Arbor Realty Trust Q2 2025 Earnings Report

Arbor Realty Trust EPS Results

• Actual EPS: $0.24
• Consensus EPS: $0.27
• Beat/Miss: Missed by -$0.03
• One Year Ago EPS: N/A

Arbor Realty Trust Revenue Results

• Actual Revenue: $27.44 million
• Expected Revenue: $76.99 million
• Beat/Miss: Missed by -$49.55 million
• YoY Revenue Growth: N/A

Arbor Realty Trust Announcement Details

• Quarter: Q2 2025
• Date: 8/1/2025
• Time: Before Market Opens
• Conference Call Date: Friday, August 1, 2025
• Conference Call Time: 10:00AM ET

Arbor Realty Trust (NYSE:ABR), Inc. invests in a diversified portfolio of structured finance assets in the multifamily, single-family rental, and commercial real estate markets in the United States. The company operates through Structured Business and Agency Business segments. It primarily invests in bridge and mezzanine loans, including junior participating interests in first mortgages, and preferred and direct equity, as well as real estate-related joint ventures, real estate-related notes, and various mortgage-related securities. In addition, the company offers bridge financing products to borrowers who seek short-term capital to be used in an acquisition of property; financing by making preferred equity investments in entities that directly or indirectly own real property; mezzanine financing in the form of loans that are subordinate to a conventional first mortgage loan and senior to the borrower's equity in a transaction; junior participation financing in the form of a junior participating interest in the senior debt; and financing products to borrowers who are looking to acquire conventional, workforce, and affordable single-family housing. Further, it underwrites, originates, sells, and services multifamily mortgage loans through conduit/commercial mortgage-backed securities programs. The company qualifies as a real estate investment trust for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders. Arbor Realty Trust, Inc. was incorporated in 2003 and is headquartered in Uniondale, New York.

Arbor Realty Trust Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Arbor completed a $500 million high-yield unsecured debt offering, used proceeds to retire all convertible debt and add $200 million in liquidity, and received a BB rating from Moody’s and Fitch.
• Positive Sentiment: The company issued the first industry-built-to-rent securitization of $800 million with enhanced leverage and a two-year replenishment period, laying groundwork for a scalable single-family rental CLO platform.
• Neutral Sentiment: Arbor generated distributable earnings of $0.30 per share in Q2, in line with guidance, but views 2025 as a transitional year due to REO drag and higher delinquencies, with earnings growth expected to resume in 2026.
• Negative Sentiment: During Q2, Arbor took back $188 million in REO assets, bringing its REO book to about $300 million and estimating a year-end range of $400 million to $600 million, which is expected to continue weighing on earnings.
• Positive Sentiment: Agency originations reached $850 million in Q2, and a record pipeline could drive approximately $2 billion in Q3 production, positioning the company to meet or exceed its $3.5 billion to $4 billion full-year target.

Presentation

[Operator]

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

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Thank you, Stephanie, and good morning, everyone, and welcome to the quarterly earnings call for ARM Realty Trust. This morning, we'll discuss the results for the quarter ended 06/30/2025. 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.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

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, Founder, Chairman & CEO at Arbor Realty Trust]

Ivan Kaufman. Thank you, Paul, and thanks to everyone for joining on today's call. As you can see from this morning's press release, we had another active and productive quarter as we continue to make substantial improvements on the right side of our balance sheet and significant progress in working through our delinquencies and REO assets despite the challenging environment. We had a very active first half of the year with many significant accomplishments. We recently completed our first high yield unsecured debt offering, raising $500,000,000 of capital that we used to pay off all of our convertible debt and added $200,000,000 of additional liquidity to fund the growth in our platform.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

This is a tremendous accomplishment, especially in this environment. And we're very pleased to report that as part of this offering, we received a BB rating on our corporate credit from both Moody's and Fitch, reinforcing the quality of our platform and the value of our diversified business model. Clearly, having access to this highly liquid market will allow us to further diversify our funding sources and push out and stagger our long term debt maturities and continue to grow our platform and drive strong returns on our capital. This was a transformational deal for the franchise, capping off a string of its significant capital market transactions totaling 2,500,000,000 that we successfully completed over the first half of this year. One of these significant transaction occurred earlier in the second quarter when we issued the first built to rent securitization in the industry totaling $800,000,000 with pricing that was well inside our warehousing lines and contains enhanced leverage and a two year replenishment period, which allows us to substitute collateral when loans pay off.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

