Thank you, ladies, and gentlemen, for standing by and welcome to the Q1 2020 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 [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Paul Elenio, CFO. Thank you. Please go ahead, sir.

Okay. Thank you Nita and we apologize this morning for a little bit of delay in our call, it seems we have a tremendous amount of people trying to participate and dial in and it's having trouble getting everybody in. So, we're going to start and hopefully all those people will be able to join us as we go. Good morning, everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we will discuss the results for the quarter ended March 31, 2020. 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 assume future results of our business, financial condition, liquidity, results or operations plans and objectives. These statements are based on 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 will now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul and thanks to everyone for joining us on today's call. We hope that you and your families are safe and healthy, and we appreciate your participation their needs very challenging times. In this environment, we are realizing more than ever, that our homes are castles, which is very relevant to Arbor and our multifamily asset class. Before we begin, I would like to acknowledge the staff and management teams here at Arbor for their outstanding effort during this crisis. We've all been significantly impacted personally and professionally, and the ability for employees to perform remotely at such high levels under these current circumstances, has been truly extraordinary. Today, I want to spend some of my time discussing our first quarter results, which were largely pre COVID-19. And focus mostly on our outlook for the balance of the year with respect to our company, and more specifically, our core earnings, dividends, assets. The significant decline in stock prices, which no one could control or predict, has forced companies in our opinion to prematurely communicate in order to defend the values of their businesses. We have been patient in our approach to communication as we were waiting for the dust to settle to properly evaluate not only the extent of the virus, but which asset classes would be impacted and the stimulus packages that would be available as well as the political landscape. We feel the timing of this call is appropriate as we have a lot more clarity about the pandemic, and how it will impact our business going forward. We have built a diversified operating platform that focuses on multifamily assets, with very stable liability structures, and an active agency business, which allows us to generate strong cash flow and consistent reoccurring core earnings and dividends in…

Okay, thank you Ivan. As our press release this morning indicated we produced core earnings of $40.7 million or $0.31 per share for the first quarter, excluding reserves related to the new CECL accounting pronouncements. CECL went into effect the non-bank public companies on January 1st, 2020. The adoption of this new standard resulted in an initial reserve of $32 million that was charged against retained earnings, $17 million related to our balance sheet book and $15 million unrelated to our Fannie Mae agency portfolio. We recorded an additional $76 million of CECL reserves through the income statement in the first quarter, $22 million on our Fannie Mae loan book and $54 million on our balance sheet portfolio, which included the $33 million in reserves that we took against the assets. Ivan mentioned earlier due to the significant adverse change in the projected economic outlook from the COVID 19 pandemic. As Ivan mentioned, our first quarter earnings were affected by approximately $0.02 a share related to COVID 19 this was due to approximately 2.5million in reduced earnings on our escrow balances and that interest spreading come in our agency business from reduced interest rates and the inverted yield curve that existed during the quarter. More importantly, we believe we will be able to generate consistent quarterly earnings for the balance of the year despite the significant dislocation from the pandemic in large part due to our capital light agency business that generates significant poor earnings and cash flow. We also have reduced our overhead and general and administrative expenses by approximately $5 million to $7 million annually, which will increase our core earnings run rate by around $0.04 to $0.05 a share going forward. Our adjusted book value at March 31st was approximately $9.50, adding back our CECL reserves on…

Thank you. [Operator Instructions] And your first question comes from the line of Steve DeLaney with JMP Securities.

Good morning, guys. And congratulations on a strong quarter despite a very fluid environment here, especially March. First, on the strong agency originations that continued over into April that $600 million figure, compared to a little over $1 billion in the first quarter. Can you comment if there are any particular large loans, that mega loans that kind of would kick that figure up in April?

There were no there were no mega loans. Although we are working on a few big transactions. That's very typical type of business we've been doing. But there were no significant mega loans.

Okay. All right. That's helpful. Thank you. And Paul on the CECL reserve, refresh me. I was trying to take notes, but there was a lot coming out. In the structured business. I think the first quarter provision was like $53.9 million call it $54 million. And Ivan mentioned some loans, couple hotels, the retail one. I just want to get the numbers, right. Is it $33 million of the $54 million that was related to the loans that Ivan mentioned?

That's correct, Steve. That's exactly the numbers. 33 of the 54 we booked through the P&L in the first quarter related to our balance sheet loans was the position we took on a few hotel and retail assets that Ivan mentioned in his commentary.

