Good day, ladies and gentlemen, and welcome to the Q4 2017 Arbor Realty Trust Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would like to introduce your host for today’s conference Paul Elenio, CFO. You may begin.

Okay, thank you, Glenda, 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 and year ended December 31, 2017. 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 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.

Thank you, Paul, and thanks to everyone for joining us on today’s call. I am excited today to discuss this significant success we have in closing out 2017, as we always have plans and outlook for 2019. As you can see from this morning’s press release, we had a very strong fourth quarter with tremendous operating results as we continue to make significant progress in growing out our platform, increasing our brand and expanding our market presence. This has allowed us to once again increase our dividend ahead of schedule to $0.21 a share or another 11% this quarter. This is our fifth dividend increase in less than two years reflecting a 40% increase over that time period and puts our dividend at an annual run rate of $0.84 a share. Initially, we estimate a significant reduction in corporate tax rates related to our Agency Business will result in an increase earnings to around $0.04 and $0.05 a share for 2018. This significant benefit combined with a tremendous growth we experienced in the fourth quarter will allow us to continue to grow our core earnings run rate in 2018, resulting in an increase core earnings and dividends in the future. Before I turn it over to Paul to take you through our financial results, I would like to talk about some of our significant 2017 accomplishments as always our outlook for 2018. Our 2017 highlights were truly remarkable and exceeded our expectations. Some of the more significant accomplishments included significant growth in our core earnings allowing us to increase our dividend run rate to $0.84 a share representing a 24% increase in 2017, and again we remain very optimistic that we will be able to continue to provide M&A in the future. Achieving a total shareholder return of 25% in…

Okay, thank you Ivan. As our press release this morning indicated, we had an incredible fourth quarter and 2017. As a result, AFFO was $20.7 million or $0.25 per share for the fourth quarter and $83.9 million or $1.04 per share for the full year of 2017. This translates into an annualized return on average common equity of approximately 11% for both the fourth quarter and full year 2017. As Ivan mentioned, we continue to put up record results and we are very pleased to have increased our dividend again this quarter. This is the fifth time we’ve increased our dividend in less than two years and represents a 40% increase over that time period. We’re also extremely pleased with our fourth quarter growth which has increased our core earnings run rate heading into 2018. Additionally as Ivan mentioned earlier, the reduction in corporate tax rates from 35% to 21% will result in an increase in our after tax earnings from our GSE business which we estimate will increase our earnings in AFFO by approximately $0.04 to $0.05 a share in 2018 as well. And we’re now more confident than ever and our ability to continue to grow our core earnings and dividends in the future, while creating a more stable, predictable and recurring income stream from the significant portion of our earnings that are coming from our Agency Business. Looking at the results from our Agency Business, we generated approximately $29 million of income for the fourth quarter. We produced strong originations in our Agency platform, closing another $1.2 billion of loans in the fourth quarter which is a 16% increase over our third quarter volume and we originated a new record $4.5 billion in loans in 2017 which is a 19% increase over our previous record originations in…

[Operator Instructions] And our first question comes from the line of Rick Shane from JPMorgan. Your line is now open.

Really just want to understand two things, it feels like in the quarter there was an impact because you were doing larger transactions and that caused a little bit of margin compression on gain on sale. You also related to the Structured Business talk about lower rates on originations, is that the same thing are we seeing increased competitive pressures here?

I’ll address the transitional balance sheet and I’ll let Paul speak to the margins. In the transactional balance sheet business is extremely competitive but we’ve been extremely effective in reducing our cost of homes and creating greater flexibility and in fact doing larger loans. So we believe that we’ll able to maintain our margins, keep our credit quality, go out cheaper but because of our effective side of how we’re borrowing we could manage that extremely effectively and that continues to be our strategy. We feel we’re in a cycle now where our concern is a bit on credit. So we’re maintaining our credit standards and if anything tightening a bit but our effectiveness and our CLO as well as our banking relationships has allowed us to be extremely more competitive in the field, more flexible in the field and still build up volume. And in fact we have tremendous synergies because majority of our bridge loans and the way we use our balance sheet ends up in having Agency execution with returns then become exponential. So that side of our business although competitive I believe that we have some real strategic advantages in the market to allow us to continue to maintain our share in the market. Paul, do you want to address the margins on the Agency Business?