As I mentioned many times, we love the single family rental business and it provides us free turns on our capital through construction, bridge and permanent agency execution. And this landmark transaction has now paved the way to building a securitization platform for this business, which will not only increase our leverage trends significantly, but will also drive substantial efficiencies with our bank lines now that there is a takeout to a CLO market. And building this type of securitization platform will allow us to scale up this business and gain market share as these efficiencies will further increase our competitive advantage in the space. These transformational deals, these two combined with a $1,100,000,000 repurchase facility, which we closed in the first half first quarter with JPMorgan to redeem two of our CLOs are tremendous examples of our ability to continue to make substantial improvements to the right side of our balance sheet and drive higher returns on our capital. And given the strong securitization market and a a highly constructive and liquid environment we are currently seeing with our commercial banks, we are confident we will continue to make meaningful progress in this area and create additional efficiencies that will help mitigate the drag from some of our non interest earning assets.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

As we've discussed in our last few calls, the prolonged elevated rate environment has created a very challenging climate that is affecting the agency originations business and inability for borrowers to transition to fixed rate loans and recap their deals. We continue to see a tremendous amount of volatility and uncertainty in the market that has resulted in large swings in the five year and ten year indexes at times, which we believe could continue in the short term, making it very difficult to predict where rates will go for the balance of the year. We will continue to monitor the market environment and the effect that we'll have on our business for the balance of 2025. And again, as we've discussed in the past, if we see a meaningful sustained reduction in the five and ten year interest rates, it will be a positive catalyst for our business by driving increased origination volumes and allow us to move more loans off our balance sheet, which will increase our earnings run rate and position us well for 2026. We continue to do an effective job of managing through our loan book despite the fact that we have been dealing with elevated rate environment for over three years now.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

To date, we've had great success in getting borrowers to recap their deals and purchase interest rate caps as well as bringing new sponsor to take over assets either essentially or through foreclosure. In the second quarter, we took back approximately $188,000,000 of REO assets, dollars 115,000,000 of which we were able to flip to new sponsors and assume our debt. This brings our REO book to approximately $300,000,000 as of June 30. We do expect to take back additional assets in the future, which net of dispositions we estimate will result in owning and operating approximately $400 to $600,000,000 in REO assets, which is slightly above our previous guidance of 400,000,000 to $500,000,000 This is reflective of some of the recent trends we have seen this quarter. Turning now to our second quarter performance, as Paul will discuss in more detail, our quarterly results were in line with our guidance with us producing distributable earnings of $0.30 per share.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We anticipate that the balances of this year will continue to be challenging due to the significant drag on earnings from REO assets and delinquencies and to the effect this prolonged higher interest rate environment is having in our originations business, all of which will make 2025 a transitional year, which is reflected in our current dividend. And as we successfully resolve these assets and if we start to see sustained rate relief, we believe we will well position to grow our earnings and dividend again in 2026. In our balance sheet lending platform, we incredibly competitive landscape. There's a tremendous appetite for deals and this is a significant amount of capital out there chasing transactions. We are seeing shops consistently compromising on credit and structure, which is not something we will sacrifice to win a deal.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

As a result, we are being highly selective and have closed about $100,000,000 in the second quarter and $215,000,000 in July, putting us around $700,000,000 of volume for the first seven months of the year. The guidance we gave at the beginning of the year of 1,500,000,000.0 to $2,000,000,000 of bridge loan production for 2025 was based on the current environment is something we still feel we can accomplish. It is highly competitive out there and whether we come in on the low end or the high end of the range will be dependent upon the market conditions and the interest rate environment, which again has been volatile and unpredictable. And again, the bridge lending businesses are very attractive to us as it generates strong levered returns on our capital in the short term, while continuing to build up a significant pipeline of future agency deals, which is critical to part of our strategy. And if we can continue to take advantage of the efficiencies in the securitization mark with our commercial banks, we can drive higher levered returns and increase returns on our capital substantially.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

