Q4 2019 Earnings Call
Good question during that portion of the calls you when need to press star one on your telephone. Please be advised that today's conference is being recorded if you required any further assistance. Please press star and zero now it's my pleasure to turn to covert their conference over to your Chief Financial Officer, Paul Elenio. Please go ahead.
Okay. Thank you Carmen good morning, everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning will discuss the results for the quarter and year ended December 30, Onest 2019 with me on the call today's Ivan Kaufman, our President and Chief Executive Officer, and before we begin I just want to inform you that I've been isn't transit due to some unforeseen travel issues.
This morning is is what do you know sounds clear, but to the extent did we lose them I'll pick up his prepared remarks, and then we'll get him back. So before we begin I need to inform you that statements made in the earnings call maybe deemed forward looking statements that are subject to risks and uncertainties, including information about possible future results of our business financial condition.
What are the results of operations plans and objectives.
These statements are based in our beliefs assumptions and expectations of our future performance taking into account information currently available to us factors that could cause actual results to differ materially from Orbitz expectation and these forward looking statements are detailed in RCC report listen as of course and caution not to place undue reliance on these forward looking statements, which.
Speak only as of today.
Our undertakes no obligation to publicly update or revise these forward looking statements to reflect events or circumstances. After today well the occurrence of unanticipated event.
I'll now turn call over to Arbors, President and CEO Ivan Kaufman.
Thank you Paul Thanks, everyone for joining us on todays call.
Right so today to discuss the.
Yes, we hadn't close outs Dane Oh, well stop plants not look at this point, it's funny as you can see from smaller suppression Louise we had an outstanding fourth quarter with tremendous operating results.
Just to demonstrate the spread about brands.
Our operating franchise. Additionally, the significant broke better experience and 29 Jane has provided us the very strong baseline of predictable stable core earnings I think that's it's 2020 thinking that's very calm the ability to comfortably dividends as well as broad future over the last five years with deliberate I do like shareholder.
Tons of approximately 30% significantly outperforming Lps each and every year. This performance combined with the quality and diverse.
Great along with the consistency of earnings and dividend payout ratio clearly differentiates us which is why we believe we consistently trade at a lower dividend yield on a substantial fragrance called peer group focusing now on how it's funny 19 accomplishments somewhat more significant highlights include generated substantial growth not car.
Thanks, a lot less than we thought dividends three times, what eligible rate of $1.20 a show up from a dollar eight per share deliberate told were turned up 54% in 20 Nike.
Hundred 75% generally for the last five yet, but I realize it's kind of approximately 30% achieving returns on equity Fortunately have reset 35% increase over the last two years producing record origination $7.6 billion, a 12% it pretty small record 2018 numbers increased.
Balance sheet portfolio, 30% 2090 $4.3 billion following our servicing portfolios at $20 billion, an 8% increase 2018 at a 48% increase over the last three years continues to be a market leader in the non recourse securitization arena closing to boost the yellow smolik one.
<unk> billion with improved carbs and flexibility achieved significant economies of scale vastly reduced debt cost then all of our facilities, allowing us to maintain our margin at a very competitive market raising 450 billion of accretive growth capital to fund duck wrong pipeline and increased core earnings and then.
Pretty sub market cap to approximately $2 billion, allowing us to access broke capital more efficiently and effectively.
I like this incredible success for I would like to talk about the growth we experienced bus platforms and our agency business <unk> portfolio, 8% or 29, eight at 20% over the last two years. This servicing portfolios now over 20 billion with a service and see a 44 basis points and have an average remaining life.
Nine years, which reflects 10% increase in duration over the last two years as result, we've created a very significant predictable and nobody event couple of 88 million gross annually and growing the of <unk>, the majority of which prepayment protected and this growth in our service portfolio also continues to increase and nobody that my estimate.
Balances, which currently earning 60 million badly for a combined annual run rate absorption income and ask Florida of 104 billion, which represents approximately 40% about total annual revenues.
Well, we also produced significant origination volumes caused 1.3 billion an agency loss in the fourth quarter and 4.8 billion for the year with strong margin very competitive market I'm about to pursue origination platform and strong footprint in multifamily affordable housing market. We're confident we will increase our origination volumes.