Yeah. We took a very conservative approach on that, Steve. We looked at all our, non-multifamily loans. We took a look at the impact of the pandemic, specifically on hospitality and retail. And we tried to come up with a realistic assessment of the value impairment on those loans on our portfolio. So, we have an appropriate reflection on our true book value. And it's probably a little different than the rest of the market. But we felt that it was prudent and so it was such a small amount of a balance sheet it was easy for us to assess and put a lot of time and effort in and come up with an appropriate response.

Well, why is to do that? Look, there's a lot of CECL noise this quarter might as well get you to throw it all throw everything but the kitchen sink in it. So, you won't have that noise, going forward. So, I commend you for that. And Paul, what on the general part of CECL at March 31 for the structured business. Can you give me that figure? So, the initial plus the incremental, what was the, the actual balance sheet allowance?

Sure. So, as I mentioned, by 11, we had to do an adjustment because of - being adopted 11. And that was around $17 million of a general reserve on our balance sheet business. And then in the first quarter, we took an additional $21 million in general reserve on our balance sheet business because of the change in the economic outlook as you run these models. They make you stress them based on the economic outlook, as I'm sure you've seen in all of the other companies in our space. So, those are the numbers of how we came up with the $71 million related to structure for the quarter was 17, opening the 33 that Ivan mentioned related to those assets, and another 21 generals. So, it was about $38 million of general CECL related to the rest of our book.

Right. And if I took the 38, I took your structured book and took away those assets that I have the 33, I can look up the principal balance, that would give us a percentage that would reflect sort of basis points, which your reserve is relative to the principal balance of the loan.

Sure. That is correct. So, I think if you looked at it that way, Steve. I think that's the right way to look at it. If you took the 21 and the 17 that we booked is 38. And you pulled out about and I have the numbers somewhere. You pulled out those assets we mentioned that Ivan was talking about in his commentary, which probably reflected about, I would say $200 million of assets. So, now you've got $38 million on a $4.6 billion portfolio.

Got it. So, something under 1%. Okay, that's very helpful. Thank you.

On the general side, that's correct.

And just side. And just one follow up thing. Private label CMBS obviously nothing was going to happen mid-spring or early spring. Morgan Stanley - Goldman, Morgan Stanley looks like they've got the deal done this week and kind of inside the original whisper talk. Any thoughts as to whether your private label transaction might be viable over the next few months or should we just think longer term on that?

Well, I'm -returning a much quicker than everybody thought. And execution of the deals done this week are really significantly inside where they thought us having a multifamily pool. We may consider going to market we'll see how the next deal gets done. But we can come in considerably tied to that. And the performance on those assets is 100%. Not one single forbearance or defeasance in those loans. And they all recently rated. I think they were rated last week. So, we got confirmed ratings. So, we're ready to go in the near term if the market continues to tighten. So, we'll see, it's all a matter of where the market is.

Great. Thanks for the comments. You all stay safe and be well.

Thank you, Steve.

Your next question comes from the line of Jade Rahmani with KBW.

Good morning, everyone. This is Ryan on for Jade. Congrats on navigating through the quarter and good to speak with all of you. Nice to hear that the favorable stats on the forbearance and rent collections in April. But just based on your viewpoint now. How are you expecting the portfolio to perform into May and June? And are there any stats you can provide on May to-date collections in both the multifamily balance sheets as well as the servicing portfolio.

So, as we enter May, we were expecting it to be significantly greater number. And when you mean it’s significant greater number, when you point three on Fannie May, we were expecting to maybe come in below 2%. We're seeing outstanding collections. And we're seeing very few forbearance requests. So, we're looking at that very, very favorably. As I mentioned earlier, our private label we didn't have a single forbearance request. They're all current balance sheet very little in our agency book. We're below the expectation of forbearance request. So, we're seeing very, very favorable trends.

And you mentioned the obvious benefit that tenants are receiving today from extended unemployment benefits, which I believe are set to expire in July. So, how worried are you about the floor that these economic stimulus programs are providing and the risk if those go away later in the summer that the collections could draw materially and forbearances spike. And separately, if there are any stats you can provide with respect to the employment profile of those tenants. And also, the, maybe a geographic exposure on the secondary and tertiary side.