In the agency business, we originated $850,000,000 of loans in the second quarter and $1,500,000,000 for the first six months of the year. We had an incredibly strong July originating an unprecedented $1,000,000,000 of agency loans, which includes a large deal that we have been working on for several months. We also have a very large pipeline, and we believe we could result in originating approximately $2,000,000,000 in the third quarter, which would be one of the single largest production quarters in our history. We are very fortunate to have such a resilient originations network with very loyal borrowers, which allows us to capture some large off market transactions despite an extremely challenging market. And these tremendous results will put us in a position to meet and possibly beat our guidance for 2025 of between 3,500,000,000.0 and $4,000,000,000 of origination volume.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We continue to do an excellent job in growing our single family rental business. We had a strong second quarter with approximately $230,000,000 in new business and our pipeline remains strong. This is a great business as it offers three turns on our capital through construction, bridge and permanent lending opportunities and generate strong leverage returns in the short term while providing significant long term benefits by further diversifying our income streams. We continue to have great success in executing our business plan, converting another $200,000,000 of construction loans into new bridge loans this quarter and $335,000,000 already for the first six months of the year. And again, with the recent CLO we discussed combined with enhanced efficiencies we are seeing in our bank lines, we are generating mid to high returns on our capital, which will contribute to increased future earnings, especially as we continue to scale up the business.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We also continue to make great progress in our construction lending business. We believe this product is very important for our platform and it also offers us returns on our capital through construction, bridge and permanent agency lending opportunities and generates mid to high returns on our capital. We closed two sixty five million dollars of deals in the first six months and closed another $144,000,000 in July. We also have a strong pipeline with roughly $100,000,000 under application and $400,000,000 of additional applications outstanding currently screening. And given the strong progress, we feel we will easily beat the guidance we gave of $250,000,000 to $500,000,000 of production for 2025 and we are and we are way ahead of schedule for the first seven months of the year.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

In summary, we had a very active and productive first half of the year with many notable accomplishments. We continue to execute our business plan very effectively and in line with our objectives and guidance. Clearly, there has been a tremendous amount of volatility in this space, especially as it relates to outlook for short term and long term rates. If the rate environment improves, it will have a positive effect on our business and outlook moving forward. Additionally, we have made great strides in improving the right side of our balance sheet through the securitization and public debt markets with our banking relationships that will continue to be a positive catalyst.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

As I mentioned earlier, we view 2025 as a transitional year in which we will work exceedingly hard to successfully resolve our REO assets and delinquencies, providing a strong earnings foundation, which we can build upon in 2026. I will now turn the call over to Paul to take you through the financial results.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Okay. Thank you, Ivan. In the second quarter, we produced distributable earnings of $52,100,000 or $0.25 per share and $62,500,000 or $0.30 a share, excluding $10,500,000 of onetime realized losses in the sale of two REO assets in the second quarter. And the $0.30 a share of distributable earnings translates into a 10% ROE for the second quarter. In the second quarter, we accrued an additional $10,000,000 of net interest on paying accrual loans.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

However, we only increased our interest receivable related to these loans by approximately $3,000,000 during the quarter, mainly due to some loans that either repaid in full or had large pay downs in which we received $7,000,000 of back accrued interest that was outstanding on these loans. And in July, we also received accrued interest of around $7,000,000 related to a bridge and mezzanine loan we had on our books on the same property that paid off in full. We had $187,000,000 of loans on this asset, which was repaid with $167,000,000 agency loan that we recaptured an outside preferred equity that came in through the borrowing group. This is a perfect example of a tremendous execution where we generated strong returns on our invested capital, recaptured the agency loan with a much lower detachment point and recouped all of our invested capital and back accrued interest. Our total delinquencies came in at $529,000,000 at June 30 compared to $654,000,000 at March 31.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

These delinquencies are made up of two buckets, loans that are greater than sixty days past due and loans that are less than sixty days past due that we're not recording interest income on unless we believe the cash will be received. The 60 delinquent loans or NPLs were approximately $472,000,000 this quarter compared to $511,000,000 last quarter due to approximately $62,000,000 of loans that we took back as REO, dollars 36,000,000 of modifications and $21,000,000 of payoffs during the quarter, which was partially offset by $79,000,000 of additional defaults during the quarter. The second bucket consisted of loans that are less than sixty days past due, came down to $57,000,000 this quarter from $143,000,000 last quarter due to $48,000,000 of modifications and $48,000,000 that we took back as REO, which was partially offset by approximately $10,000,000 of new delinquencies during the quarter. And while we're making steady progress in resolving these delinquencies, we do anticipate that we will continue to experience some new delinquencies, especially if the current rate environment persists. In accordance with our plan of resolving certain delinquent loans, we've continued to take back assets as REO, and we expect to take back more over the next few quarters as Ivan mentioned.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

The process of foreclosing on and working to improve these assets and create more of a current income stream takes time, which again will temporarily impact our earnings. In the second quarter, we took back $188,000,000 of REO assets. We've been highly successful at bringing in new sponsors and certain assets to take over the real estate and assume our debt. This strategy is a very effective tool at turning dead capital in a non performing loan into an interest earning asset, which will increase our future earnings. We sold $115,000,000 of these assets in the second quarter, and we're in the process of bringing in new sponsors on another $40,000,000 of OREO assets, which we hope to close by the end of the third quarter.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