I want to quantify in addition, as we talked about about last fall with <unk>, we were active without who offer a private label products, which we launched the result of the disruption than the agencies during the third quarter of last year. We close 400 billion of this product funny 19, and expect boasts an additional two to 300 billion a next to me.
Okay and issue off course securitization of around six to 700 billion in the second quarter of this year. We're pleased to a progress to date I believe this product relative corresponds to the lending platform at Wal Soc, there's a bit again against further potential changes disruption with the agencies with respect to our balance sheet business because experis embedded.
Growth about loan book.
We grew this portfolio, 24% 2018, and another 30% 2019 on 2.8 billion in originations balance sheet portfolio is now at 4.3 billion at a significant growth we experienced book continues.
We saw run rate of netted the.
I'm going going forward.
There's also significant.
It's.
There's also with it.
Yes.
Multifamily assets, which is.
Okay.
And we also have a very robust pipeline, which we believe will allow us to meaningfully grow our loan book in 2020 and significantly increased our fit.
They're not single family rental business, we continue to make progress developing our platform Weve closed approximately 150 million of SFR products to date.
I'm pleased with the opportunities we're seeing so meaningfully grow this business into future pipeline continues to gross differently. We believe this business provides enormous opportunities both the bridge Ed farmer lending products.
Confident that we will build us out Swiss that's been driver yet until the end from sprint probably the most by 11.
We also continued up tremendous success through us securitization expertise walk banking relationships and substantially due Sarah that costs, which has allowed us to achieve significant economies of scale and maintain our margins are very competitive market.
In the fourth quarter, we closed our 12 month recourse yellow with 635 billion of assets I sit VIX significantly improved terms, including reduced pricing increase leverage the three replenishment feature. We're also very successful fourth quarter exchanging up five in the quarter percent convertible debt for the Ria convertible.
Debt issuance with fixed rate of 4.75%.
This transaction had many significant benefits, including reduced interest cost restarting, both our conversion price and dividend protection on the dupont's at much higher levels generating 30 million of additional capital to fund the growth of our business. Overall, we're extremely pleased about 29 to resolve and an expense. So us we considered.
I'm going to operating platform and greatly enhancing the value about franchise or sell something truly remarkable Sicily outperformed our peers. We're we have created a strong baseline as two of our diversified it could well for our earnings I think it's it's funny quality of the also very excited about the future growth opportunities Ross up.
Slides. It is also important to note that we have made a strategic decision that pretty Soc test persistent honestly is approximately 500 million cash and liquidity on hand for operations. We believe at this point in this cycle is very prudent survives sufficient amount of cash available I will put us in a very offensive position as we transition.
With that for part of the cycle and even with these high cash balances we've been able to just as we grow earnings and dividends and remain very confident ability to continue to grow our dependent in the future I'll now turn the call over default take you through the financial adults.
Okay. Thank you I haven't as the press released this morning indicated we had a very strong fourth quarter and full year 2019, as a result, a AFFO was 42.1 million or 34 cents per share for the fourth quarter, excluding a onetime loss in the early exchange of our convertible debt securities of 7.3 million and 6.1 million an unrealized gains on hedges relate.
To our private label business, we've excluded the hedging gains related to our private label business from a AFFO. Since these loans have not yet been securitize the soul and the earnings process is not yet complete we intend to adjust day AFFO in the future for any hedging gains or losses associated with these loans in the quarter in which the loans are sold to properly reflect a true economic.
Most of these transactions, we also generated or are we use or approximately 14.5% in 2019, representing a significant increase over the last two years, which continues to demonstrate the earnings power of our capital Light agency business as well as a significant growth in cost efficiencies. We're experiencing as we continue to scale our balance sheet business as Ivan mentioned, we're very pleased.
Where ability to continue to generate for earnings in excess of our current dividend and we remain confident or ability to comfortably maintain our current dividend as well as grow it in the future looking into results from our agency business. We generated 37 million of pre tax income in the fourth quarter on approximately 1.3 billion in originations and 900 million in loan sale the margin on the fourth.
