Arbor Realty Trust Q3 Earnings Call Highlights

Key Points

• Arbor Realty Trust suspended its quarterly common dividend to preserve about $31 million per quarter and strengthen liquidity ahead of a $275 million unsecured debt maturity due in March.
• Third-quarter results were pressured by higher interest rates, declining multifamily property values, rising delinquencies and slower asset resolutions. The company reported $14.8 million in distributable earnings, or $0.08 per share, while recording $61 million in REO impairments and specific reserves plus $27 million in general CECL reserves.
• Arbor had approximately $1.25 billion in non-performing assets at quarter-end and plans to generate about $300 million in additional liquidity over the next four to five months, targeting roughly $700 million in cash by the end of the first quarter.

Arbor Realty Trust NYSE: ABR said third-quarter earnings were pressured by higher interest rates, rising delinquencies and slower asset resolutions, prompting the company to suspend its quarterly common dividend as it builds liquidity ahead of a March debt maturity.

Chief Executive Officer Ivan Kaufman said the five- and 10-year Treasury indexes had risen substantially over the past nine months, contributing to a further 5% to 15% reduction in multifamily property values and curtailing transaction activity because of higher debt and equity costs.

The company reported distributable earnings of $14.8 million, or $0.08 per share, excluding $21.7 million of realized losses from resolving certain delinquent and real estate owned, or REO, assets that had previously been reserved for. The realized losses were within management's prior guidance range of $20 million to $30 million, Chief Financial Officer Paul Elenio said.

Dividend Suspension and Liquidity Plan

Arbor's board suspended the quarterly common dividend effective immediately, a move Kaufman said would preserve approximately $31 million per quarter, or $125 million annually, in cash flow.

The company had about $400 million of cash and expects to generate another $300 million of liquidity over the next four to five months through loan payoffs, loan sales, REO dispositions, financing and securitization efficiencies, and the dividend suspension. Management expects that plan to bring cash to about $700 million by the end of the first quarter.

Arbor intends to use part of that liquidity to repay $275 million of unsecured debt maturing in March while retaining roughly $425 million of liquidity to manage through the current market environment and address its legacy loan portfolio.

In response to an analyst question, Elenio said Arbor sees a path to generate an additional $150 million to $200 million of capital between the March maturity and another $250 million maturity later in the year. Management said its desired operating cash level, excluding debt issuances, is between $350 million and $450 million.

Kaufman said the company would evaluate all available alternatives to bolster liquidity, including potential capital-market and asset-related options. He also said Arbor had not considered selling an interest in its agency business, though he described the franchise as valuable and said good assets can provide options if market conditions deteriorate.

Delinquencies, REO Assets and Reserves

At Sept. 30, Arbor had about $750 million of delinquencies and roughly $500 million of REO assets, for approximately $1.25 billion in non-performing assets. That total was about $200 million higher than the prior quarter, driven by higher rates that accelerated delinquencies and delayed certain resolutions.

Kaufman said the company remains focused on a “ring-fenced” legacy portfolio that declined to $4.5 billion at Sept. 30 after Arbor resolved $1.1 billion of loans over the preceding three quarters. Of the remaining legacy portfolio, $1.2 billion was performing under original terms and $1.3 billion was either delinquent or REO.

Management is targeting restructurings and resolutions of approximately $400 million to $500 million of loans per quarter. Arbor expects that pace could reduce the legacy portfolio to about $2.7 billion by year-end and about $1 billion by the end of 2027. Kaufman said total delinquencies may remain relatively flat until the remaining legacy portfolio is reduced further.

The company recorded $34 million of additional REO impairment during the quarter and $27 million of specific reserves on its balance-sheet loan book, totaling $61 million. It also added $27 million of general CECL reserves because of a changed outlook for real estate values. Elenio said Arbor could experience similar levels of reserves and impairments over the next several quarters.

Book value per share was $10.92 at Sept. 30, reflecting the increased reserves and impairments.

Kaufman said ICE raids in markets including Jacksonville, Orlando, San Antonio, Houston and Atlanta had reduced occupancy at certain legacy assets and contributed to higher delinquencies. The company said it would continue evaluating the longer-term effects on those assets and adjust its strategy and reserves as needed.

Asset Sales and Market Conditions

During the question-and-answer session, Elenio said a planned $35 million liquidity contribution from REO dispositions relates to one asset under contract. The buyer had received city permit approval, and the company expects the transaction could close in November or December. Arbor expects to take back about $200 million to $225 million of additional REO assets while disposing of approximately the same amount, leaving the overall REO balance relatively flat by year-end.

Kaufman said the recent jump in interest rates paused or delayed some REO sales processes by an estimated 30 to 90 days. He said values could decline by about 10% in some cases but added that the market appeared to be settling at a new level.

On multifamily valuations, Kaufman said Class A properties in weaker markets could be down more than 5% to 10%, citing markets such as Phoenix, Dallas, Austin and Charlotte, where he said concessions had increased. He estimated Class A values in some cases could be down 15% to 25%.

Origination and Capital Markets Activity

Arbor originated $900 million in agency volume and $75 million in CMBS brokerage transactions during the third quarter, for total volume of $975 million. Year-to-date volume was approximately $2.8 billion, and management is targeting $3.5 billion to $4 billion for the full year, depending on interest rates and closing timing.

The company originated $600 million in its balance-sheet lending business during the first nine months of the year. Management said it has largely limited new balance-sheet lending to selective transactions that can replenish existing securitization vehicles and reduce financing inefficiencies.

In its single-family rental business, Arbor originated $250 million of new deals in the third quarter and about $700 million year to date. Kaufman said the company expects approximately $1 billion of full-year volume in that business, while remaining selective about using balance-sheet cash.

Arbor also completed an $825 million collateralized loan obligation during the quarter, priced at 170 basis points over with 88% leverage and a two-and-a-half-year replenishment period. Kaufman said the transaction generated an additional $50 million of liquidity through enhanced leverage.

The company’s fee-based servicing portfolio stood at $36.8 billion at Sept. 30 and was expected to generate about $128 million of gross annual income, according to Elenio.

About Arbor Realty Trust (NYSE:ABR)

Arbor Realty Trust, Inc is a real estate investment trust that originates, acquires, services and manages a diversified portfolio of commercial real estate-related investments. The company focuses primarily on multifamily properties and provides financing solutions to property owners, developers and investors.

Arbor's business includes bridge and mezzanine lending, structured finance, mortgage servicing and agency lending. Through its agency platform, the company provides financing for multifamily properties through programs associated with Fannie Mae and Freddie Mac, while its structured finance activities include investments in mortgage-related assets and other real estate debt.

Founded in 2003, Arbor Realty Trust serves markets across the United States.

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