We recorded an additional $16,000,000 of loan loss reserves in our balance sheet loan book in the second quarter, dollars 6,500,000.0 of which were specific reserves, with the remaining $9,500,000 being general CECL reserves as a result of changes in the outlook on real estate values from the outside service providers we use to assist us in determining our loss reserves. And again, we believe we've done a good job of putting the appropriate level of reserves on our assets, which is evident by the transaction we've been able to effectuate to date at or around our carrying values net of reserves. In our agency business, we had a solid second quarter. And as Ivan mentioned, we are expected to have an exceptional third quarter as well. We produced $857,000,000 in originations and $8.00 $7,000,000 in loan sales in the second quarter with very strong margins of 1.69.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

We also recorded $10,900,000 of mortgage servicing rights income related to $853,000,000 of committed loans in the second quarter, representing an average MSR rate of around 1.28%. Our fee based services portfolio grew to approximately $33,800,000,000 at June 30, with a weighted average servicing fee of 37.4 basis points and an estimated remaining life of six point five years. This portfolio will continue to generate a predictable annuity of income going forward of around $126,000,000 gross annually. In our balance sheet lending operation, our investment portfolio grew to $11,600,000,000 at June 30 from originations outpacing runoff for the second straight quarter. Our all in yield on this portfolio was 7.86% at June 30 compared to 7.85% at March 31, mainly due to taking back nonperforming assets as REO, which are separately stated on our balance sheet, which was partially offset by some new delinquencies in the second quarter.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

The average balance in our core investments was $11,500,000,000 this quarter compared to $11,400,000,000 last quarter. The average yield on these assets decreased to 7.95% from 8.15% last quarter, mainly due to less back interest collected on our portfolio and some additional delinquencies in the second quarter. Total debt on our core assets was approximately $9,600,000,000 at June 30. The all in cost of debt was approximately 6.88% at sixthirty versus 6.82% at threethirty one, mainly due to slightly higher rates in our legacy CLOs from lower rate debt tranches being paid down with runoff in the second quarter. The average balance on our debt facilities was approximately $9,500,000,000 for the second quarter compared to $9,400,000,000 in the first quarter, mainly due to funding our second quarter growth.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

The average cost of funds on our debt facilities was 6.87% in the second quarter compared to 6.89% for the first quarter. Excluding interest expense from levering our OREO assets, the debt balance of which is separately stated on our balance sheet and therefore not included in our total debt on core assets. The slight reduction in the average cost of funds was mostly due to the full benefit of lower rates on the new JPMorgan facility that we closed in the first quarter as compared to the CLOs that we redeemed. Our overall net interest spreads in our core assets was down to 1.08% this quarter from 1.26% last quarter, largely due to more back interest collected last quarter on delinquent loans combined with a few new non performing loans in the second quarter. And our overall spot net interest spread were 0.98% at June 30 compared to 1.03% at March 31.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Lastly and very significantly, we've managed to delever our business 25% during this very lengthy dislocation to a leverage ratio of three:one from a peak of around four:one nearly three years ago. And as Ivan mentioned in early July, we issued our first unsecured rated debt deal, which will now provide us with a significant pocket of new institutional capital allowing us to transform our balance sheet and fund more of our business with unsecured long term debt. That completes our prepared remarks for this morning. And I'll now turn it over to the operator to take any questions you may have at this time. Stephanie?

[Operator]

Thank Our first question will come from Steve Delaney with Citizens JMP.

[Steven Delaney, Analyst at Citizens JMP Securities, LLC]

Good morning and thanks for taking the question. First question, I guess, the drop in net interest income from $75,000,000 in the first quarter to $69,000,000 Can you just explain what if there were any unusual items in there? Was it reversals when you took things into foreclosure? Just any color there. And I apologize if I was trying to take good notes, but I probably did you may have mentioned it and I didn't get it down. Thank you.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Question. So yes, there's a couple of items. One, we had a few more delinquencies in the second quarter, as I mentioned in my commentary. We also had a little less back interest collected on previously delinquent loans. Obviously, they move through the life cycle and become further and further delinquent and we're lining it up to take them out as REO or reposition them, the chances of getting back interest gets smaller and smaller as we're taking those assets back.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

So that had a little bit of an impact. But to your point, and as I mentioned in my commentary, we had recorded net new paying accruals of about 10,000,000 for the quarter. It would have been about $15,000,000 but we reversed $5,000,000 of paying accrual and $3,000,000 of that were on loans that we foreclosed on, one of which we flipped that loss this quarter that we mentioned in our commentary. So we do spend time every quarter looking at the performance of our assets and depending on where things are with a particular property, a particular sponsor, we may make decisions to reverse certain back interest and we did that again this quarter to the tune of $5,000,000 and that's really what's driving that difference.

