Arbor Realty Trust's Q3 2025: Contradictions Emerge in Performing Loans, Interest Income, Occupancy Recovery, and Capital Expenditure

Date of Call: October 31, 2025

Financials Results

• EPS: $0.35 per share (distributable earnings of $73 million)

Guidance:

• Originate between $8.5 billion and $9.0 billion in total volume for 2025 across Agency, bridge, SFR, construction, mezz/PE.
• Agency originations on pace to exceed prior guidance ($3.5B-$4.0B); 10-month agency volume at $4.2B.
• Construction guidance raised to $750M-$1.0B for 2025 (from $250M-$500M).
• SFR expected $1.5B-$2.0B for 2025.
• Accelerate resolution of legacy troubled assets (target largely resolved by Q2 2026); aim to resume dividend growth in 2026.

Business Commentary:

• Legacy Asset Resolution and Income Gains:
• Arbor Realty Trust reported a $48 million gain from the sale of a portion of the Lexford portfolio, with the investment generating over $100 million in income over its lifespan.

• The resolution of legacy assets is aimed at improving earnings and without significantly impacting book value.

• Interest Income and Run Rate Fluctuation:

• Interest income reduced by $34 million in Q3 due to reversals of accrued interest and modifications, resulting in a $16 million reduction in run rate going forward.

• The company is taking aggressive steps to resolve troubled loans and stabilize its earnings.

• Borrower defaults and Delinquencies:

• Arbor's defaulted loans increased to $750 million at September 30 from $529 million at June 30.

• This reflects the current stage of the cycle and the need for quick resolution to manage these delinquencies.

• ** Origination Performance and Strategic Growth:**

• The Agency business originated $2 billion in loans in Q3, surpassing the previous quarter's record, and achieved $2 billion in loan sales.
• This strong performance is attributed to the value of Arbor's franchise and loyal borrower base, despite a challenging rate environment.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted a $48M gain on Lexford, $73M distributable earnings ($0.35/share), issuance of a $1B CLO and added liquidity, origination guidance beat (10-month agency $4.2B), and repeated optimism about rate relief and resolving legacy assets to improve run-rate and enable dividend growth in 2026.

Q&A:

• Question from Steven Delaney (Citizens JMP Securities, LLC): Can you estimate what 'inning' you're in for remaining loans (how stable performing loans are, how many mods may be needed over next 6–12 months)?
  Response: We're at peak stress but acting aggressively — of ~$750M delinquencies we expect ~ $500M to be resolved within ~45 days; one more wave into Q4, and the majority of legacy issues should be cleaned up by Q1–Q2 2026.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): Does the $18M accrued interest reversal mean Q3 interest income ($208M) is a reasonable baseline and what is the run-rate of interest income going forward?
  Response: The $18M reversal is largely a one-time adjustment; run-rate impact is roughly a $16M reduction (≈ $4M stop PIK + $4M mods + $8M delinquencies) partially offset by remediation actions already adding ~$3M, leaving a net ~$11–13M headwind (≈ $0.05–$0.06/share) that should improve as resolutions close.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): Any one-time items in Q3 interest expense driving it higher (structured business at $176.2M)?
  Response: Yes — higher interest expense reflects issuance of $500M senior notes (full quarter effect) and a one-month double interest from convertible payoffs timing; the double-interest is nonrecurring.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): What drove the increase in GAC/risk-sharing provisions to $8M — loan putbacks, fraud, or broader credit deterioration?
  Response: Increase reflects modest uptick in agency delinquencies (e.g., NYC rent-control/ stabilization impacts) and peak stress timing; expect similar reserves in Q4 with potential moderation in Q1 as peak stress subsides.

• Question from Richard Shane (JPMorgan Chase & Co): For Homewood, given UPB and reserves, will there be a realized loss in the quarter affecting distributable income?
  Response: Sale at $59M vs net carry $50M yields a $9M reserve reversal but roughly a $1M distributable-earnings hit; additionally a $20M TRS tax deduction yields about $7.5M tax benefit and converts/creates a performing ~ $53M loan at ~10%.

• Question from Richard Shane (JPMorgan Chase & Co): That Homewood loan previously had a 10% coupon but no accrual — any accrual reversals or nuances?
  Response: No accrual reversal — interest had not been accruing; sale provides cash, tax benefit, and converts to a performing loan earning ~10%, improving future cash flow.