What a sales was 1.55%, including miscellaneous fees up from 1.43% well in margin on our third quarter sales. We also recorded 28 million a mortgage servicing rights income related to 1.2 billion of committed loans during the quarter, representing an average MSR rate of around 2.32% compared to 2.02%.
Great for the third quarter, mostly due to a change in the mix of our fourth when a loan production servicing posts portfolio also grew another 8% in 2019 to 20 billion at December 31st what a weighted average fee of approximately 43.8 basis point and then the estimated remaining life of 8.8 years. This portfolio will continue to generate a predictable annuity.
Weve income going forward around $88 million gross annually, which is up approximately 4 million on an annual basis from the same time last year. Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have you'll maintenance provisions. This accounted for 4.7 million in prepayment fees in the fourth quarter compared to 5.3 million.
In the third quarter and our balance sheet lending operation, we grew up portfolio, 30% to 4.3 billion on 2.8 billion in originations in 2019, the significant growth continues to increase our core earnings run rate and based on our current pipeline and deep origination network. We remain extremely confident in our ability to continue to grow our balance sheet investment portfolio in the.
Future.
4.3 billion investment portfolio had an all in yield of 6.68% at December 31st compared to 7.04% at September Thirtyth, mainly due to higher rates on run off as compared to new originations during the quarter and from a reduction in LIBOR, which was partially offset by LIBOR floors in a portion of our portfolio the average balances.
Our core investments was relatively flat at approximately 4 billion for both the third and fourth quarters. Despite a fourth quarter growth, mainly due to the timing of originations and run off in the fourth quarter, which tends to be later and the average yield than these investments was 7.18% for the fourth quarter compared to 7.31% for the third quarter, mainly due to high interest rate.
It's on runoff as compared to originations and from reduction in LIBOR, which was partially offset by more acceleration of fees from really run off in the fourth quarter total debt on our core assets was approximately 3.9 billion at December 31st what an all index loss of approximately 4.35% compared to like that close to 4.65% at September Thirtyth.
Mainly due to a reduction in LIBOR and from reduced borrowing cost on our new CLL in the fourth quarter. The average balance on our debt facilities is up to approximately 3.76 billion for the fourth quarter from 3.52 billion for the third quarter, mostly due to senior unsecured notes that we issued in the fourth quarter and the average cost of funds and our debt facilities decreased to approximately.
4.60% for the fourth quarter compared to 4.87% for the third quarter due to reduction livewatch and from lower borrowing costs associated with our new CLL, which was partially offset by 1.4 million of noncash fees that were accelerated from the early unwind of seal a seven in the fourth quarter overall net interest spreads in our core assets.
Increased to 2.58% this quarter compared to 2.44% last quarter, mainly due to the positive effect of LIBOR floors, and a portion of our balance sheet portfolio and from reduced borrowing costs from our recent FILO execution and our spot net interest spread was down slightly to 2.33% at December 30, Onest from 2.39% at.
September thirtyth, mainly due to higher interest rates on run off as compared to originations, partially offset by the positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing cost and Siloed 12, and lastly, the average leverage ratios on our core lending assets, including the trust preferreds and perpetual preferred stock is equity was up to 83% in the fourth.
Order from 80% in the third quarter due to a new unsecured debt issuance and increased leverage on Siloed 12, and our overall debt to equity ratio on a spot basis was flat at 2.5 to one at both December 31st at September Thirtyth that completes our prepared remarks in this morning, I'll now turn it back to the operating take any questions pharma.
Thank you and as a reminder, ladies and gentlemen to ask a question you wouldn't need to press star one on your telephone to withdraw your question press the pound or hash key.
Please standby well we've compiled it came in a roster.
And our first question comes from Steve Delaney with JMP Securities. Please go ahead.
Good morning, everyone and happy Valentine's day, probably not a bad thing for all of us to take one day to think more about love them mortgages.
I've been comex is good to have you with us.
Do you.
Can you share with US, which are 2019 rankings were with with Fannie and Freddie.
There I think you are we will once again for the 13 General Roe.
Fannie Mae lender I think got ranking came in at nine with a number one small dallas lender to Fannie Mae Freddie.
Freddie Mac I think we were that number three small balance lender.