[Steven Delaney, Analyst at Citizens JMP Securities, LLC]

And it sounds like you're being very proactive trying to move five rated loans into REOs, so you control the situation. $365,000,000 now, that's more than double $176,000,000 at the year end of 2024. Paul, do you have some idea just where that might peak out? How high could that figure go over the next two quarters before it starts rolling down? And I know you're moving some off as you did this quarter. But where should Yes. You expect the

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

So Steve, let me give you a macro outlook in terms of how we're approaching it. As I said in my commentary, we're viewing 2025 a transitional year. So we want to try and accelerate this process as much as we can and get all of this behind us as much as possible behind us. Clearly, the non performing loans is a bit of a drag. We've seen a little bit of a recent phenomenon and we've expanded our potential REO by about $100,000,000 and it's a little bit of a different outlook.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

A lot of our REOs that we have are we've mentioned are twelve to twenty four months hold. But we're seeing loans that are reasonable occupancies well above 80 like in the 85 area where the sponsors are basically out of capital. And we feel without them putting an additional capital to continue with the unit turns and keep the assets up and or buy rate caps, we're making decisions now that we're better off facilitating the disposition of those assets and bringing in new sponsors. So as a result, there will be on our books for a shorter period of time as we go through those foreclosures, maybe ninety to one hundred and twenty days, doesn't have much to do with those assets. So there'll be a little bit of a drag and we may bubble up a little bit more in REO, but it's a lot lighter touch.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

And we're doing it at or about where these assets are marked on our balance sheet. And also when we do that, as I previously mentioned, end up with a lot of recourse liability to these sponsors, which we feel will create additional income in the future, which takes time to collect. So we've adjusted our philosophy of being a lot more aggressive, looking at this year as a transitional year and really taking repositioning more aggressively.

[Steven Delaney, Analyst at Citizens JMP Securities, LLC]

Got it. Thank you both for the added color.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Thanks, Steve.

[Operator]

Thank you. We'll move next to Jade Rahmani with KBW.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you very much for taking the questions. We've seen tighter lending spreads as I think you noted in your comments and a pickup in CRE capital markets activity with lenders across the board being much more active including the GSEs and multifamily still remains in favor broadly speaking. So the question is if this is translating into Arbor's portfolio via increased interest from outside parties in the REO book, in the sub performing loan book and also in an uptick in repayment activities. Just if you could comment on that that'd be great.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

So clearly that has a lot to do with the perception of where interest rates are. And as you could see rates are moving down. Every time rates move down, it creates an opportunity to people get into fixed rates. There is a tremendous amount of dollars chasing distressed deals. And then when we do have a deal that's in the distress, we have multiple bidders.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

And it's a very, very competitive landscape. But as rates move down, all of that, as I said in my commentary, will be in our favor. Even as small move like today of over the last maybe seven days of a 20 basis point drop in the five year, I could tell you we're converting a couple of $100,000,000 off our balance sheet today and tomorrow just with that move. So that will accelerate a transition for people and an attraction of capital. And without a question, multifamily, the asset class has always been a great asset class.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

There's been a dislocation, but we feel it's extraordinarily resilient and we're seeing a lot of money into this space.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

I was also wondering if you think that there's an opportunity for Arbor to own key assets within the portfolio if you've identified any assets that seem attractive? Because we know there's a shortage of affordable housing in the market and the outlook probably will improve for this asset class post the current period of elevated delinquency and non performance?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Yes. We're not afraid historically we've done a great job of taking back assets, doing extraordinarily well on them, on our balance sheet and then at the appropriate time selling them. So clearly, it's within our philosophy and capability to do that. So when we do take back these REOs, we feel we can improve them, manage them and get great execution. So I think giving guidance to 400 to $600,000,000 of assets owned, when we get to a certain level, we make a decision whether it's optimum to sell it.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

But we do believe in workforce housing. We think that a lot of these assets have been capital starved and under managed and bringing the right management and the right amount of capital to reposition them is not only a good opportunity to get full realization on our debt, but hopefully do better than that as well.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thanks. And on the GSE side, could you comment on credit trends within that portfolio? We did see the delinquencies pick up.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Yes. I think across the board and the agencies you've seen a level of increase in delinquencies. I think we're at the bottom of the cycle. And I think that every time you're at this bottom of the cycle, you'll see them peak. I've met with the agencies.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

I've been with them. They've taken about a record number of REOs relative to the last several quarters, they feel they're peaking as well. But I think borrowers are at that peak stress point, and they're running out of capital. So I think you're in this period of time where you've seen a bit of a peak. We think that will continue through the next couple of quarters.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

And clearly what happens with interest rates has a major impact on that. As rates go down, people find a way to sell their assets or attract new capital. But we definitely are in the peak of it. And I think the next two quarters will reflect a little bit of what's happened in the last quarter. But we think we're at the bottom.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you very much.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Thanks, Shady.

