Arbor Realty Trust, Inc. (ABR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2026 Arbor Realty Trust Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to now turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Stephanie. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 30, 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 risks and uncertainties and 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 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 allowed us that have allowed us to increase our liquidity and 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're 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 increased returns on our capital. We believe it's very important to point out that we had 7 legacy CLOs with $9 billion of collateral in the height of the market, and through effective balance sheet management, we've delevered $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 spray debt and buy back a significant amount of our stock at 50% of book value. We used $114 million of 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 through 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 a convert premium of almost 100% above the current stock price. And we just -- and 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 the 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 and certain disciplines in order to property rightsize our staff and payroll to the current environment. This was carried out last month, and we estimate the reoccurring savings after onetime severance payments 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 $1.5 billion in volume, $1.5 billion in volume, in addition to $50 million 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% year -- over last year. The elevated rates are certainly affecting our ability to close deals quickly and pushing out the timing somewhat. However, we have a growing pipeline of larger deals, which we expect will result in 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 how 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 large deals with high-quality sponsors. We guided to between $1 billion to $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 level returns on our capital in the short term while continue to build up a pipeline of future agency deals. And with the significant efficiencies we continue to see in the securitization market with our -- and with our line lenders, we were 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 housing bill 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. And 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 generate strong level of 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 to $750 million of this product as well. On our last earnings call, we discussed the lengthy effect of the increase in interest rates is having on the timing and resolution of our nonperforming and sub-performing loan book. We believe in the current rate environment, it will take us 4 to 6 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 laid things a little bit but 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 total nonperforming 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 months that we have executed agreements on. This will bring down nonperforming loan book to approximately $875 million or a 13% reduction in the first quarter. We also have line of sight on an additional $200 million to $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 30 from successfully resolving $800 million of these loans in the last quarter. $1.3 billion of the book continues to perform in accordance with their original terms and $1.1 billion are either delinquent or REO, and that we have a clear line of sight to resolving over the next several quarters. The other $2.3 billion of this book, we have been aggressively working through with the goal of restructuring and resolving $500 million of loans a quarter, which we are on pace to accomplish. This will reduce our legacy book, including our delinquencies and REO assets down to around $2.4 billion by year-end and well below $1 billion by the end of 2027. We also continue to make progress in reducing the amount of accrued interest outstanding on certain loans in this subset by resetting the rates in today's market spreads and requiring that the borrower paid down a large portion of the outstanding accrued interest as part of the modified terms. In fact, of the roughly $600 million of legacy loans will result in Q2, on $500 million of these loans, we received approximately $15 million of back accrued interest in the second quarter, and we'll receive another $10 million in accrued interest by the end of the third quarter. This will reduce our total accrued interest by approximately $25 million and the total loans outstanding with accrued interest down to only $1.1 billion. As Paul will discuss in more detail, we produced distributable earnings of $0.15 a share in the second quarter which was in line with our expectations and included $0.02 of onetime drag from some inefficiencies in our financing for facilities. Clearly, our earnings are being greatly affected by the significant drag from our noninterest-earning assets as well as from resetting legacy loans to today's market rates. We are taking a very aggressive stance with our borrowers and resolving our nonperforming loan book. This would continue to affect our core earnings in the short term, which is not something we are focused on. Our goals are always longer term in nature with our sight set on working through the loan book as quickly as possible, which will reduce the earnings drag from these assets and allow us to [indiscernible] build back our run rate of interest income and drive higher returns in the future. This, again, we estimate to take us 4 to 6 quarters to accomplish, and we are taking a very methodical approach through resolving $500 million of these loans a quarter and bring down the remaining legacy book to a very nominal number relative to our total loan book. In summary, we have made tremendous progress in the capital markets with $12 billion of transactions between the unwind of our legacy CLO vehicles, the issuance of new CLOs, the unsecured and convertible debt markets we have accessed and the efficiency we have been able to generate on our warehouse lines. This has allowed us to increase our liquidity and drive higher returns on our capital. At our agency business and our diversified origination platforms are all performing well despite elevated levels. With respect to our legacy book, we have made significant progress, and we have a clear path to reducing this loan book on a quarter-by-quarter basis which will put us in a position by the end of 2027 for this to represent a very nominal portion of our total loan book and allow us to grow our earnings run rate for the future. I will now turn the call over to Paul to take you through the financial results.