Yeah, it's a lot of detail, which we don't have at the present time. But I'm sure Paul can provide that offline with you. But right now, we're seeing very, very small drop off less than we anticipate on rent collections across the portfolio. We're seeing very, very positive trends. My comment in my introduction stating that our homes or our cash flows our apartments or cash flows. There's a certain psychology that we're seeing. Which is people are really spending all this time in their homes. And that's their place, and that's the place they're protecting. So, there's a bit of a psychology that we didn't expect due to the pandemic that they're valuing their homes, and therefore, they're going to make sure that their homes are safe. And all the initial discussions about rent forgiveness, that's pretty much off the table. Rent forbearance and evictions is something that's out there, but people are really looking to pay their rent. We instituted a specific program, all the rental relief program in conjunction with our landlord. So, we're working firsthand with a lot of our tenants directly to a bar. And the attitude is, we do want to pay our rent. We're going to pay our rent. We may need some assistance we may need some rental assistance. We're not looking not to pay our rents. So, the attitude is very, very positive throughout our tenant base and our borrower base. So, we're fairly optimistic and certainly we were prepared for the worst and expecting the best and we're really getting the best. So, we hope that continues.

Okay. And then Paul, just considering all the puts and takes you mentioned, can you give us a sense of what you believe is a reasonable range of run rate, quarterly earnings for the balance of the year and then Ivan as a follow-up to that. Can you say how the board plans to approach the dividends for the rest of the year?

So, I think those questions are combined. I'll handle the front end of that, and Ivan and I will handle the second one. I think what we've laid out pretty clearly in our commentary is that we are extremely fortunate to be one multifamily focused and to have this large agency platform. And we've always said on all of our calls that the diversity of that platform and having that capital light agency business really drives a significant amount of our core earnings. So, as the pandemic is hit and certainly there have been affects that pandemic to our business, i.e. the OREO asset, having a little less income going forward, balance sheet growth being curtailed as we're going to preserve capital and be very selective. We're very, very happy to be able to say that the agency business is functioning very well. We had a $600 million quarter as we mentioned. We expect that business to grow and, in our view, although it's early and a lot can change, we think as we said, we can put up pretty consistent numbers for the balance of the year. Now whether that's every quarter is a 31 or 30 or 32 it's hard to say, but in our mind, relatively consistent numbers for the balance of the year, which would be a tremendous accomplishment considering what is going on in this market. I don't know if you want to add some color to that and then talk about the dividends.

Well, I think you really have to focus on our asset class, which is a multifamily asset class and the fact that that is going to be probably the most desired asset class in the market. I think people are going to continue to invest and it is our prediction that you can actually see CapEx compression in the multifamily asset class, which you can't invest in retail. You can invest in hospitality, you very suspect in office, and therefore people are going to continue in this asset class and it's going to be very viable on the one hand. On the other hand, when looking at our portfolio and it speaks to our dividend and speaks to our core earnings, what we're seeing is very, very few requests for forbearance. And keep in mind, forbearance is just a deferral of your payment. Okay that's all it is and since most of the multifamily borrows treasure or access to the agency platform, they cannot pay their forbearance and that's why they're actually paying, because if you don't pay forbearance back or if you default, then you're no longer a viable bar in the multifamily market. So, they have resources and if they have to, I believe they will support that. So, it speaks to where our earnings are. We don't have a lot of non-multifamily assets, and I would be concerned, and it doesn't really impact us when you have a potential deterioration of asset value and when you have a substantial amount of loans, put it on paying accrue. We haven't had a single paying accrual loan. So, getting back to our core earnings and not dividend, we have multifamily assets that performing in an outstanding manner, based on the core foundation, I think they'll continue to perform and therefore as they perform, they'll continue to contribute towards our earnings. In addition, the agency access is the viable liquidity in the market. We've indicated we've had a great first quarter. We've told where we think the second quarter is going to go. Our pipeline is strong, it's vibrant, it's growing. So we're very, very comfortable with what we spoken about today, which is I mentioned in my comments, it puts us in a class by ourselves, and that's what really distinguishes us from the traditional mortgage rate because we have an operating platform that produces stable core earnings. And as Paul mentioned in his comments that I have, we have over $90 million of servicing revenue that comes in each and every year, and it's a growing part and it represents a very substantial amount of our core earnings. So that's kind of a summary of how we feel and how the board feels.

Okay, great. Thank you for all that color.

Your next question comes from the line of Stephen Laws with Raymond James.

Good morning.

Hey, Steve, how are you?

Good, good to hear from you, I hope all are well on your end, both Paul and Ivan, and everyone else. Wanted to touch base them a little more detail on the agency business, Paul, and I want to touch later on the call, but the margins, what should we think about the factors plus or minus kind of going forward is where we see the MSR margin and the fee based services income margin headed as we move forward from here?