[Operator]

Thank you. We'll move next to Rick Shane with JPMorgan.

[Rick Shane, Analyst at JP Morgan]

Thanks guys for taking my questions this morning. Okay. So you realized $10,500,000 of losses related to REO this quarter. It sounds like one property basically you foreclosed on or took Dean Lou and sold right away. The other one perhaps more seasoned. Is that the way to look at this?

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Yes. So Rick, I'll let Ivan give the details on the one property. But yes, there was an asset that we took back right away as soon as it went delinquent. It went delinquent in the quarter. We took it back right away and flipped it to a quality sponsor and took a loss from where we had it marked.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

We had it marked at about $4,000,000 loss. We ended up taking about a $9,500,000 loss, so a little deeper than our reserve and Ivan can talk to why we did that. The other asset we took back during the quarter as well, but we had it marked pretty much right on top of the value. We flipped it I think for a $1,000,000 loss from where we had it marked. So the one was deeper, the other one was pretty much right on top.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

But I didn't give the details on the one asset at the $10,000,000 loss.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Yes, we just made a decision on that particular asset that if we didn't get our management then the asset could suffer significantly. Management was stopping to put capital in, payables were accruing, the asset would could have deteriorated exponentially. So we just thought it would best to foreclose on it, settle out with the sponsors and move it into capable hands. That asset has been moved into capable hands, now an interest earning asset on our balance sheet. It will improve occupancies up and we think we made the right decision.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

It was in the market where and we thought the existing management group was not capable of continuing to maintain the value and we felt we were at risk of potential deterioration of value. So that was our decision at that period of time to move that asset out.

[Rick Shane, Analyst at JP Morgan]

Totally makes sense. And I also very much appreciate the transparency about the where you were where you sold it versus where your marks were. Can we talk a little bit about given the increasing contribution from PIK, the amount of crude interest on the balance sheet? I'm assuming that that's that's being capitalized in the loan balances, but want to make sure. And if we can just get some numbers around that to understand how that's building over time that would be really helpful.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Sure, Rick. Absolutely. So we're sitting at June 30 with $95,000,000 of PIK on our balance sheet as a receivable. Dollars 15,000,000 of that PIK is related to mezz and PE, most of which is behind our agency where there's a pay rate and then some accrual rate as part of the normal course of doing those loans. I will say that in my commentary, I mentioned we did get a payoff yesterday on $187,000,000 loan.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

It was a bridge loan and a mezz loan, and we did get back $7,000,000 of that PIK. So that $15,000,000 now goes down to $8,000,000 effectively that payoff, which is a really nice execution for us. The other $80,000,000 is in bridge lending. And just to put some numbers around it, we're accruing about 75% of the loans we modified. So there's about 25% of loans we've modified that we're not accruing the interest on.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

It's been running about $15,000,000 a quarter, as I've said in the past. It would have ran around that number this quarter, but we elected to take back and reverse some at about 5,000,002 million or $3,000,000 of it was related to the one asset, OREO asset that we sold at a loss. And we'll probably have some of that going forward. As Ivan and I look at the next couple of quarters, we see it to be continually challenging with people running out of steam. And we keep looking every day and every quarter on what we think we're going to collect and what we're not going to collect.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

And as the situations change and things are real time, we'll make decisions to reverse some of that at times. We did reverse some of it this quarter. That trend may continue as we go forward. But we are adding that interest to the carry value of the loan. And then we continue to look at the value of those loans every quarter when we do CECL.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

And if the value is under our carry then we're writing it down. So that's been our procedure. That's something we'll continue to do. And that's the way we're approaching it.

[Rick Shane, Analyst at JP Morgan]

Got it. And then last question for me. Ivan, you discussed tactically some of the decisions related to REO this quarter and sort of hey these were two first loss best loss type properties. You now have almost $400,000,000 of REO as Jade pointed out. We're kind of reaching probably the cyclical peak in terms of deliveries of multifamily.