• Question from Richard Shane (JPMorgan Chase & Co): REO property income fell sequentially despite more REO — why and implications for recovery values?
  Response: Newly repossessed REOs often have very low occupancy (some ~40% or lower) causing negative NOI; strategy is to empty, renovate (capitalized), lease up, then sell — NOI will be lumpy near term but should improve as occupancy and exits progress.

• Question from Crispin Love (Piper Sandler & Co.): Is Q3 the trough in net interest income given the one-time hits versus go-forward impact?
  Response: Yes — management views Q3 as likely the trough; expect Q4 to be less impacted and meaningful run-rate improvement in Q1–Q2 2026 as delinquencies are resolved and modifications/recapitalizations take effect.

• Question from Crispin Love (Piper Sandler & Co.): Details on the $48M Lexford gain — transaction timeline and buyer?
  Response: Lexford was a long-managed restructuring taken to realization now to demonstrate value; the sale was competitive with multiple bidders and the buyer is undisclosed.

• Question from Crispin Love (Piper Sandler & Co.): The additional ~$7M you expect — will that be recorded as income from equity affiliates?
  Response: No — the ~$6.5–7M refers to GAAP and distributable income from the Homewood sale expected in Q4, not equity-affiliate income.

• Question from Leon Cooperman (Omega Advisors, Inc.): With stock below book and optimism for H2 next year, will you buy back shares or deploy capital elsewhere?
  Response: There is an existing share buyback program and insiders continue to purchase shares; capital allocation will be evaluated opportunistically and buybacks are considered when appropriate.

Contradiction Point 1

Stability of Performing Loans and Loan Modifications

It involves differing statements about the stability of performing loans and the approach to loan modifications, which impacts the company's financial outlook and operational strategies.

What is the estimated stability of performing loans, and how many additional loan mods are projected for the next few quarters? - Steven Delaney (Citizens JMP Securities, LLC, Research Division)

2025Q3: Loans performing are generally stable. - Ivan Kaufman(CEO)

Could you comment on credit trends in the GSE portfolio? - Richard Shane (JPMorgan Chase & Co, Research Division)

2025Q2: We are at the peak of delinquency, but we think we are at the bottom of the cycle. - Ivan Kaufman(CEO)

Contradiction Point 2

Interest Income and Expense

It involves differing statements about the impact of interest income and expense on the company's financial performance, which is crucial for investor expectations.

How should we view the $18 million accrued interest reversal and the interest income run rate? Were there any one-time items in Q3 interest expense? - Jade Rahmani (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: The $18 million reversal is a one-time adjustment. The ongoing impact will be a $4 million reduction due to lowered interest on modified loans. - Paul Elenio(CFO)

Why did net interest income decrease from $75 million in Q1 to $69 million in Q2? - Steven Cole Delaney (Citizens JMP)

2025Q2: We accrued net new paying accruals of about $10 million, but we reversed $5 million related to loans that were foreclosed on. - Paul Elenio(CFO)

Contradiction Point 3

Occupancy Recovery and Market Conditions

It involves differing statements about the company's outlook on occupancy recovery and market conditions, which are key factors in understanding the company's operational performance and growth potential.

Are you confident Q3 was the trough for NII, considering one-time charges? - Crispin Love(Piper Sandler)

2025Q3: We're seeing occupancy firm up, and economic challenges have been addressed. Many markets have bottomed out due to COVID-related issues. With better management and repositioning, we expect continued recovery. - Ivan Kaufman(CEO)

What were the key issues with the 2022-2023 vintage bridge loans, and how are you addressing them in 2025? - Steve Delaney(Citizens JMP Securities)

2025Q1: We're experiencing occupancy recovery, which is natural, and we're getting our arms around this. Occupancy is continuing to recover, and we're aggressively managing this. - Ivan Kaufman(CEO)

Contradiction Point 4

Capital Expenditure

It involves differing statements about the expected capital expenditure for the company's portfolio, which impacts its operational costs and financial planning.

What caused the decrease in REO property income and expenses? - Richard Shane (JPMorgan Chase & Co, Research Division)

2025Q3: When we take back REOs, we're improving them to increase occupancy. This process initially causes a decline in NOI. - Ivan Kaufman(CEO)

What capital expenditures are expected for the portfolio over the next 6–12 months? - Richard Barry Shane (JPMorgan)

2025Q2: We have budgeted for $25 million to $50 million in total over time, with most recent assets requiring minimal capital. - Ivan Kaufman(CEO)