Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the third quarter Arbor Realty Trust earnings Conference call. At this time off because just the timelines are in listen only mode. After the speakers presentation. There will be a question and answer session. There ask a question doing especially no need to press star one on your.
Please be advised to today's conference is being recorded if you require further assistance. Please press star zero I would now like to kind of all over to your speaker today, how everybody else. Please begin sir.
Okay. Thank you know LMR and good morning, everyone and welcome to the quarterly earnings call for Realty Trust. This morning, we'll.
The results for the quarter ended September Thirtyth 2019, with me on the call today as 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.
And liquidity results of operations plans and objectives. These statements are based on our beliefs assumptions assumptions and expectations about future performance taking into account. The information currently available to us factors that could cause actual results to differ materially from offers expectation of these forward looking statements are detailed in our FCC 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 well the occurrences of unanticipated events I'll now turn the call the Arbors President and CEO Ivan Kaufman.
I do pool, and thanks, everyone for joining us on todays call as you can see from this mornings press release, we had another outstanding quarter, which continues to demonstrate the diversity of our operating platform.
And the value of up franchise, we're very pleased with the continued growth in our business.
Just.
Distantly increase our baseline are predictable and stable earnings, allowing us to once again increased quarterly dividend to 30 cents a share which represents about a third increase this year reflects an annual run rate of $1.20 per share up from a dollar eight per share.
Additionally, the significant growth.
We experienced this year continues to increase our run rate of core earnings, making I was very confident in our ability to comp we maintain a current dividend as well as growth in the future.
Over the last few years, we've clearly outperformed our peers delivering consistent annual shareholder returns of a.
Sleep, 30%.
And this performance combined with the quality and diversity of our income streams, along with the consistency of our earnings and our low dividend payout ratio clearly differentiates us which is why we believe we shouldn't consistently trade at a lower dividend yield on a substantial.
Our peer group.
To highlight about success for though I would like to talk about the growth we experience in both of our business platforms.
And our agency business, we grew our servicing portfolio another 3% in the second quarter and 12% over last year and is now at 20 billion.
In dollars this portfolio generates a servicing fee of 44 basis points and have it has an average remaining life of over nine years.
Which reflects an 11% increase in duration over the last two years.
And as a result, we have created a very significant predictable annuity of income.
<unk> 87 million gross annually and growing the majority of which is prepayment protected.
As this growth and off servicing portfolio also continues to increase the annuity of income <unk> escrow balances, which are currently earning 19 million annually.
<unk> for a combined annual run rate of servicing income and ethical earnings of $106 million.
We also had a very strong originations quarter closing 1.4 billion in agency loans in our pipeline remains strong providing us with confidence in our ability to produce consistent origination.
James for the balance of the year.
We're also very pleased and our ability to continue to generate strong margins on our loan sales despite the extremely competitive landscape.
These income streams from our agency platform continue to create significant diversity at a high level of certainty and <unk> and constraints.
There's been a lot of talk lately about the potential for the GFC reform and the effect that it has and the new cap could have on do you see lenders in the future.
The new cap for 2020 has been increased and represents approximately 40% of the projected 2020 multifamily market.
The new cap also.
All eliminates any exceptions and mandates that 37.5% be directed towards mission driven business or affordable housing I.
I would you see production historically has been mostly an affordability and the affordable housing market and therefore, we believe that the increase to the cap combined with a large portion being.
Dedicated to the affordable housing component puts us in a favorable position to be able to continue to grow our agency production going forward.
In anticipation of a potential reduction in the agency footprint.
Which did not occur we launched our Arbor private label program.
In the beginning of a third quarter the industry experienced a slight disruption as the agency caps were being navigated.
And that short period of time, we had a competitive advantage in the market and we're able to build a pipeline of six to 700 million of this product, which we expect to close and securitize and.
The first quarter of 2020.
We believe the development of this product line well first to further diversify our lending platform and act as a mitigant against any further changes to the agencies.
With respect to our balance sheet business, we experienced tremendous growth in our loan book.
We grew this portfolio, 24% in 2018 and another 21% already for the first nine months of this year on nearly 2 billion of originations.