So Rick it’s has to do with the mix of the volume and the mix of the GSE products. I think what I have guided people in the past to is a margin of anywhere from 140 to 150 this quarter we came in just in that range a little bit lighter than the prior quarter, but it really has to do with mix. We did some large loans that carry a small margin we also did - we had more FHA sales last quarter than we did this quarter and that timing is very unpredictable with the FHA business but they carry a higher margin then the other GSE business. So it just has to do with mix of products, size of products and again I think the right range for us going forward is anywhere from one 140 to 150 on all-in margin on the GSE business. I think just to add to Ivan’s comments about the competitiveness in the Structured Business and how we’ve been able to effectively compete with the lower borrowing for us, this quarter we did have lower yields on our originations than last quarter or then the runoff but the runoff had some subordinated paper in it that ran off and they were unlevered. So they have higher growth rates but on a levered return basis we still did generate on a levered return basis for our fourth quarter originations even with the competitive pressures a 13% levered return which we think is very strong and that’s all due to the improvements we’ve made on the financing side both in the leverage and in the cost of funds reduction.

And Ivan’s question actually was a perfect segue to my follow-up which is that, we did see the leverage in Structured Business on your balance sheet increase. Are you more comfortable with the CLO structure and facet to that financing running that business with higher leverage going forward?

Yes we’re very comfortable on the CLO side with higher leverage and as we’ve talked about in the past, our CLOs are senior debt primarily and I mean a 100% senior debt, and where the execution on the senior debt that is generally an Agency take-out and size to an Agency take-out with the right structural enhancement. So we are very, very comfortable with the brief loans we are originating and we are very comfortable with the structures we have and in a way these assets fit into those structures.

And just to add to that…

Okay.

The leverage was up a little bit during the quarter for few reasons, as Ivan mentioned, we are comfortable with the increase leverage we are getting on the securitizations, with the non-recourse and very flexible. The leverage was also up a little bit because of the new convert we did and that convert really in my mind, I think, in Ivan’s mind is in view of equity capital it was growth capital for us. So it does distort a little bit the leverage, but really that was like in view of equity capital to grow.

Got it. Thank you guys very much.

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

Thanks very much. Can you elaborate on the comments you just made with respect to increase concern on credit?

I think there is a lot of liquidity in the market if you look in the newspapers and the credit are always in the reports. There is always another tech fund coming out. And a lot of the debt funds are competing on credit and new players, and there are two ways to compete in the market, especially if you don’t have a brand or franchise or well customer base and one is price and the other is credit and people who don’t have the footprint or the expertise tend to compete more on the credit side. We have chosen at this point where we are on the cycle to put our efforts in competing more on the price side. We have been able to do that because of capability in the debt side of the market and also the synergies with our Agency Business when we originate a loan, not only that we make the earnings on the spread we are also able to make the earnings on when we convert debt into the Agency Business, which is not reflected in our leverage returns, so we are just in a very strategic position to do it. Our balance sheet is approaching $3 billion, very sizable, gives us huge economies in the market both on the CLO side as well as with our banking relationships and our brand and our history gives us a strategic advantage. So that’s how we are able to originate more last year. That’s how we feel we will be able to maintain our market share and probably grow market share this year as well.

And are you seeing the loosening in the market driving compromises on Structured or is it on higher leverage?

I think just from a common sense standpoint the more players you have in the market the more competitive pressures that there is always some level of deterioration. So what we try and do is stay away from loose sponsors. You will see a lot of new debt funds go after some of the new sponsors. You’ll see them go a little bit on the margin, on the credit side and that’s just normal course of where we are in the cycle.

In terms of borrowers sentiment with increasing interest rate expectations, have you seen any changes in terms of transaction pipelines, any deals having to re-trade or closing is being pushed out, because fixed rate spreads have widened?

People are definitely scrambling as more capitalization in some of these transactions and people try to figure out, how to take transactions that they wanted the contract in December that they are closing now and scramble to get them done. The numbers are different, different than they anticipated. So they’re working it through. They are getting less proceeds. They are seeking more equity capital. They are doing what they can to try and make their transactions work, so it definitely -- there is definitely a mathematical adjustment going on and that have to result in some greater acquisition on some of these transactions will re-trade in the purchase, some of them are taking place now.

So in terms of the sort of outlook for the GSE business, do you think that 1Q, potentially 2Q could be soft as in terms of volumes, as everyone digests high rates and fees what the Fed as planned and then pick up later in the year?

