non-multifamily assets that we took in the beginning of the pandemic. We also made significant progress over the last few quarters in our non-performing loans as trends continue to improve. We received another $32 million in payoffs and pay downs in the fourth quarter related to three loans, leaving us with effectively only one remaining non-performing loan for $20 million. We have always prided ourselves on investing heavily in our asset management function, and the success we’re having in working out these assets further demonstrates the value of our unique franchise. Looking into the results from our GSE agency business, we originated $1.6 billion in GSE loans and recorded $1.5 billion in GSE loan sales in the fourth quarter. We also continue to produce consistently strong margins in our GSE loan sales, generating a margin of 1.52% in the fourth quarter compared to 1.60% in the third quarter. Additionally, as Ivan mentioned, we remained very active in our private label program, originating $282 million of new loans in the fourth quarter, completing our third private label securitization totaling $535 million in October and our fourth securitization totaling $490 million earlier this week. In the fourth quarter, we also recorded $35 million of mortgage servicing rights income related to $1.8 billion of committed loans representing an average MSR rate of around 1.88% compared to 1.75% last quarter, mainly due to a greater mix of Fannie Mae loans in the fourth quarter that contained higher servicing fees. Our servicing portfolio also grew 9.5% in 2021 to $27 billion with a weighted average servicing fee of 45 basis points and an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $121 million gross annually, which is up approximately $9 million or 8% on an annual basis from the same time last year. Additionally, prepayment fees related to certain loans that have yield maintenance protection increased again substantially in the fourth quarter to $20 million compared to $11 million in the third quarter, mainly due to significantly more runoff this quarter as a result of the continued increase in real estate values. In our balance sheet lending operation, we grew our portfolio another 33% this quarter to $12.2 billion on record quarterly volume of $4.3 billion. Our $12.2 billion investment portfolio had an all-in yield of 4.62% at December 31 compared to 4.97% at September 30, mainly due to higher rates on runoff as compared to new originations during the quarter. The average balance in our core investments increased substantially to $10.5 billion this quarter from $8.2 billion last quarter, mainly due to the significant growth we experienced in both the third and fourth quarters. The average yield in these investments was 5.03% for the fourth quarter compared to 5.55% for the third quarter, mainly due to higher interest rates on runoff as compared to originations in the third and fourth quarters combined with $3 million in back interest collected in the third quarter from the payoff of a non-performing loan. Total debt on our core assets was approximately $11.2 billion at December 31, with an all-in cost of debt of approximately 2.61%, which was down slightly from a debt cost of around 2.64% at September 30, mainly due to a reduction of the cost of funds from our new CLO vehicles and reduced rates on warehouse and repurchase agreements during the fourth quarter. The average balance on our debt facilities was up to approximately $9.4 billion for the fourth quarter from $7.3 billion for the third quarter, mostly due to financing the growth in our portfolio and issuing $180 million of new unsecured notes during the fourth quarter. The average cost of funds on our debt facilities also decreased to 2.65% for the fourth quarter from 2.76% for the third quarter, again, mainly due to reduced pricing in our CLO vehicles and warehouse facilities. Our overall net interest spreads in our core assets decreased to 2.38% this quarter compared to 2.79% last quarter. Overall, our spot net interest spreads were also down to 2.01% at December 31 from 2.33% at September 30 due to yield compression on new originations as compared to runoff. That completes our prepared remarks for this morning. I’ll now turn it back to the operator to take any questions you may have.

Thank you. We’ll take our first question from Steve DeLaney with JMP Securities. Please go ahead.

Thanks. Well, hello, Ivan and Paul, congratulations on an excellent close to last year. I think the thing that jumped off the page the most to me, it’s a lot of good things in the report and in the year, but the dramatic growth in your structured business in terms of origination volume, you did $9.7 billion, but $6.8 billion or 70% of that came in the second half of the year. So my question, the strong demand that you're seeing from multifamily bridge loans in the market, do you expect that to carry over into 2022? Is it possible that 2022 could set a new record for origination volume in the structured business? Thank you.

Yeah, thanks, Steve. Clearly, there was a little bit of a shift in the environment and I'll give you some of the reasons for it and why we're so well-positioned and so dominant in that space. If we had more personnel and more ability, we could probably have done more. We’re limited in what we could do, and we’re still limiting what we can do. I think with the huge jump in rental rates, we've seen between a 10% to 25% increase in rents from people buying properties and not going for permanent financing, so they're opting for more transitional financing before they get to permanent financing, creating a very significant shift. Through the COVID period, rents remained fairly flat. After the initial stages of COVID, rents really accelerated. Buyers are purchasing multifamily properties, taking a year to two years to stabilize those rents before transitioning to permanent financing. That has been the shift in the market. We are the best balance sheet lender in the business when it comes to multifamily. We do a great job, and that business is growing dramatically. We've probably turned away a significant amount of business due to our limitations. In terms of the outlook for 2022, we are running at about $1 billion a month on our books for closings for the first quarter. We still have to turn down a significant amount of business. We have restrictions, and human capital is a very big restriction currently. As we all know, hiring and retaining people is a big task. We're managing to retain our employees well, but hiring new staff is very challenging. Overall, the outlook on the balance sheet is still very strong, and we remain a market leader in that area.