Sure. I think that's a great question. And given the landscape I think what we've been impressed with and Ivan will touch a little bit more on the market and spreads is we've been impressed with is that we've been able to hold our margins really, really well. And so, we put up a 150 at 149 margin this quarter. I think they'll be - I think they'll be fairly consistent throughout the, throughout the rest of the year on our gain on sale. We do some larger loans, maybe it comes down a little bit in a given quarter, but for the most part, I think those margins are going to hold. The second thing we've seen is our servicing fees are holding. So, we are seeing the agencies hold the servicing fee high. And so, we don't expect the servicing fee to really drop much if at all going forward as well depend on where the runoff is, and what rate of servicing fee the runoff is paid at. We did have a little bit higher runoff this quarter on a higher servicing fee, but the servicing fees were generating in the new origination have been very strong. So, the originations have been strong, the margins have held, the servicing fees have held. As far as a capitalized MSR number, let's talk about that a little bit. This quarter, the number came in a little lighter than it did last quarter, mostly due the mix, we had a little bit more on our committed loans Steve in Fannie and Freddie conventional as a percentage of our total book and FHA and a little bit of private label. Therefore, those servicing fees are a little lighter on an MSR perspective, and Fannie. So that mix really drives those MSR rates going to go. If we're doing more Fannie, then MSR rates going to rise. If we're not, then the MSR rate comes down. But it doesn't affect our servicing fee in my mind, our servicing fee will hold. The second thing that affects MSR values today is the value of the escrows. And that's something we talked about in our commentary, that even despite the net interest income going down pretty substantially for where interest rates went on our escrows. We're still able to, in our opinion, generate consistent core earnings, which is attribute to the platform. But those reduced earnings on escrows going forward, do hit the MSR capitalization rate a little bit, because it's a part of the value of the service and you're putting on day one.

That's great. That's helpful. Thank you for the detail there. Could you touch base again on the servicing, I was writing things down as quickly as possible? I think you said a servicing advanced facility 100% advanced rate is not going to be an issue for us. But can you provide - was there a size of that facility? Or did you quantify anything in your comments around that?

So, servicing advanced for April was $300,000.

That's not $200,000.

$200,000, it's really nominal.

Yes.

So, we don't - we initially when, there was a tremendous amount of fear, that'd be a lot of forbearance. Everybody scrambled around and thought that number would be a big number. We immediately contact is one of our banks. We've had a number of banks wanting to offer us a servicing advanced facility. So, we're in the process of putting it in place for no fee. The terms have been agreed upon. And that'll provide a 100% of the advances that we have to make, so we'll have no capital outlay on that.

Great. Sorry to have you have you repeat it, but I appreciate, making sure it's clearly. That's great to hear. Thanks for the time.

Thanks Steve.

And your next question comes from the line of Rick Shane with JPMorgan.

Hi guys. Thanks for taking my questions.

Rick.

Ivan, I really appreciate the clarity and sort of outlook on the agency volumes going forward. I am curious, I'd love to hear sort of structurally, how underwriting works in this environment in terms of due diligence and appraisals, et cetera?

Sure. So, what was the real paradox here is that loans that we're generating on the agency loans are probably the best loans we've ever generated for two reasons. Number one, more conservative underwriting. Number two, there's less competition. And number three, every single loan is being underwritten and funded with interest reserves. Interest reserves are generally six to 12 months. So if there is any shortfall, and they have a problem and you want to actually have insurance that you're going to have those payments made current and keep in mind a 12 month interest is, or even in very draconian circumstances, if a property doesn't perform a last over two years. So those are all the enhancements that are put in place. And I must say that Arbor was a front runner in working with Fannie Mae and we started putting, we wouldn't close a loan when the pandemic started unless we had an interest reserve and we were actually the architect with Fannie Mae and put that in place. So, I think the quality of our loans are outstanding in terms of the appraisals and the inspections and that whole technical process. I'm personally not that granular in it. I worked our technical staff work with the agencies to make sure that we had the right spectrum processes. Initially there were some issues, but I believe that they believe who prayed and inspect. It's all been put in place and all the right fundamentals are there.

Great. Okay. Thank you. I appreciate both the physical explanation and the structural loan explanation as well. One question, on the balance sheet business, you guys walked through the CECL reserve, and I'm sure it's in the K or excuse me in the queue and I've just got to get there at this point. Um, but were there any realized losses net against the reserve in provision that we should be aware of in the quarter?

So, Rick, that we're not, we have zero realized losses, in the quarter. And none of the reserves as you know, were realized. No realized losses would net it against that. And that's one of the reasons we are adding it back to our book value as we spoke is these are all just CECL reserves general in nature and none of them have been realized. And hopefully, we've been conservative in our approach. We feel like we have been, and we'll see where the market goes and how we end up with those reserves.