I don’t think the GSE business is going to be bigger than year as an overall market. I think we are looking at before the increase was they were projecting the same or a little bit more. I would say that the markets going to be the same or a little bit less. We don’t know where the rest of the market is. We have a significant pipeline. Our pipeline is very consistent with last year. But I definitely think we would watch interest rates and see how that would affect the overall business. The business is broken up into, of course, the purchase business, which I think has slowed a little bit, slowed a little bit last year, but the refinance business is a very active part of the market, a lot of loans are five-year, seven-year and 10 year durations, which constantly come up for refinance. They have to be refinance, but the question is, how is that market going to be refinance, is there going to be a little more equity capitalization, are people going to change their product mix a little bit, instead going for 10-year and 12-year loan, maybe they go for shorter duration with lower interest rates. I am not sure how it’s all going to fall. But right now our pipeline is somewhat consistent with where it was last year.

Yeah. And I think I gave a little color to that Jade some numbers and Ivan is right, it’s very consistent. We did originate $350 million of loans in GSE in January. We are expecting to do another $350 million in February, so that will put us about $700 million. So I think we are on pace to do $1 billion to $1.1 billion and that puts us on pace to what we did last year and I think we will have the ability hopefully to grow that over the life of the year. As far as the numbers for the first quarter, I think, you guys, the analyst get the math. We did sell some more loans as you saw in our commentary in the fourth quarter then we expected from the Agency Business. We have a little bit less of a held-for-sale balance going into the first quarter then we normally see what is traditional. So the gain on sale dollars maybe lighter in the first quarter than they are in other quarters. But again from a volume perspective we are on a pace to do -- what we did last year and maybe even more.

Thanks. Just a big picture -- bigger picture question and actually you raised the dividend again. On the asset management side we’ve seen some companies contemplate converting to C Corp.’s and with the lower corporate tax rate. Is there any rationale to consider converting to a C Corp. considering the amount of TRS income that you are generating?

It’s something that we always consider and look at but it’s now something we’ve done an extensive analysis on it, Jade, right now we are very comfortable operating the businesses the way we are in the REIT structure. The people do get the benefit now under the new tax code with the reduced rates on the dividend being received and we have the TRS business. But we understand your point of TRS business is large and growing, something we will always look at but right now it’s not something that’s in our sites.

Thanks very much for taking the questions.

Thank you. And our next question comes from the line of George Bahamondes from Deutsche Bank. Your line is now open.

Hi, guys. Good morning. So just a question on the transitional business, I noticed $754 million in bridge loans in 4Q across about 30 year loan, it’s about $25 million on average in terms of loan size. Where there are few larger loans driving that $754 million or is it $25 million representative of [inaudible] during the quarter?

Yeah.

We are definitely be doing -- we are definitely doing larger loans. We did, I think, two significantly larger loans. So given a facility and the size of facilities, growth on our capital has allowed us to work on these larger loans. So no question that our average balance loan, I think, might have even doubled over last year. So that’s very, very beneficial and we are pleased to be able to work in that category. Paul, any comments on that?

Yeah. I think Ivan is right. We almost doubled our loan size from last year. I think last year we have an average loan size of about $12 million. This year it’s up to $20 million. We did a $1.8 billion on 93 units and last year we did 170% less than that on 70 units. Definitely our loan size has grown. To your comment, on the quarter we did have four loans that I am looking at that were greater than $50 million in the quarter and two that were greater than $100 million. So we did have some larger loans in the quarter. But, overall, our loan balance, our average loan size has grown pretty significantly an average $20 million for the year.

Great. Okay. Thanks for the color.

Thank you. And our next question comes from the line of Steve Delaney from JMP Securities. Your line is now open.

Thanks. Good morning and congratulations on an outstanding quarter and year, for sure.

Thanks.

Thanks.

Ivan, when we look at the progress, the lending progress on both sides of the business. Would you say that it is a function more of the people that you may have added or the or have or is it more a function of like the products that you have now and the technology platform? What is allowing you to drive this kind of dramatic growth in lending.

So, Steve, there is no one answer to that. We run a very diverse franchise and we have been growing our originations platform organically each year. So, I’d say, four years ago you probably had six or eight core loan originators. Today we probably have 14 to 16 core originators. All of our guys, almost all of them are homegrown. It takes three year to five years to train these guys. It takes 10 people to get to and we have made those investments. We touched on earlier the ability to do larger loans. We didn’t have the capital and we didn’t have the brand in that area. We invested in building our balance sheet and our technology and we are now seeing the benefits of doing large and larger loans. Our brand is just getting stronger and stronger and stronger. Our product diversity is getting greater and greater and greater. Five years ago we were in a Freddie Mac’s small balance and there was no program. We developed that program with Freddie Mac and we are leader in that space. So in building the business and we talk about this very frequently, we are not a mortgage REIT that just does balance sheet loans and on the treadmill where you put them on to get paid off in two year, three years, four years and you put another one on. We have an Agency Business. The synergies between Agency Business or residual business are exponential and we keep building the depth of that business and investing in it and I believe our brand is getting stronger. And the amount of business that we generate from our balance sheet that spans entire Agency Business and the amount of business now that we’re generating from the run-off from our own servicing portfolio generates a continued source of new originations and that will continue to build the bill. So we’ve invested very, very heavily in multiple aspect of our business. We are continued to do so.