Our balance sheet portfolio is now at $4 billion and the significant growth. We experience will continue to increase our run rate of net interest income going forward.
Good.
It is also significant to note that almost 80% of a portfolio is in multifamily assets, which is clearly the safest asset class.
We also have a very robust pipeline, which will allow us to continue to grow loan book for the balance of the year I.
And as result of this wrong.
Pipeline, we elected to raise a 120 million a fresh capital in October through it for three quarters unsecured debt issuance that was 100 basis points tighter than our last debt issuance in March.
This was very attractive capital as will be used to fund our pipeline of new investments and be immediately accretive.
To our core earnings.
We can.
We continue to have tremendous success for our securitization expertise and our strong banking relationships and substantially reducing our debt costs, which has allowed us to achieve significant economies of scale and maintain our margins in a very competitive.
Market and again the income generated from our balance sheet loan book is a significant part of our earnings will remain very confident ability to continue to grow this income stream.
Updating you now on a single family rental business, we continue to make us feel considerable progress and developing applied.
Form or we're committed to becoming a leader in this space. We're very pleased with the continued growth, we're seeing and our pipeline of opportunities by leveraging off our existing originations capacity and capabilities. We've closed approximately 100 million of single family rental product to date and we believe this was a phenomenal.
Business with enormous opportunity both the bridge and permanent lending products and we are confident that we will build this out to be a significant driver of yet another source of income stream and further diversify our lending platform.
Overall, we're extremely pleased with our progress and a tremendous success we continue.
To have and growing our operating platform.
The quality and diversity of our income streams makes us very comfortable with the stability of our dividend and confident based on a strong baseline revenues that the current status our pipeline <unk>, we'll be able to consistently grow our dividend and in the future and.
Due to generate outsized returns to our shareholders.
I'll now turn the call over to pull to take you through the financial results.
Okay. Thank you Ivan as our press release. This morning indicated we had a very strong third quarter generating a AFFO 42.4 million or 36 cents per share. These results reflect an.
Hi, guys return on average common equity, a 15% which continues to demonstrate the earnings power of our capital Light agency business as well as a significant growth in cost efficiencies. We're experience is experiencing as we continue to scale our balance sheet portfolio.
And as Ivan mentioned, we're very pleased where our ability to once again increase our quarterly dividend.
The 30 cents a share reflecting an 11% increase from a year ago I remain confident in our ability to comfortably maintain our current dividend as well is growing in the future.
Looking at the results from our agency business, we generated 29 million a pre tax income in the third quarter on approximately 1.4 billion in originations and 1.5 billion in loan.
Yes, the margin on our third quarter sales was 1.43%, including miscellaneous fees compared to 1.5 for all in margin on our second quarter sales. We also recorded $30 million of mortgage servicing rights income related to 1.5 billion of committed loans during the third quarter, representing an average MSR rate around.
Around 2.02% compared to a 1.44% rate for the second quarter, mostly due to some large deals that we closed in the second quarter, which generally have lower servicing fee.
Our servicing portfolio grew another 3% during the quarter to $20 billion at September Thirtyth weighted average servicing fee of 43 point.
Five basis points and estimated estimated remaining life of 9.2 years.
This portfolio will continue to generate a predictable annuities income going forward around $87 million gross annually, which is up approximately $5 million on an annual basis from the same time last year.
Additionally, early run off.
Now servicing book continues to produce prepayment fees relating to certain related to certain loans that have you'll maintenance provisions. This accounted for 5.3 million in prepayment fees in the third quarter, which was up from 3.5 million in the second quarter.
The earnings associated with our escrow balances also continues to grow and contribute meaningfully to our recurring income streams.
We currently have approximately 950 million of escrow balances, which are running around 2% and the earnings associated with these balances were up approximately $4 million were 29% on an annual run rate as compared to this time last year.
And our balance sheet lending operation, we grew up portfolio, 21% for the first nine months of the year.
The $4 billion and based on our current pipeline, we remain extremely confident and our ability to continue to grow our balance sheet investment portfolio in the future. Our 4 billion dollar investment portfolio had an all in yield of approximately 7.4% at September thirtyth compared to 7.34% at June Thirtyth.
