Arbor Realty Trust, Inc. 2026 Q3 Earnings Call

Please go ahead, sir. Good morning, everyone, and welcome to the quarter earnings call for Arbor Realty Trust.

This morning, we will discuss the results for the quarter ended September 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'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks to everyone for joining on today's call. On our last earnings call, we discussed at length the effect of the increase in interest rates is having on the timing and resolution of our non-performing and sub-performing loan book. Since that time, we've seen a tremendous increase in interest rates with the 5 and 10-year treasury indexes up another 75-85 basis points and 140-160 basis points in the last 9 months. This is a very material development which has resulted in further reduction in values across the multifamily sector of between 5%-15% and has significantly curtailed transaction volumes from the increased cost of debt and equity.

This will result in a temporary increase in our delinquencies and a slightly longer timeframe to resolving certain legacy assets, as well as an increase in our loan loss reserves due to a change in values. There has also been a significant negative impact on some of our legacy assets from ICE raids in certain areas of the country, including Jacksonville, Orlando, San Antonio, Houston, and Atlanta. These raids have significantly reduced occupancy on some of our assets in these areas, which has contributed to an increase in our delinquencies. This was completely out of our control and not something we could have anticipated. We will continue to evaluate the long-term impact that this may have on our legacy assets and adjust our strategy and reserves accordingly.

As a result, one of our main objectives is to preserve capital, have the appropriate level of liquidity to pay off our upcoming debt maturities, and operate our platform to resolve our legacy issues and preserve our book value. We are currently sitting on approximately $400 million of cash and believe we can organically create another $300 million of liquidity over the next four to five months through loan payoffs, loan sales, REO dispositions, increased efficiencies in our financing facilities and securitization vehicles, and by reducing our dividend. With that in mind, our board has decided to suspend the quarterly common dividend, effective immediately, which will preserve $31 million a quarter or $125 million in annual cash flow.

We anticipate that this will put our cash position at around $700 million by the end of the first quarter, which will allow us to repay the $275 million of unsecured debt that is maturing in March and still maintain $425 million of liquidity to work through this cycle and resolve our legacy loan book. We will also continue to look to other areas to bolster our liquidity position further. As the largest shareholder with the highest inside ownership of any REIT, we are completely aligned with our shareholders and believe this strategy to be the most appropriate at this point in the cycle. Despite this extremely challenging environment, we continue to make progress in resolving our loan book and are working very aggressively to liquidate this collateral as quickly as possible.

As a result of the material change in interest rates, delinquencies have increased and the REO dispositions have slowed, which is pushing out the timing on resolutions another quarter or two. We are still dealing with the same universe of legacy loans that we have ring-fenced and remain confident in our ability to continue to make progress and reduce this exposure significantly over the next four to six quarters. We ended the third quarter with approximately $750 million of delinquencies and around $500 million of REO assets, for total non-performing assets of roughly $1.25 billion, which is up around $200 million from last quarter's numbers as a result of the significant increase in rates, which again, has accelerated delinquencies and delayed the timing of the resolution of certain assets.

As we have discussed in detail on our last few calls, we continue to focus heavily on our legacy portfolio, which is down to $4.5 billion at September 30, from successfully resolving $1.1 billion of these loans in the last three quarters. $1.2 billion of this book continues to perform in accordance with their original terms, and $1.3 billion is either delinquent or an REO that we expect to be able to resolve over the next several quarters. We have $2 billion of this book we have been aggressively working through with the goal of restructuring and resolving approximately $400 million to $500 million of loans a quarter. This will reduce our legacy book, including our delinquent scenario assets, down to around $2.7 billion by year-end and around $1 billion by the end of 2027.

As these legacy assets work through the system, we expect our total delinquencies to stay relatively flat until the remaining legacy book is reduced further, and then we should see a meaningful move down in total delinquencies as we continue on our pace of resolving approximately $400 million to $500 million a quarter. This will go a long way towards significantly reducing the drag on earnings and increasing our run rate of income in the future. We also continue to have tremendous success in capital markets, issuing another CLO in the third quarter with exceptional terms. The new CLO was an $825 million vehicle with pricing of 170 over and 88% leverage with a 2.5-year replenishment period. This has allowed us to continue to drive higher returns on our capital and generate an additional $50 million of liquidity to enhance leverage.

We have now issued over $3 billion in new CLOs, which has reduced the position of our recourse debt outstanding and is driving higher returns on our capital. This success, combined with the unwind of approximately $8 billion of legacy CLOs and $1.3 billion of new unsecured debt issuance, means we have successfully completed in excess of $12 billion of capital markets transactions over the last 36 months. As Paul Elenio will discuss in more detail, we have produced distributable earnings of $0.08 a share in the third quarter. Clearly, our earnings are being greatly affected by the significant recent rise in rates, which has increased our delinquencies, extended out the timing of resolving our non-interest-earning assets, and temporarily affected our agency volumes. We expect this trend to likely continue for a little longer, which could continue to affect our earnings in the short term.

Our goals are always longer term in nature, with our sights set on capital preservation and working through our legacy book as quickly as possible, which will reduce the earnings drag and allow us to start to build back up our run rate of interest income and drive higher earnings in the future. This, again, we estimate will take us four to six quarters from now to accomplish, and we are taking a very methodical approach for resolving these loans each quarter and bringing down the remaining legacy book to a more normalized level relative to our total loan book. Turning now to our production numbers for the third quarter. In our agency business, we originated $900 million in volume, in addition to $75 million in CMBS brokerage transactions for a total third quarter volume of $975 million. This brings our year-to-date volume to around $2.8 billion.

Clearly, the elevated rate environment is greatly affecting our origination executions. We originated $450 million in August and had good momentum with a large pipeline until a significant rate spike, which curtailed originations and pushed out our pipeline. We originated less than $200 million in September and around $300 million in October. As a result, we are targeting between $3.5 billion and $4 billion of total volume this year, which could obviously move up or down depending on rates and timing of closings, which is hard to predict in this environment. In our balance sheet lending business, we originated $600 million of volume through the first nine months of this year. We have been relatively inactive in screening new business given the current landscape, except for very selectively originating deals that fit into our current securitization vehicles to replenish runoff and reduce any inefficiencies.