That's very helpful. Thanks for the color on the mindset of these borrowers that it's not buying a property and taking three or four years to renovate completely. I mean, they're seeing a near-term opportunity, and I can understand how that is boosting your demand for bridge. So, thank you for that. One follow-on question regarding your single-family rental business, still relatively small but strategic for sure. I see you're showing $57 million in originations in the fourth quarter, while servicing about $190 million. What I was trying to reconcile was that you're showing $729 million in total commitments. Can you help me understand where we've seen the origination volume that would have contributed to the $700 million of commitments?

So, the various segments of that business include providing fixed-rate production, which is one aspect of our operations. We're ramping that side of the business up to about $20 million a month, focusing on originating fixed-rate products and selling them as fixed-rate loans. We don't hold them for securitization, but we do sell them into the market and perform very well with those. The second element involves providing floating-rate products for individuals buying scattered-site single-family rentals, either from builders or scattered sites, and developing them. That portion of our balance sheet is growing. Paul could explain how much is on the balance sheet and how much is in the pipeline. The third piece, which is where we see ourselves as market leaders, is in the build-to-rent communities where we provide construction loans. These stabilize, followed by bridge loans, and then we do a takeout loan. That's where we're investing a lot of time and money, and we anticipate exponential returns on that investment in 2022, 2023, and 2024. Paul, could you add some financial detail?

Yeah, I think Ivan's outlined the different components of the business. It's a bit complicated from a financial modeling perspective. We're trying to give you insight into the breadth of our platform when we disclose the committed volumes. Those transactions can be significant, but do take time to fund. As Ivan mentioned, we've funded $57 million in permanent fixed-rate loans that hit the agency side. We’re managing those without retaining risk. For year-to-date through December 2021, we originated approximately $170 million of permanent product, with 136 million fixed-rate loans sold through the market for profit. The balance sheet currently holds about $450 million, which includes both fixed-rate loans and various commitments for bridge loans and fundings for scattered site and build-to-rent products. We're disclosing this to provide insight into where the business is headed, understanding the funded volumes may trail the committed volumes over time.

Got it. I appreciate that clarity. Thank you.

I want to reiterate that we are resource-constrained. We could be doing significantly more business, but we simply don’t have the workforce to manage it efficiently, which is a first for me in my career—seeing the inability to hire for managing new business and needing to turn away opportunities. It's quite a remarkable situation to find ourselves in.

To add on to Ivan’s commentary, we originated approximately $850 million in January, with $150 million in runoff. We're maintaining a run rate of $800 million to $1 billion monthly. We do have some constraints, but the business remains active with a large pipeline.

We'll take our next question from Rick Shane with JPMorgan. Please go ahead. Your line is open.

Hey guys. Thanks for taking my questions this morning. Can you hear me?

Yes, Rick, how are you?

I’m doing well, thanks. A couple of things. Implicit in your comments about labor markets and growth opportunities, I assume that suggests we should anticipate some expense growth in 2022. What type of expense growth do you think is reasonable to assume for this year, given the language around employees?

Before Paul addresses that detail, I will mention that we have maintained a lot of flexibility in how we compensate, even if that means we have to raise salaries for our employees. We focus on long-term incentives rather than annual payouts to encourage retention. Many of our employees have been with us for many years, and we must recognize their compensation needs in today's market while rewarding their loyalty. Now I'll pass that over to you, Paul.

Certainly, Rick. That’s a very good question. Our comp and G&A expenses are up about 20% year-over-year from 2020 to 2021, but remember that 2020 was a COVID year with less travel and fewer conferences—so it is a difficult comparison. Given our current constraints with human capital, I think it’s reasonable to expect similar growth of about 15% to 20% in expenses for this year.

That’s very helpful, thank you. Looking at the structured business, it appears to be potential energy for the agency business. I'm curious, as you underwrite loans, are you starting to factor in higher interest rates for exits? Could this impact managers, owners in acquiring financing?

We are constantly reevaluating our models based on economic shifts. We underwrite our bridge loans by evaluating where the takeout financing will come from, which is an ongoing process. Back in November, we reevaluated the market and adjusted our rent growth forecasts. We recognized that while we had seen exceptional rent growth recently, we believe it will subside to more normalized rates—about 3% moving forward. We are continuously adjusting our underwriting practices, including changing our pricing methodology to be more aggressive on loans with lower loan-to-value in primary markets.

This is great detail, I appreciate your thorough answers. Thank you both very much.

Thanks.

I believe Lee Cooperman is in the queue, and we will do our best to answer his questions even though he has not yet entered.

Unfortunately at this time, I do not have anyone in queue.

Thank you, everyone, for your participation. It was a phenomenal year, and our outlook for the first quarter is very strong with a significant pipeline. We look forward to continued participation and wish you all a great day and weekend ahead. Take care.

Thanks, everyone.

Thank you. This does conclude today’s program. Thank you for your participation. You may disconnect at any time.