For their Freddie Mac small balance books.
That's right okay. Thanks.
And then the you know the new caps everybody kind of focus is on the 20 billion a quarter.
But you can only do 20 billion a quarter of 37.5% a dad is affordable.
And can you comment on.
On that affordable segment, and the size of that and how the profile of your customer base versus maybe some other larger lenders, Mike Mike fit in and the prospects that your market share with the G.S. east because of that 37.5%.
Might have a tailwind it might go up in 2020.
Well, we do have a one of the largest percentages.
The affordable and meeting.
<unk> goals for the FHLB pay so were viewed very favorably and we don't have to scramble like all the lenders do when that part on the other hand, we don't know what's going to happen that third and fourth quarter update on meeting the 37%, but where the being viewed very favorably being treated very well.
Great. Thank you and you commented on the private label Bitch did you hope to do a securitization in the second quarter.
Your 400, it fits into the year, what is sort of at target size to do it a securitization.
Well I'll minimum target side was 350 million that was a minimum target.
And because the transaction costs get.
But not all but the volume so getting to 700 million as a significant achievement for us above what we projected forward, okay transaction costs being more efficient.
Great and that kind of the cost kind of ties into my last question on that can you give us a sense that the.
The execution on that in the leverage how you think the return on your equity in that private label CMBS might compare with the returns you're seeing today on your structured business.
Well I can't talk run the market went up from it it to do that but everyone. Understood goal can understand couldn't understand that credit spreads tightened significant growing significantly since we started the origination process. So we're very optimistic very efficient execution that were being very.
Very very favorably in the market.
Multifamily LD securitization and the risk retention bought by maintaining LLP piece is let's see what were uniquely qualified to do based on our capital structure.
Look that you'd be looking very.
Investors, So Oh thing is for us.
We feel very optimistic profitable and it could set this platform walk to really search well ahead of most of the platforms in the market.
And long duration cash flows as well so thank you. Thank you for all those comments.
Thanks, Paul.
Thanks.
Thank you.
NSR reminder, ladies and gentlemen to get into can you just press Star then one.
And our next question is from Jade Rahmani with KBW.
Good morning, everyone. This is Ryan tomasello on for Jay Thanks for taking the questions.
Hey, Ryan just considering the hey, everyone just considering the potential tailwind that Ivan was just talking about on the given the affordability component on the GRC side.
In coupled with the ramping up yes, the bar business on the structured side can you give us a sense of what you're targeting for originations in 2020 in both of those business, maybe on a nominal or just kind of growth rate basis.
So let me give you an overall on our outlook on the agency business kind of consistent with my comments last year.
But what we what we decided last year was the give slot guidance to a prior originations.
Pretty simple as chip here and it's not so much that we can't originate more but we've chosen to maintain how much right. So we could we didnt grow our agency business as big as somebody other lenders that but that was by choice and design. So our guidance to feed maybe slightly higher than.
What we did last year on the agency side with respect to the SFR business. We are so excited about the opportunities there to an enormous market, where we're assembling and have assembled quite a staff, it's taking time and expense and while it didn't contribute economic legal last year, probably it rained, we're expecting a positive.
In addition, we're closing about $150 million.
That spaces divided in three components as we see it single family rental to build which we feel we'll do the job, but I'm wondering how we're very active and that we're creating the problem in that space for each pipeline.
Then we have the single family of rich to securitization of the middle market, which is generally people who are buying.
Anywhere between 25 to 250 units, which could develop the nice flow and expect that the growth of somewhere between 20 million a month and originations.
Currently operating about 10 million origination above and most significantly what work you know to figure out the biggest part of the market and where someone machines to do that as well.
Originate wander off single family rental loans, which is 80% of the market. So that business, we've invested almost most time.
As a management team with great history.
On the platform with manufacturing capability. So we're extremely excited about it and we think that's really where a tremendous amount of a growth because some of the future.
That's very helpful color, Ivan and I guess, just following up on on the SFR business. You know how long do you expect that ramping period to take I'm, just giving I'm, assuming the hiring that's necessary and is building out the infrastructure and maybe you can give us a sense or remind us of how the return.