That’s helpful. Thank you, Ivan. And just one other -- you covered a lot of ground already, so I won’t beat those items to death. But just one final thing, I noticed the -- for Paul. Just looking at the credit, the legacy credit Paul, the non-performing loans looks like it declined to just two loans at year end from five at September 30. Can you talk about what went on when things being repaid or reclassified to performing with account for that decrease?

Yeah. Steve, that’s great. We had one loan payoff that was non-performing. So that came out non-performing and we repaid in full. We had another loan become performing that was temporally non-performing and then we just had another loan that we had fully reserved that was non-performing and spent on the books for a long time and just clean up we wrote it off against the asset for GAAP purposes. But that’s the driving force between the two numbers from year end to 2017.

Okay. Great. And thanks for the clarity on the tax law impact. That’s helpful for us for modeling. I appreciate the time.

Thanks.

Thank you. And our next question comes from the line of Lee Cooperman from Omega Advisors. Your line is now open.

Thank you. Just three or four questions I guess getting out. One, how do you view your capital position presently, do you feel you have adequate capital or do you have more demand for or more opportunities than you have capital. Second, I think, you touch to this, Ivan, but exposure rising rates, if I assume that the Fed raised the quarter point 3 times to 4 times this. What were the net affect be on our book? Third, I assume the dividend increase you would not have undertaken unless you felt was sustainable. So back into sustainable ROE, the way you intend to run the business, what kind of returns you think you generate on the shareholders book value? And fourth just administrative question, the [ph] 6% to 8% (38:08) converge which mature in 2019, under what conditions can you call them. I know the convertible is around $835 million, but can you force conversion?

Okay. So…

I will address a couple of them and then turn it over to Paul.

Yeah. Thank you. Thank you very much and congratulations on a good year.

Thanks. Well, I will take the easy ones, of course, and leave the tough to Paul. With respect to rising interest rates, as you know we are LIBOR-based lender and when LIBOR rises, it’s actually beneficial to us, very beneficial. So we’re okay with that. We are good with that. We also have about $500 million in escrow balances and to the extent LIBOR rises on a dollar for dollar basis we increase our earnings. If LIBOR grows at one point I believe that’s about $5 million or more income, which is probably another $0.05 or $0.06 in earnings. So we are pretty well-positioned for rising interest rates relative to earnings. The key, of course, is keeping an eye on credit, making sure we have the right LIBOR caps in our books and making sure we have right bars with the right depth if there is a rise in some level of capitalization and right now our delinquency rates and our portfolio and our performance is even better than what was underwritten. So that part of our book is really in great shape. From capital, we raised a good amount of capital last year and in the proper forms. We think in order to continue to grow our book we are always looking at effective ways to raise capital whether it would be CLOs, all the debt instruments and where appropriate and if appropriate if our stock prices trading at the right level and it’s accretive to us we will always look at that. But at the moment in time we are in pretty good shape. Paul, do you want to take the rest?

Sure. So Ivan’s commentary on the rising rates, I think, is right on, but one thing I will add, Lee is, 80% -- 88% of our book is floating on the Structured side, $2.7 billion, so not only what we see a increase in earnings from the escrow balances but if LIBOR ran up 50 basis points, it’s about a $2 accretion to net interest income on our Structured book as well, because so much of it is floating, both on the debt and on the asset side. As far as your comments on the dividend, obviously, we think the dividend is very sustainable. We actually think we’ll be able to grow it in the future. We talked about in our commentary there are significant benefit we are going to receive in our Agency Business from a lower tax rates, also the growth we had at the end of the year and what we think we will be able to continue to grow our Structured book. We think the dividend is very sustainable is that a pretty pay rate, so we do think over time we will be slow and steady, but over time we will be able to continue to grow that. As far as the ROEs on the business, we have talked about this a lot, Lee, and we always said, we would like to run between 10% and 12% ROE. We came in 11% this year. Obviously, the Agency Business has a higher or even than the Structured Business, but they are interrelated and they are cohesive and they feed off each other. And we do think with the growth we had this year we have scale in our Structured portfolio, in our Structured Business, so we do think we will continue to grow that business with very incremental increase in our cost, in our compensation. So we do think there is scale in that business. We do think the additional leverage and the reduced borrowing of course could even drive a higher combined ROE going forward. So that 10% to 12%, we are right there and may be little time here we can get that even higher. So we are very comfortable operating in the 10% to 12% and hopefully even higher in the future. To your last point I think it was on the covert. I don’t believe we have the right to force a convert early, we may a couple of months prior to maturity, but that’s not something that’s in our control. We can’t force the converter early.