Okay. Thank you, Ivan. In the second quarter, we produced distributable earnings of $31 million or $0.15 per share, excluding realized losses of $10 million from the resolution of certain delinquent and REO assets that we had previously reserved for. On last quarter's earnings call, we guided to around $15 million to $25 million in realized losses a quarter as we look to accelerate the resolution of our nonperforming loan book. As Ivan mentioned, the elevated rate environment has pushed things out a bit, and we have seen a little longer time line to resolving certain assets, which resulted in slightly less realized losses for the second quarter than we anticipated. We are making good progress in the third quarter on resolutions. And as a result, we expect realized losses to increase and be in the range of $20 million to $30 million for the next few quarters, although the exact timing on dispositions is tough to predict and could result in fluctuations in these numbers each quarter. Our second quarter numbers were in line with our guidance and expectations of $0.15 a share, which was reflective of roughly $0.02 a share of unusual drag from some inefficiencies related to our financing cost from a temporary overlap of interest for part of the quarter. As Ivan mentioned earlier, our aggressive approach to asset resolution is impacting our earnings in the short term, with long-term accretion expected as we continue to make more progress in this area. We have made good progress in the third quarter so far, which combined with the cost-cutting measures we have implemented and the positive effect of large buyback from our convertible debt offering will have on our distributable earnings per share makes us optimistic that we'll be able to start to experience some growth in our run rate of income in 2027 as we realize the full benefit of converting our delinquent assets into performing loans. In the second quarter, we recorded an additional $14 million of impairment on our REO book to properly mark these assets to where we think we can effectuate a sale. We've engaged brokers to sell the bulk of these REO assets quickly and create interest-earning loans for the future. And while we expect a few additional delinquencies in REO assets as we work through the bottom of the cycle, we believe we'll be able to resolve more nonperforming loans than new ones and continue to reduce the drag on our earnings. We also booked another $22 million of specific reserves on our balance sheet loan book for total REO impairment and specific reserves of $36 million in the second quarter, which is up from a total of approximately $21 million in the first quarter. General CECL was also elevated this quarter from a change in the outlook for real estate values, resulting in an additional $16 million in reserves in our balance sheet loan book, which is an increase of $20 million from the first quarter. And given the current environment, we expect that we could experience similar levels of specific reserves and impairments over the next few quarters as we are being extremely aggressive in accelerating the resolution of our problem loans, which will allow us to reduce the drag on our earnings and grow our run rate of income for the future. Our book value per share came in at $10.95 at June 30 as a result of the increased reserves and impairments we booked in the second quarter as we are taking a very aggressive approach to resolving our legacy book. As Ivan noted earlier, the convertible debt offering we closed on July 6 contained a very unique buyback feature that's resulting in us using $114 million of proceeds from the offering to buy back stock and retire 21 million shares at less than 50% of book value. This is highly accretive to our book value per share, which on a pro forma basis, increases our book value per share to $11.59 from $10.95 at June 30 or a 6% increase. In our GSE agency business, we originated $1.1 billion of volume and had $1.1 billion in loan sales in the second quarter. The margin on these loans came in at 1.33% this quarter compared to 1.86% last quarter mainly due to some larger transactions we closed in the second quarter that contained lower margins. We also recorded $12 million of mortgage servicing rights income related to $1.2 billion of committed loans in the second quarter, representing an average MSR rate of around 1.1% compared to 1.32% last quarter, again due to an increase in the average loan size and a shift in product mix in the quarter. Our fee-based servicing portfolio grew to $36.7 billion at June 30, with a weighted average servicing fee of 35 basis points and an estimated remaining life of 6 years, and will continue to generate a predictable annuity of income going forward of around $128 million gross annually. In our balance sheet lending operation, our investment portfolio was $12.1 billion at June 30 with an all-in yield in this portfolio of 6.95% compared to 7.03% at March 31. This was mainly due to resetting rates on certain legacy loans and from the new delinquencies during the second quarter. The average balance in our core investments was $12.08 billion this quarter compared to $12.04 billion last quarter from our second quarter growth. The average yield on these assets decreased to 7.21% from 7.50% last quarter, mainly due to significantly more back interest and default tranches collected in Q1 on loan resolutions in addition to the effect of our second quarter delinquencies. Total debt on our core assets was approximately $10.5 billion at June 30 compared to $10.7 billion at March 31. This reduction was mainly due to the repayment of our $175 million senior notes in April. The all-in cost of debt was approximately 6.38% at 6/30 versus 6.40% at 3/31, mainly due to the unwind of CLS 17 with our bank lines in the second quarter at a reduced rate. The average balance in our debt facilities was approximately $10.5 billion for the second quarter compared to $10.4 billion in the first quarter mainly due to the enhanced leverage received on the unwind of CLO 17 with our bank lines and the full effect of CLO 21, which was issued late in March. The average cost of funds in our debt facilities was 6.40% in the second quarter compared to 6.52% for the first quarter, excluding interest expense from levering our REO assets, the debt balance of which is separately stated on our balance sheet and therefore, not included in our total debt on core assets. This decrease is mostly due to the reduced pricing we received from the unwind of our legacy CLO vehicle and the full effect of CLO 21 issued late in the first quarter. And our overall spot net interest spreads were approximately 0.57% and 0.63% at June 30 and March 31, respectively. That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you may have at this time. Stephanie?