The average.
Balance in our core investments was up from 3.6 billion last quarter to 3.9 billion. This quarter due to a second and third quarter growth and the average yield on these investments was 7.31% for the third quarter compared to 8.24% for the second quarter, mainly due to default interest collected on our second second quarter loan payoff.
Higher interest rates on runoff as compared to originations and from a reduction in LIBOR during the third quarter.
Total debt on our core assets was approximately 3.5 billion at September Thirtyth, we'd all in debt costs of approximately 4.65% compared to a deck was around 4.96% at June thirtyth, mainly due to reduction in.
Library during the third quarter, the average balance on our debt facilities was up to approximately 3.5 billion for the third quarter from 3.4 billion for the second quarter due to financing our portfolio growth and the average cost of funds in our debt facilities decreased to approximately 4.7% for the third quarter compared to 5.35% for the.
Second quarter due to 1.2 million of noncash fees that were accelerated from the early unwinds of CLL six in the second quarter. The full effect of lower borrowing costs associated with our new CLL and from a reduction in live or in the third quarter.
Overall net interest spreads in our core assets were down to 2.44% this quarter compared to.
2.89% last quarter again, mainly due to default interest received in the second quarter and higher interest rates on runoff, which can as compared to originations and our overall spot net interest spread was relatively flat at 2.39% and 2.38% at September Thirtyth and June Thirtyth respectfully, mainly due to the.
Positive effect of LIBOR floors in a portion of our balance sheet portfolio and from reduced borrowing costs from our recent celo execution.
The average leverage ratio on our core lending assets, including the trust preferred and perpetual preferred stock is equity was down slightly the 80% in the third quarter as compared to 81% for the second quarter and our.
Overall debt to equity ratio on a spot basis, including the trust preferred to preferred stock as equity was also down to 2.5 to one at September Thirtyth from 2.6 to one at June Thirtyth. Lastly, we also had another very strong quarter from our residential bank banking joint venture. This investment generated 2.6 million of income to us this quarter.
Were mainly due to the success, we continue to have in building out the retail branch networks and from the current interest rate environment. We also expect to record additional income from the investment in the fourth quarter, there will be more in line with past fourth quarter performance is due to the normal seasonal nature of this residential banking business and this success continues to demonstrate.
The diversity of our income stream and the value of our operating franchise.
That completes our prepared remarks for this morning, and I'll now turn it back to the operated take any questions. You may have this time Norma.
Thank you.
Ladies and gentlemen at this time, if you have a question. Please press star one.
Sure we must yourself from the Q you May press the pound cake.
One moment wildly compiled the culinary roster.
Our first question comes from Steve Delaney of JMP Securities. Your line is open.
Good morning, and thanks for taking the question the gain on sale margin little over 2% in the third quarter, you mentioned that you had a mega.
Your large deal in the second quarter, Paul how do you feel about that as as a run rate and obviously I know the Fannie Mae component, which was up to 77%. That's a factor in there, but it's 2% a reasonable given your mix of business a reasonable level for for us to project on the.
Yeah sure MSR gain.
Sure Steve I think you said gain on sale, but I think you meant MSR rate I meant MSR my bad Yeah, Yes. The MSR rate is was 2.02 for the quarter. It was higher than it was last quarter for the reasons. You mentioned, we did have some larger loans that we closed in the second quarter with lower servicing fees, we didnt.
Have that kind of mix in the third quarter. It also depends on as you mentioned the mix of Fannie Mae versus the other products and it was a little heavier towards Fannie Mae. So it's a tough it's a tough ones that project, but I would say that it should trend on the higher end, maybe not 2% every quarter, but it should try and know the higher end that it has over the last.
Last few quarters, because the Fannie Mae business has picked up a you know with the new cap and the new developments there and the servicing fees are staying relatively high in that business. So unless the mix significantly changes the more Freddie and Fannie, which I don't anticipate we think that MSR rate could be could be high going forward.
Hi, Great. That's helpful. In Europe , you smoke me out on the.
Interested in be servicing revenue going up 10% with the volume only up a W.P.B. up three and you mentioned your yield maintenance is you get tribute that do you consider what you saw kinda routine or was it the.