[Rick Shane, Analyst at JP Morgan]

Can you talk a little bit about the absorption of vacancy on the properties where you're seeing strength, where you're seeing weakness and how that's dictating your strategy about what you're going to sell quickly versus what you're going to hold to potentially enhance value?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Sure. First, the absorption issue that most people talk about is on Class A deliveries in some of the major metropolitan areas where there's been an oversupply and a big overhang. We don't really have much concentration in that area. That doesn't affect us, but that's how people really look at it, whether you go to areas like Austin or Nashville or Atlanta, where there is just tremendous Class A deliveries in Charlotte, And it really doesn't affect our portfolio. What we really have is a lot of workforce housing in certain areas where you have some operators who operated inefficiently.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

You had a lot of COVID overhang and economic occupancy issues that existed. As said in my previous calls, economic occupancy was as high as 12%. So we're seeing tremendous growth on the REO book that we have in terms of occupancies. Our initial REOs that we took back were very deep, They're very neglected properties, very poorly run properties and those are all being repositioned and you'll see steady, steady growth in occupancy. I think the occupancy will grow.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

I think our deep REO book was probably in the mid-30s. We think that will grow over twelve month period steadily and increase at about five to 10 points a month. The more recent stuff we're looking at taking back, which is why we want to be aggressive, we're looking at occupancies in the low to mid-80s, even some at 90. And we want to take that stuff back because the sponsors are not going to manage the unit turns, increase occupancy, and improve that property. So we think that will be very short term in duration.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We think that we'll take them back. We can transition them very quickly, some simultaneously, some maybe thirty, sixty, ninety and one hundred and twenty days. The absorption will be fine on those. It will be normal. We'll get with the right capital improvements.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We'll get those back up to the high 80s, low 90s. And once you're at that level, if the market's right, then we'll look to dispose those. So that's kind of but the absorption issue doesn't materially affect us. That's more Class A. You do have certain areas like San Antonio and Houston, where you had a lot of migrant issues, you had a lot of economic occupancy issues due to the migrant issues.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

That's transitioning over. That's a transition market and we think that market will show constant improvement in occupancy and have all the right trends.

[Rick Shane, Analyst at JP Morgan]

Thank you. And I apologize, I am going to ask one last follow-up on that. Hopefully, it's a quick answer. Given the size of the portfolio and your description of repositioning some of it and optimizing it, what type of capital expenditure should we expect on the portfolio over the next six to twelve months?

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Yes. So it's a good question. I've got to get some numbers and maybe Ivan can help. But there's two categories, right? There's the more heavy lifting assets that we're owning and operating that needs some reposition and needs some capital and then the lighter touch stuff that Ivan has been talking about recently.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

I don't know if Ivan you have in your head what you think we would invest in the assets we have on our balance sheet right now to get them repositioned. Yes, we'll get back

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

to you. We do have a budget on that. They've all and budgeting. The more recent stuff we're talking about is very nominal.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

It's not a huge amount of money. I mean, right now, I think it's probably on everything $25,000,000

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

to $50,000,000 over time. That will be a high number. Rather than high we'll get back to on that number.

[Rick Shane, Analyst at JP Morgan]

Okay. Thank you, guys. And I apologize for so many questions.

[Operator]

Thank you. We'll move next to Crispin Love with Piper Sandler.

[Crispin Love, Director - Equity Research at Piper Sandler Companies]

Thank you. Good morning. First on agency originations, Fannie increased materially, but Freddie has been lower in recent quarters. Can you discuss some of the dynamics there? And then also just what the key drivers of the very strong July were despite rates being relatively stable?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

So first of all, it's good to have two agencies that compete with each other. And sometimes one is more competitive than the other. And sometimes one provides quicker service and it all varies. We've traditionally done a lot more Fannie Mae business than we've done Freddie. Freddie has been really stepping up our relationship recently and sometimes they're more aggressive on certain loan types, in particular some of the bigger loans.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

So we're pleased to be able to have both agencies and do a really good job on it. We've been working on some really significant transactions throughout the year. And as Paul mentioned, July was probably the biggest month we've had in a long time, closing $1,000,000,000 They represented a couple of marquee big transactions with some of our sponsors who are very loyal to us. So we've done a good job. Our pipeline remains extremely strong, and we're very bullish on our numbers for the third quarter, which will put us back on track to beat or exceed what our projections are.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

We're looking today at a drop in the five year, as I mentioned. So within an hour this morning, we already had about $200,000,000 worth of loans that are going to convert off our balance sheet just from that drop. So if the rate environment continues to drop, we should continue to increase our originations above our forecast. But right now, we're looking at a pretty good third quarter.