Good. Thank you very much for responses and good luck and congratulation on a very good 2017.

Thank you, Lee.

Thank you, Lee.

Thank you. And we have a follow-up question from the line of Jade Rahmani from KBW. Your line is now open.

Good morning. It’s actually Ryan Tomasello for Jade. Thanks for taking the follow-up. Just dovetailing off the earlier question, maybe you can quantify the amount of spread compression you have seen on the balance sheet side over the past few quarters, and perhaps, give where incremental spreads are on loans you are originating today, may be in the current quarter and the last quarter?

Can you repeat the first part of that question again I get cut off?

Just perhaps if you can quantify on the bps basis how much spread compression you have seen on the balance sheet side on incremental loans over the past few quarters?

Yeah. I would say that that’s happened over a period of time. I would say that it has been anywhere depending on the asset class where you are in the capital structure anywhere between 25 basis points to 75 basis points of spread compression on the lending side. So I would say effectively on the bridge lending side, the tightest we probably ever got was $350 million over, so maybe $350 million to $500 million was a ranged and that was tightened up from what was -- we probably never went below $400 million for a while. So we will probably $400 million to $600 million. So that’s probably the range of tightening that took place over 12 months to 18 months period of time and that’s probably where we are right now. The larger the loans, the higher quality of loans, the more pressure there is. As you know, we trust we can do a lot of smaller loans and get less spread compression on that side and that -- that hasn’t tightened as much. But I would say 25 basis points to 75 basis points is probably the range that we’ve seen.

And just going back to ROEs, despite the strong pre-expense ROEs that you saw in the low teens for the balance sheet business, it seems like after incorporating corporate overhead ROEs are running in the mid-single digits, if you look at the helpful segment breakouts that you have provide. So maybe can you outline some factors that are depressing that? You mentioned thoughts on growing the Structured Business effectively, which would further rationalize the G&A base and maybe what amount if any is being tied up in these remaining non-performing and underperforming assets?

Sure. Ryan, so it’s Paul. I think it’s a good question. But, again, the segment information is helpful and it’s a GAAP requirement. But we don’t really view the businesses that way, we view them very cohesive, very interrelated and feeding off each other, so it is not easy to allocate the expenses completely appropriate between each segment, we do our best under GAAP. But people were on both of the businesses, so it’s not easy to do that. But if you did look at the way we have presented it for GAAP, there are a couple of driving factors that I think will drive that ROE meaningful. As I mentioned in my commentary and in answers Lee question, the scalability of the business on the Structured side is very important to us to be able to grow that portfolio to get over $3 billion and not add much incremental cost to do so, we will grow that ROE significantly. The additional leverage and maybe more importantly reduce interest costs we have we will continue to generate the ROE. And as you mentioned, if you have about $100 million tied up in two legacy assets, that’s not earning any interest currently, one of them were in the process of liquidating and we are hopeful we will get that done by may be the second half of ‘18 and put that $30 million back into our flow and drive a significant return. And the other is the Lake Tahoe asset we have and we are working on monetizing that as well. So over time as we get that $100 million deployed it will take some time back into our normal flow than it will certainly help us drive a significant amount of increase in the ROE.

Okay. I do look forward to 2018 as -- I think there is less volume and I think it will put us the better position to manage our employment costs, which have been very difficult to manage in such a competitive environment. And in ‘16 and ‘17, as you know, wage has maintain a very large portion of our spent ratio and I do think that if there is a little softness in the market on our employment basis, we will be able to manage our employment costs more effectively.

Great. Thanks for taking the follow-up.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the call back over to management for closing remarks.

Well, thank you for your questions and thank you for your time and certainly support our 2017 and I really look forward to another great year at Arbor Realty Trust. Have a good day everybody.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.