GAAP in the 10 year you know from 250 early in the year to Oneseventy do you think that there are people actually that are bailing out early in refining their or their G.S.C. ones.
I'll, let Ivan talk about the market, but I do think that it was a little surprising and it probably had to do with the.
At rates the prepayment fees were trending more in my opinion normalize over the last because got down to three and a half million last quarter, that's where I kind of packed I thought it would be this quarter and maybe next quarter, but it came in a little higher than I expected and I think I would attribute that probably too as you mentioned Steve the.
And the interest rates and people refinancing their portfolio, but.
Well get Ivens view on and where he thinks the market is from that perspective sure I think it's not just the product allows recently or your opinion I haven't Hello, Yes, I got you know I got you. Okay. Yeah. It's not just the product of refinancing I think when rates do drop a there may be an acceleration.
You can have some sale activities and people are willing to deal with the.
A yield maintenance issues, because they're gain on sale and they were on assets.
More robust so it's a factor it's it's it's definitely a factor and it's a consistent factor for us in our earnings and you know sometimes the tires.
Sometimes the slower, but it's always within a certain range.
Got it. Thank you both of your comments.
Thank you.
Your next question comes from Stephen lots of Raymond James Your line is open.
Hi, good morning, I've been in Paul.
What a follow up on a couple of things from up from Ivan.
Your prepared remarks on the private label side at 81 million originations in Q3.
You know what should we think about it that normal quarter on the private label.
Business and then you know that what's the difference and underwriting standards that are the loans, you'll do there on the private label Securitizations or a yields versus.
The agency yields or maybe a little bit above the characteristics of distinguished itself.
I I think first off the private label was was was created as a result, though the agencies or at least our anticipation that the agencies would be cutting back because they were hitting against that cap.
And that's how we created.
The program. So it was filling a an absolute void with the agencies were not quoting it we're backing up their pricing you know very very very steep in the private label was actually inside of of the agency pricing. So the amount of private label, but we we produce will be a product of how aggressive the.
Agencies will be <unk> will not be and that's that's a real primary issue. The secondary issue will be is if they're not fulfilling their mandate on the on the mission driven business, which was 37.5%.
They'll be more aggressive on the mission to driven business and less aggressive on the non.
One business. So if there are less aggressive on a month non mission driven business will do more private label business in general.
Sometimes the agencies have a concentration in a specific market and there are less aggressive and that's avoid to be filled as well with sometimes they have a concert.
It's a concentration and not affects them as well. So there are various number of factors that exist, but we would not expect the amount of private label business. We've we didn't a short period of time.
To be operating at that level on on a run rate enlistee agencies Shai back on on there.
Production they are getting more aggressive now and I think that taken more and more of the market well. So I would anticipate seeing also lower run rate then.
Then and then then what we have in the pipeline right now what we have in the pipeline right now suggested probably about it you know.
Two and a half billion securitization level three or four for for 2020, I'll expect that to be probably half.
Great appreciate the color there and it does sound like a good opportunity look to fill and when there are gaps and ER and the markets and shifting to follow up.
On your asset bar comments 100 million today.
No a lot of expenses have been going and building out the platform how should we think about.
Topline growth really not right one thing about that but are we use associated with ramping that up and what type of borrowing expansion or benefits. The bottom line as you as you leverage those costs that it would have been put in.
He is building out that platform.
So I think you know we've been able to absorb the cost in our operating numbers for 2019.
And I believe that for 2020 will continue to.
Grow that business. My objective would you know what would be able to get to a run rate of Oh.
Of both bridge lending and securitization of around 50 million a month on each side.
At that level, if we can get there it'll be a substantial contributor or talk to our bottom line.
But right now it's not a drag it's probably somewhat neutral turning to a positive as we now have some law.
He is on our balance sheet producing positive earnings.
Fantastic and then and then thinking about the the competition side. When you look at your competitor you're seeing more pressure on on spreads are on the credit side with underwriting standards and.
And maybe talk a little bit to teach side of that as to how you're you're addressing.
And that competition in the market.
Yeah. This comp there's constant there's constant pressure on spreads on the balance sheet side.