Turns might vary across those three different buckets that you laid out and how that compares to kind of the typical traditional agency and structure traditional product you you originate today.
Yes, Jade I think it's a little premature to have that kind of detailed discussion, but like any entry into a business that margins just generally baker and as you went for a business a competitive basis to gain a franchise value. So I think as we go quarter to quarter, we'll talk more positive growth in that business.
Album, and we're getting a footprint tenants. So I think it would be a little premature, but we are pleased with the margins were getting.
And our relations with the developing in the potential opportunities.
And one last one I've been just regarding the environment for multifamily overall, what are you seeing in terms of fundamentals in underwriting are you seeing any signs of deteriorating credit performance across the market and what do you really see as the biggest risks for multifamily going.
It's 2020.
So we think that.
And that's why we've given guidance on a small just a very modest growth Andy Andy Agency business.
There's an excess use the bio that cap rates are very compressed and isn't very aggressive lending environment, we're seeing an increase from taxes across multiple anybody jurisdictions and so even a lot of prudence the underwriting expense side as well as I understand that traditionally just a level of amortization and ask.
Okay and to use caution or underwriting loans. So we put in for <unk>, but looking forward you know the appropriate measures act, our origination side push back to the asset management side Weve, a deep and diverse bench, we've added to that and we'll continue continue fourq very aggressively.
To front run.
Changes in the economic environment and manage our assets applause. Accordingly, So we think we're well ahead of the curve to anticipate any changes in the environment.
Thanks for taking the questions.
Thank you.
And our next question comes from Henry Coffey with Wedbush.
Yes, good morning, and thank you for.
So taking my question letting me become part of the small crew here I do agree with Steve So.
[laughter] so it's nice to hear his voice.
The <unk> you know when do we look at the date of Fannie Freddie and recently you know the S.A.J. have <unk> started tightening a little bit in the summer.
And the FHLB the H.A.
So to jumped into this on the residential side.
When you look at the multifamily business they.
They're not as tempered by past experience there but.
Have you have the GE as he started to tighten up a little bit I mean, given given your own insights into what's going on they I'm sure you're an active dialogue with them, but I was wondering if you could give us some thoughts about that.
My answer is they have not they have a but they have not at the moment their underwriting standards continue to Ah.
Oh, it to be consistent with their prior year standards.
So, we'll wait and see what they do.
Pretty consistent but bottom line.
And then I'm equally intrigued with the single family business. It seems to be more of a private then a public market, which is good for you as a lender.
[music].
Our <unk> are you looking at the full spectrum, which is what it sounds like a and can you give us some some sense of what the lower end to the market looks like in terms of rates, an expected losses and risk factors.
Yeah, well it is a private market and that's why we're uniquely positioned with permanent capital how securitization ability.
Originations capability really after that market effectively.
The key to the or two to the biggest Florida market, which is the aggregation of individual borrowers.
This is where were really I think the margin doesn't that growth will come from that's 80% of the single family to read market. So we're working really hard on the technology side, yeah originate that product actively if were successful if we combine that with the other originations we do on the single family rental will have significant volume.
At scale to effectively access securitization market very consist basis. So you know we are in the beginnings, we do have the background the capability.
And the name and we think this isn't a real significant yet for us up to provide all the components that I made earlier.
Earlier, well now boasts Bob mobs Olympic making significant progress on this and will play a little REIT market a single family.
Nope, Tourette market, which we love.
We are developing a very loyal customer base or originations that work on mid tier borrowers and now we want to build out or the individual obligation on the individual units. So we're quite pleased as I mentioned earlier I think its little early to give any kind of projections, but you can't make Uh huh.
Arms earnings even this year.
Listen thank you very much and thank you for taking my question.
Okay Henry.
And I'm not showing any further questions in the queue I will turn to called back to Ivan Kaufman for his final remarks.
Okay. Thank you everybody for your participation and it's been a abdominal 2019 were extremely optimistic about 2020 and were very handy for change in the cycle.
<unk> balance sheet cash accumulating vehicle.
Okay very offensive position. So thank you again.
Good day happy Valentine's day, everybody.
And with that ladies and gentlemen, we thank you for participating in today's conference you may now disconnect.
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