Arbor Realty Trust 2026 Q2 Earnings Call

Thank you, Stephanie. 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 June 30th, 2026. 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 risk 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 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. As you can see from this morning's press release, we had a very active quarter in the capital markets and several notable transactions that have allowed us to increase our liquidity and drive higher returns on our capital as we continue to navigate through this extended downturn. First, we were once again successful in unwinding one of our legacy CLOs by financing these loans through our bank lines with superior terms. In fact, we were able to reduce our pricing by almost 40 basis points and enhance our leverage by nearly 10 points, which allowed us to generate approximately $135 million of additional liquidity and increase returns on our capital.

We believe it's very important to point out that we had seven legacy CLOs with $9 billion of collateral in the height of the market. Through effective balance sheet management, we've de-leveraged $7.8 billion of CLOs, in addition to adding $2.5 billion of new vehicles for total capital markets transactions of $10 billion over the last 36 months. This leaves us with only one remaining legacy vehicle with $1.2 billion of collateral, which is currently levered at 66%, that we also expect to successfully unwind in the near future. We also closed on a $375 million convertible debt offering in early July, which we used the majority of the proceeds to pay off our September bonds earlier this week.

This was an exceptional trade that allowed us to raise capital with pricing that is 400 basis points inside of straight debt and buy back a significant amount of our stock at 50% of book value. We used $114 million of the proceeds to buy back stock at $5.42, which will be highly accretive to both book value per share and our future earnings per share, as well as to allow us to be more aggressive in resolving our legacy loans quicker and reduce the drag on our earnings. The stock buyback portion of this trade also creates a natural hedge against the $6.10 convert price strike price. In fact, the stock would need to trade above $9.28 a share before we would have to issue more shares that we bought back in the deal, effectively creating convert premium of almost 100% above the current stock price.

Just recently, we created another $185 million of liquidity from additional financing proceeds we're able to generate from one of our bank lines on existing collateral. These are extremely important accomplishments that, again, have enhanced our liquidity position and will allow us to work through our legacy loans very aggressively. We have also implemented several cost-saving strategies given a challenging climate that will have a very meaningful impact on reducing our expense load going forward. The first of which was a reduction of headcount in certain disciplines in order to properly rightsize our staff and payroll to the current environment. This was carried out last month, and we estimate the recurring savings after a one-time severance payment to be approximately $10 million annually or $0.05 a share.

We will also continue to identify additional opportunities to reduce expenses going forward, which includes a big push to fully integrate AI across all aspects of our business, which will drive additional economies of scale through significant operational and process efficiencies. Turning now to our production numbers for the second quarter in our different business lines. In our agency platform, we originated $1.05 billion in volume in addition to $50 million in CMBS brokerage transactions for a total second quarter volume of $1.1 billion. This brings our year-to-date volume to around $1.9 billion, which is up 30% over last year. The elevated rates are certainly affecting our ability to close deals quickly and pushing out the timing somewhat.

We have a growing pipeline of larger deals, which we expect will result in a stronger second half of the year, and hopefully allow us to produce similar volumes as we did in 2025, although the exact time of closing is hard to predict in this elevated rate environment. In our balance sheet lending business, we originated $160 million in volume in the second quarter and just over $550 million for the first half of 2026. This business continues to be incredibly competitive, and as a result, we are being highly selective and are focusing our attention on larger deals with high-quality sponsors. We guided between $1 billion-$1.5 billion of volume for 2026, which was reflective of the current environment.

The bridge lending business is an important part of our overall strategy as it generates strong levered returns on our capital in the short term, while continue to build up a pipeline of future agency deals. With the significant efficiencies we continue to see in the securitization market and with our line lenders, we're able to produce strong returns on our capital despite the competitive landscape. In our single-family rental business, we had a strong second quarter and have seen a real uptick in our pipeline now that the One Big Beautiful Bill Act has been passed with the appropriate carve-outs for the build-to-rent businesses we discussed in the past. We originated $315 million of deals in the second quarter and $215 million in the month of July, for a total volume year to date of $700 million.

Again, we are starting to see a real increase in our forward pipeline, which we expect will result in a very strong second half of the year. This is a great business as it offers us returns on our capital through the construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams. We're also very active in the construction lending business and expect to be able to originate $500 million-$750 million of this product as well. On our last earnings call, we discussed at length the effect the increase in interest rates is having on the timing and resolution of our non-performing and sub-performing loan book.

We believe in the current rate environment, it will take us four to six quarters from now to resolve the vast majority of these assets, which will allow us to significantly reduce the drag on our earnings and build back our run rate of interest income for the future. Unfortunately, rates continue to remain elevated and volatile given the geopolitical landscape, which is certainly making it more challenging to resolve these loans quickly. Having said that, we feel confident that we have ring-fenced the majority of our issues and have a clear path to a resolution on these assets. The rate increases have delayed things a little bit, we are making good progress and again, expect to reduce this loan exposure consistently on a quarter-by-quarter basis.

We ended up in the second quarter with approximately $525 million in delinquencies and around $545 million of REO assets for a total non-performing assets of roughly $1.07 billion, which is up nominally from last quarter's numbers as a result of things being slightly delayed due to elevated rates. We have, however, made strong progress in July, resolving $90 million of these assets this month and have another $105 million scheduled to be resolved next month that we have executed agreements on. This will bring down our non-performing loan book to approximately $875 million, or a 13% reduction from the first quarter.

We also have line of sight on an additional $200 million-$300 million of delinquencies we expect to resolve in the third and fourth quarters, in addition to feeling very confident in our ability to reduce our existing REO book down to approximately $300 million by the end of the year as we have been actively marketing several of these assets for sale. This progress will go a long way towards significantly reducing the drag on earnings and increase our run rate of income for the future. As we discussed in detail on our last few calls, we continue to focus heavily on our legacy portfolio, which is down to $4.7 billion at June 30th from successfully resolving $800 million of these loans in the last quarter.