Yeah, it's interesting you just provoked it. I thought there was a lot of people in order to get liquidity sold - hat securities and have a lot of realized losses to great that liquidity. Fortunately, we had sufficient liquidity, and we didn't sell any loans, nor do we have any realized losses.

That's an excellent point. I should have mentioned that we have not sold a single loan at any stress distress value.

Okay, great. And, and just so we can think about it from a housekeeping perspective, the plan on core going forward would be to add back provision, but to deduct any defaults or charge offs. Correct? So that way that's where the credit will run through the core number.

That's correct. So, we're trying to be like everybody else here because we feel like our AFO was a little bit of an outlier. Core earnings is how people look at the business that's how you support your dividend. And I agree with you, so as you book general reserves, they get backed out. If you do have a realized loss, well then that's a real loss, right? That's a cash loss. And then, therefore it would charge against your core. And that's exactly how we are approaching it.

Terrific. Great guys. Thank you very much.

Thank you. Your next question comes from the line of George Bahamas with Deutsche Bank.

Hi, good morning. Good morning. Thank you for taking my question. Well, just a follow-up on Rick's question and appreciate the color on the six to 12 months in reserves of new loans you mentioned are, will look more attractive today that they had to source from this given competition declining. And some of the other factors you've mentioned. In terms of yields on these loans, maybe LTV. Have those changed meaningfully? In the current environment relative to what they look like prior to all this occurring?

They have, I think in terms of cash out refinances, those are being cut back significantly. And also, loans are being underwritten to their current economic, to their current collections. So, collections are off 3% to 5%. Then they're being on the written offer today. So, let's assume you typically have a loan that's at a 95% occupancy and it's backed up to 92. You're not underwriting off 95 writing off the car level, which is just a temporarily impaired level. It's not permits. So, I think you're getting a reduced loan. In addition, the lower the LTV, the less of a reserve, so you’re going to see people who don't want to post 12 months and six months perhaps go for a lower LTV. So, I think we'll have a low LTV in actual that's lower. And then if you take into consideration that this impairment on your rent collections is temporary, then it's even further than that. So, I would say at least 5% across the board, I expect and perhaps hold that more.

Great. Thank you. That's helpful color and appreciate your time today.

Thanks, George.

And your final question comes from my line of Lee Cooperman with Omega Family [ph].

Thanks so much of a question, but I do have one. I think you deserve a shoutout. So, I'm going to give it to you, which is unusual for me. Nobody thinks like an owner, accept the owner and the fact that you guys own over 20% of the company demonstrates the scenario, the view that nobody thinks like an owner. Because for the last year now, you've been focusing your remarks on a restrained and conservative outlook, saying you were concerned that some of the competitors were resorting to doing foolish things. I think you've kept the company conservatively focused on workforce housing. And given your profitability, you validated our book value. My only regret is the question is you probably didn't get enough stock in a sub four but your press release didn't refer to anything in stock repurchase, I have not gotten to a 10-Q yet, but did you do anything is stock repurchase in the quarter?

So, Paul, why don't you indicate what we did buy back, and I'll get some color in terms of what our thought process was sure.

Sure. So, the massive simply we bought about a million shares back at just around $4, we spent about $4 million of our capital on the plan. And Ivan or I can give you the dialogue around that, but Ivan if you want to take a crack at it.

Sure, certainly, in retrospect, we would have liked to have bought more, but we had two issues. Number one, given the pandemic and not knowing how deep it would go, and what further strains were put on liquidity, we couldn't have a free for all buying. And second of all, we entered into a blackout period. So, we had to enter into a program buying what ranges. So fortunately, or unfortunately, and I would say unfortunately, we didn't get to buy more unfortunately, a lot more liquidity and the pandemic only lasted a certain amount of time in terms of how it affected our business. And being in a position where we couldn't go in daily and buy, but we're subject to a preconceived formula. That's all we were able to get. And we're having a blackout period now, stock is higher. So, it's a different environment. But it was definitely our intention to buy. But given the circumstances, that's what we're able to come up with. But we did buy.

Nothing to apologize for you. Very good job in a very difficult environment. Congratulations.

Thank you, Lee. And nice to your support.

Thank you.

They are no further questions at this time. I'll turn the call back over to the host.

We definitely appreciate all our shareholders support. This has been a very trying period of time. Our team here, as I've mentioned in my remarks, at Arbor have worked remotely and tirelessly and perform at a level beyond my expectation. We feel we are well fluent, in good standing and very optimistic about our franchise and our ability to produce core earnings and consistent dividend. So, stay healthy. Be well. Look forward to our next call. And everybody have a good weekend.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.