[Operator Instructions] We'll take our first question from Chris Muller with Citizens Capital Markets.

So I know you may not be able to answer this one, but I'm going to try anyway. So you guys have been buying back a lot of stock discount to book value has persisted at pretty extreme level. So there's clearly a disconnect where you guys perceive the value in the market's perception. You guys have operated as a private company for a long time before your IPO in early 2000. So I guess the question is, if this discount remains or gets worse, is there a point where you guys would explore some strategic alternatives as several of the other mortgage REITs are doing?

Listen, our job is always to maximize shareholder value. There's a lot of paths to be able to do that. And clearly, that is more to do alternatives we consider in terms of maximizing shareholder value.

Got it. And then I guess maybe changing gears to REO a little bit. You guys talked about on the last call getting that balance down to $250 million to $300 million by year-end, including adding another $100 million or so through that period. But foreclosures in the second quarter were $121 million, and Ivan, I heard you mention $300 million by year-end now. So I guess the question is, are you guys expecting foreclosures to slow down dramatically in the back half of the year? Or are you expecting that you'll be able to sell down REO faster than you initially expected last quarter?

I think we're working on all cylinders. We are definitely looking to accelerate our sale of REO assets. And that does get impacted as is volatility with interest rates. As rates move down, there's more liquidity as rates move up, there's a little more uncertainty. So that can be bumped around a little bit. We are much more aggressive with our borrowers in terms of moving forward with them. And converting some of those loans from nonperforming into REO, and that might bump up and be a little volatile as well. And a lot of this is interest rate-driven. So we don't have control of all those variables, but our goal is to try and dispose REOs as quickly as possible. We're marking them as close to where we feel the markets and brokers are. With respect to our borrowers, if they can't come up with additional liquidity and repositioning loans, we're going to move very aggressively and move that along. And as you know, certain jurisdictions are create different problems. If you have assets in Texas or Atlanta or in areas like Phoenix, you can get a hold of those assets much more quickly. If you have assets in areas like New York or Florida, it takes a lot longer. So it all depends on all those factors. But our goals are still the same.

Yes. And Chris, it's Paul. I think I've hit on all the points that driving. It's hard to predict where this goes. Things are a little bit more delayed with higher interest rates. But just to put some finer points on the numbers, you mentioned the $120 million of new REO for the quarter. Really, that number was $80 million, which was right in the range of the [ $50 million ] to $100 million that I guided to last quarter. The other $40 million were delinquent loans that we took back strategically as REO and on the same day, flip them simultaneously. So they're not really, in our minds, true REO assets that you're holding and marketing for sale over a long period of time or putting capital into rehab. Those were just strategic opportunities that we purposely foreclosed on and immediately had to take out. So really the number was $80 million. Having said that, what we've guided to is this $545 million on our books, getting down to $300 million. And yes, we'll probably add a few here or there and sell you other ones, but the timing is just hard to predict where rates are.

Got it. And I guess, how quickly does that REO sales market react rates? Like if we get some relief on rates in the back half of the year, could we see REO sales accelerate in the back half of the year, or would that slip into '27?

I mean liquidity returns very, very quickly and the sentiment changes when rates go up, you get a negative sentiment and it gets hard to move them when rates come down, it becomes very positive, and it's very dramatic. So if we return to where rates were before the Iran issue, you've seen an enormous acceleration of the dispositions of the delinquencies in the REO in a very real manner.