Spreads have come in considerably I'd say there with their in another 25 to 35 basis points last a four months since our last.
Core quarterly.
Cool however, we've been able to get a lot of economies scales on the on the borrowing side to offset that and maintain maintain our spread. So that's been you know a quite positive for us and grow our book well at the same time, so we're pretty comfortable with where we are although our coupons are.
Our tighter borrowings have offset that to launch degree on the agency side. It is a fiercely competitive market and you know we've been able to maintain a volume levels and not be ambitious about growing to shoot too much in being overly aggressive and what we do and <unk> and wait.
Up on on our overhead so we've been pretty disciplined about trying to manage our business accordingly, and doing a good job I'm I think that market will continue to be competitive, but we have a good franchise, we have a good customer base and we've been able to maintain all business lines fairly effectively.
Great. Thanks.
A lot for all the comments and taking my questions.
Thank you again, ladies and gentlemen to ask a question that star one.
And I'm currently showing no questions at this time I like to trying to call back over to Mr., Ivan Kaufman for closing comments actually I'm, sorry, I ask questions.
Jade Rahmani plus KBW your line is open.
Thanks, very much I was wondering if you'd be interested in property management as an additional.
Business line to add is it would seem complementary to the company's increasing focus on the residential market. We know in single family rental space, There's definitely a need for institutional property management, because they scale requirements and economics in that business and also I know you've made investments in technology and technology has been a theme as well.
So could you comment on that.
We've evaluated that in the past and we've we've decline in going into that area for a number reasons just from.
It varies people intensive requiring a lot of a lot of management a lot of infrastructure with the margins being very very low we're also.
Great. If some of the headline risks that might come along with that because you know the property management and some of the negative things that can occur when you when you're managing properties. There was some headline risk from time to time, whether it's justified or not that we felt was probably not you know where we wanted to be as as a public company.
Affect the rest of our business is the only real issue for us is whether the synergies from managing properties and trading financing opportunities would also offset all that and create additional revenue streams and you know we're not sure does so we think there a better places to put on capital in.
When its present time.
Thanks, Ray thanks, very much for that.
Turning to the overall commercial real estate business. It seems like you have a very positive view toward multifamily as well single family rental and.
Lower risk dynamics in residential housing in general.
Hey, particularly the affordable focus what's your view toward the rest of the commercial real estate market and do you expect to continue to resonate bridge loans.
You know another property types, such as office or a net lease.
So weve you know weve, probably have about 20% to 25% of our originations.
And portfolio and other asset classes, we pick our spots, we'll do some hospitality some retail some office.
Certainly some health care. So we're not major players not area, where more opportunistic for either servicenow bars are seeing a unique opportunity.
But historically, we love the multifamily market.
<unk>, it's been the best performer in an outside of all the markets that we've engaged and.
So that'll probably be the balance in our book.
And then the commercial real estate asset classes, you mentioned away from residential would you expect an uptick in market wide loan delinquencies next year.
Our feeling is that you know where certain point of time a cycle. There's a lot of liquidity. There are lot of new players. There's a lot of syndicated capital any a lot of a new entrance into the market.
And you know with that becomes a level of risk and I think that you know what we'll do is proceed with a.
Lot of caution with the sponsors we do business with.
And be very very cautiousness point in time in the cycle. So we do expect it to be a little bit of a uptick in delinquencies in the industry in general and a lot will do with interest rates as well as a you know well rent increases.
So you've had a historical run of over 10 years of you know, 3% to 5% rental increases.
With which has been very very positive for the multifamily asset performance.
And and a very attractive interest rate environment, though the two variables that nobody can control right now.
But we're very.
Conservative in the way, we underwrite alone for rent growth.
As well as exit cap rates on an exit interest rates on auto loans, but now would be the period of time to be cautious.
And touching on the dividend what drove the decision to again raised the dividend just with the factors you.
Second rate spreads being an uncertainty.
Why not choosing instead to be more defensive and retain some additional capital.
Well number one we feel we are very conservative we have a lot of room within a dividend and a core earnings just continues to grow at a tremendous levels and I think whats worth noting is.