[Crispin Love, Director - Equity Research at Piper Sandler Companies]

Great. Thank you, Ivan. And then also in the quarter, you had a big pickup in SFR originations. How do you think about the longer term strategy of SFR versus bridge multifamily for Arbor?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

So the SFR market is growing dramatically and there's been a lot of even in this location, a lot of capital put into that space. Doing the construction lending part of that requires a real level of expertise that a lot of people don't have. And if we're able to provide the whole gamut of services for those borrowers, meaning construction, bridge and permanent, we're in a great competitive advantage. Having done the CLO, it gives us the ability to really expand out how much we do. We were always concerned with being too reliant on commercial banks without having that outlet.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Once we did that securitization, we really stepped up our appetite and we'd like to actually increase and be a little bit more dominant. So we were a little cautious having too much concentration without having the CLO origination capability and non recourse non mark to market financing. Now that we have that we can be a little bit more aggressive and our returns have been exceptional. So we're going to put a big effort into continue to build our market share in that space.

[Crispin Love, Director - Equity Research at Piper Sandler Companies]

Great. Thank you. And then just one last one for me. Can you share your thoughts on the net interest income trajectory over the near term in the current environment and kind of where you might expect it to bottom?

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Yes. That's a good question, Chris. And it's a tough one to answer. We are seeing, as Ivan said, we are seeing a challenging environment that we expect to continue for the third and fourth quarter. Obviously, if rates move down, that will certainly help.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

But we are expecting it to bottom out here over the next quarter or two. A couple of things that could offset it to the positive though are things we've talked about in our commentary. One is all the efficiencies we've been getting on the right side of our balance sheet is certainly helping some of that drag. And we're also seeing growth in the portfolio. As you mentioned, our SFR business is building.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

We're doing a nice job of converting construction loans over to bridge loans, which is helping. We're also still growing even though it's very competitive, the balance sheet book. So I think that growth will help offset a little bit of that drag, but we do expect it to bottom out here over the next quarter or two given what we're seeing in the market.

[Crispin Love, Director - Equity Research at Piper Sandler Companies]

Great. That's it for me. Appreciate you both taking my question.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Thanks.

[Operator]

Thank you. We do have a follow-up question from Jade Rahmani with KBW.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thanks very much. I'm curious if you might be interested in launching a fund to put some of the REO and non performing assets into raised capital around bifurcate the portfolio, create a fee stream and also create some participation in the upside in those assets and allow the company to invest and add value there. Is that something you might consider?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

A few people have approached us on it. We're going to have to evaluate how much it can be transitional, how much we're going to end up with and whether we have a core big enough to do that. So it is something that management has been discussing. But I think it's probably a little bit premature. We want to see where interest rates go over the next month or so because if interest rates drop, I think that will be a real stimulus to move those assets out more quickly. But we will evaluate that option.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thanks. And then just on the agency business, there's quite a lot of noise with what the Trump administration might do, whether they try to take the GSEs public. I guess number one, is that affecting the business at all in terms of the plan to originate new bridge loans and eventually get a GSE take out? So that's just number one. And number two, one of your peers, Mortgage REIT, made an acquisition.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

They acquired another license and pretty good valuation. Would you be interested in potentially JV ing with other firms that are interested in the agency business?

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

Listen, we're always would like to increase our agency business originations and whether we partner up with them directly or indirectly if there are other firms who want an affiliation to access our agency originations on the from their bridge lending, we're happy to do it. But I think the landscape is going to change a little bit. We've talked in the past about how we've been the only effective lender to be able to do balance sheet lending and agency lending. We now have somebody else trying to replicate that. It took us years and years to be able to perfect that.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

It's not an easy thing to do. So we'll see how effective they are. I wish them luck. It is a process. It takes a long time to create the right culture and we continue to be very effective at it.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

But we do everything we can to increase our partnerships with other people who can contribute to our agency originations.

[Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thanks very much.

[Paul Elenio, Executive Vice President, Chief Financial Officer at Arbor Realty Trust]

Thanks, Jade.

[Operator]

Thank you. This does conclude our question and answer session for today. I'd like to now turn it back to Mr. Ivan Kaufman for any closing or additional remarks.

[Ivan Kaufman, Founder, Chairman & CEO at Arbor Realty Trust]

All right. Thank you everybody for your participation and support. Have a great week and enjoy the rest of the summer.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect.

Participants

Executives

• Paul Elenio, Executive Vice President, Chief Financial Officer
• Ivan Kaufman, Founder, Chairman & CEO

Analysts

• Steven Delaney, Analyst at Citizens JMP Securities, LLC
• Jade Rahmani, Managing Director at Keefe, Bruyette & Woods (KBW)
• Rick Shane, Analyst at JP Morgan
• Crispin Love, Director - Equity Research at Piper Sandler Companies