We'll take our next question from Rick Shane with JPMorgan.

Look, I'd like to talk about the REO sales and a couple of things here. One, can you talk a little bit about the types of buyers that are out there. And second, can you give us a sense of what percentage of seller financing you are providing on those REO sales? Are you not providing financing? Or are you generally providing financing, or help us understand that a little bit better, please.

Yes. Let me speak about the type of buyers are acquiring these assets. Generally, what we like to do is to go to our existing borrower base who have knowledge and expertise in these markets that we have experience with. That's usually our first look. And those usually done on a consensual basis where we take an asset that's showing trouble, and we know we're going to foreclose on. We bring them in a long process. So when it gets to the actual foreclosure, we can do a simultaneous transaction and avoid a lot of friction costs. I say there is a lot of friction costs. If you have to foreclose on an asset, finance it step award into our management. That's the optimum situation and usually done with people who we have great relationships and in fact have done many transactions. We've had a lot of success. But that's the preferred profile when we have existing REO assets that we've already taken back and I guess that has to do with prior strategy of trying to take the asset improvement moving along, then we'll generally [Audio gap] go to more on those the right level. But that general strategy as of now is when we have a delinquency when we have a potential REO, we premarket that asset to people we've done. That's just we try and create a simultaneous transaction. I'll let Paul go through the numbers.

Yes. So a couple [Audio gap] When we look at these REO assets, as Ivan just laid out the preferred buyer of those assets. We are generally producing some self-financing. There are occasions, where we're just taking a cash offer. We had 1 or 2 this quarter when we took a cash offer and just walked away. But we are generally providing seller financing. And one of the reasons we're doing that is; one, we'd like to obviously put our money into a good loan if it's been recapped, and they're putting in the right amount of new equity. But two, it's a certainty of execution. This is something Ivan and I talk about all the time. sometimes in certain markets, time is not your friend on certain assets that as time marches on, things could deteriorate even further. So when you have someone coming in and making a bid, if you're providing the financing, you have certainty that, that deal is going to get done in a short period of time. If you don't provide the financing, and they have financing they're bringing to the table, we've seen sometimes with that financing walks, now it's 30 to 60 days later. Things are marching on, things are getting worse and then you to the market. So the certainty of execution is something we let a lot. As far as how we're lending, I know it looks like when you look at the disclosures that the sale prices are pretty much on top of the loans. But you've got to look at it a little differently, and we've beefed up our disclosure this quarter to help people with this analysis. When someone is buying an asset, they're buying it for the purchase price, they're paying closing costs, they're bringing in CapEx, they're bringing in reserves. So the total capitalization is much higher than the purchase price in a loan and carry. So when we look at it, we're probably lending on average anywhere from 75% to 85% loan to capitalization. That's the loan to value. We're looking at some as high as 88%, some as low as 70%. But in general, we're targeting 75% to 85% of the total capitalization of that deal to be our loan.

Got it. Okay. And look, we're a month into the third quarter. Gain on sale margins have fluctuated a great deal between first and second quarter. Can you talk about that dynamic? And can you help us think about what -- where we stand quarter-to-date so that we can all refine our models around that assumption as well.

Sure. It has a lot to do with the change in profile of our business line and a lot of it's been directed by the agencies. I think if you go back to the prior administrations. There was a real push towards small balance loans, towards B&C properties, towards affordability. And we did a lot of small balance loans, and that was what was encouraged by the agencies. In the current administration, that is not the case. So we've shifted our business dramatically, and our average loan size is probably going to be more than double what it was last year, and we're doing a lot of large transactions. In the larger transactions, the fees are less and the margins are less, but also note that the labor is less and the commissions are less as well. So we are working on a significant number of larger transactions. The gain on sales will be smaller, but the expenses affiliated with those will also be significantly reduced. But that's definitely the shift in our business line.

Yes. And I would say just to guide you, guys, Rick, is that I would say the margins are probably in the range that you saw this quarter going forward, maybe a tad lower in some quarters, maybe a tad higher. But I would say the 186 margins are not here for the next few quarters as when I look at our forward pipeline, we have -- as Ivan said, we have a lot of larger deals. We're upscaling to a better borrower, a better asset class. And we think even though the margins are in and the servicing fee is in as a result, from a risk-adjusted return perspective, it's a better deal.