When it went out of core earnings grows our baseline grows it doesn't go down enough servicing revenues are rational balances our balance sheet. It shows a tremendous baseline from year to year and we have got where we're still at a very low payout ratio. We feel there's a lot of Rome, and we're very comfortable with it and it was almost fee.
Inappropriate for us to have a low payout ratio with our core earnings growth, that's such a rapid rate.
[noise], thanks for taking the questions.
Thank you.
Our next question comes from Rick Shane of JP Morgan Your line Stephan.
Hey, guys. Thanks for taking my.
Questions. This morning.
And then I appreciate the commentary on the private label in response to Steves question I'd Love to talk about it a little bit tactically, obviously, it's a business that's meant you sort of.
Provide stability when they're.
Patients a in the other parts of the market, but obviously you can't just sort of be in and out of that based on where the where the thresholds are a I'm curious.
You know it sounds like the plan is to run this on a steady state basis, how do you look at the economics.
Versus the agency business, how do you decide.
In periods, where there is capacity on the agency side, whether or not to do private label loans.
I think what'll happen is depending on where the agencies are and how aggressive they are both on pricing.
And in markets I think that footprint.
Well Frank dramatically will grow in a nice way there may be periods of time, where we're just not an effective originator of that product because he agencies are too aggressive. So currently the pipeline. We generated is significant and will you know should lead to really really good execution.
I think now that the agencies are tightening up every week.
It may not be space for us to originate that product in the markets. So the market will dictate to a large degree with the agencies being the leader in the market for how much room. There is that the agencies continue a week by week to tightening spreads you know three base.
At this 0.5 10, they went from being you know 250 to 75 over and now they're actively quoting from 190 to 210 to 15 over which is right around where were quoting and if they get inside of that they won't be sufficient enough product, but if they widen it will be so right now it's kinda borderline.
With the agencies, probably going to dominate that market again, so we'll have to wait and see how it works.
Great. That's that's very helpful and I'm not sure I heard you answered this to steves question or not but how do the economics compare versus the agency business on a gain on sale basis.
So we think that its life somewhere between the two agencies between Fannie and Freddie the economics. So the economics on the Fannie Mae business or stronger than on the Freddie Mac business and we think that lies right in between.
Okay, great. So it probably.
Well in tacking on sale.
Margin at the margin.
Paul What's your feeling on that yeah, I think that's right I think it will depend on how as Ivan laid out Rick how active we are in that private label business.
I think the economics as Ivan laid out fall in between the two.
Agencies, obviously, fannie being more robust on the servicing fee side and on the gain on sale side.
Then Freddie so if it falls in between those two.
Likely doesn't move the margin in total significantly unless it's a bigger part of our book than the eight than he and the agencies regress. So it'll.
To be hard for me to tell you that it won't affect the margin at all but unless it's a real big part of our business and that means the agencies are.
Reducing their footprint I don't think it moves the margin materially.
Yeah. There are there are some factors on that the larger deal you do you can absorb fixed.
<unk> expenses and that has a big impact on the market. We originally targeted doing a $350 million deal, we hope to come out somewhere between six and 800 million, which will have them very positive impact on margins probably at least the core set them up in those fixed expenses.
And the other.
Adam, which we don't know how much of an impact will have we're trying to build a brand given the way we're doing it and we're hoping we can trade you know we're pricing with the trade comparable to the CMBS market, we think without brand our expertise and the securitization market was you know on maintaining you know <unk>.
Part of the B piece and being you know in the servicing side of the business, perhaps it can be so you know some pricing advantage, which hasn't been factored in so it's a little early to say exactly where we come out but.
All right now is looking very favorable.
Okay. Thank you guys again for your time this morning.
Thanks, Rick.
Thank you again, ladies and gentlemen to ask a question that star one.
And I'm currently showing no questions at this time I like to trying to call back over to Mr. Ivan Kaufman.
Thank you everybody for participating on today's call sorry for the.
Nickel difficulty that occurred originally on the inception another call.
Third quarter was once again, a another outstanding quarter.
The mystery to complete the rest of the you're not in a very positive way. Thank you again I can't really money.
Ladies and gentlemen, this concludes todays conference you may now.
Now disconnect.
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