Arbor Realty Trust, Inc. (ABR) Earnings

Management highlights

### Capital Markets & Liquidity Improvements - Successfully unwound another legacy CLO, refinancing the underlying loans on bank lines with 40 basis points lower pricing and 10 percentage points higher leverage, generating $135 million in additional liquidity and higher returns on capital. - Over the past 36 months, the firm completed $10 billion in total capital markets transactions, deleveraging $7.8 billion of the original $9 billion in legacy CLO collateral, leaving only one remaining legacy CLO with $1.2 billion in collateral (66% levered) targeted for near-term unwind. - Closed a $375 million convertible debt offering in early July 2026, using most proceeds to retire upcoming September 2026 bonds early. The deal includes a structure that avoids new share issuance unless the stock trades above $9.28 per share (a ~100% premium to the current price), and the firm used $114 million of offering proceeds to repurchase 21 million shares at less than 50% of book value, which is 6% accretive to pro forma book value per share, increasing it from $10.95 to $11.59. - Generated an additional $185 million in liquidity from new financing on existing collateral via a bank line. ### Cost Reduction & Operational Efficiency - Implemented headcount reduction to right-size staff for the current market environment, completed in June 2026, with expected annual recurring pre-tax savings of $10 million ($0.05 per share) after one-time severance costs. - Actively rolling out full AI integration across all business functions to drive additional operational efficiency and economies of scale. ### Business Model Shift - Shifted origination strategy from small-balance loans to larger transactions for both agency and balance sheet lending, aligning with current GSE priorities. New normal minimum bridge loan size is $25 million, with an expected average loan size of over $50 million. - For non-performing assets, management prioritizes pre-marketing delinquent assets to existing experienced borrowers to complete simultaneous foreclosure/sale transactions, reducing friction costs and avoiding long-term REO holding and heavy CapEx requirements.

Guidance

- Full-year 2026 balance sheet lending origination guidance is maintained at $1 billion to $1.5 billion, consistent with prior guidance, reflecting the highly competitive market environment. - Full-year 2026 agency origination volume is expected to be roughly similar to 2025 full-year volume, within 10% of the 2025 level, though closing timing remains uncertain due to elevated and volatile interest rates. - Single-family rental construction lending full-year 2026 origination is guided to $500 million to $750 million. - Realized losses from non-performing asset resolution are expected to increase to $20 million to $30 million per quarter over the next few quarters, up from $10 million in realized losses in Q2 2026, as the firm accelerates asset resolution. - Similar levels of specific loan reserves and REO impairments to Q2 2026's $36 million total are expected over the next few quarters, as management pursues an aggressive resolution strategy. - Management expects to resolve the vast majority of non-performing and sub-performing assets within 4 to 6 quarters from Q2 2026, reduce the total legacy portfolio to ~$2.4 billion by the end of 2026, and below $1 billion by the end of 2027. REO holdings are targeted to fall to ~$300 million by the end of 2026. - $200 million to $300 million in additional delinquent assets are expected to be resolved in Q3 and Q4 2026. - Distribution earnings per share growth is expected to begin in 2027 as non-performing asset resolution removes drag on core earnings and cost cuts and share buybacks accretion take full effect.

Segment performance

1. **Agency Platform**: Originated $1.05 billion in origination volume plus $50 million in CMBS brokerage transactions for a total Q2 2026 volume of $1.1 billion. Year-to-date volume reached ~$1.9 billion, up 30% year-over-year. The fee-based servicing portfolio grew to $36.7 billion at June 30, 2026, with a weighted average servicing fee of 35 basis points and an estimated remaining life of 6 years, generating an expected annual gross income of ~$128 million. Quarter-over-quarter, origination margins fell to 1.33% from 1.86%, and average MSR income fell to 1.1% from 1.32%, driven by a shift to larger, lower-margin transactions. 2. **Balance Sheet Lending**: The total investment portfolio reached $12.1 billion at June 30, 2026, with an all-in portfolio yield of 6.95% (down from 7.03% at March 31, 2026) and an average asset yield of 7.21% (down from 7.50% in Q1 2026). Total debt on core assets was ~$10.5 billion, with an all-in cost of debt of 6.38% (down from 6.40% in Q1 2026). Average cost of funds for debt facilities was 6.40% (down from 6.52% in Q1 2026). Quarter-end spot net interest spread was 0.57% (down from 0.63% at quarter-end March 2026). Q2 2026 origination volume was $160 million, bringing year-to-date volume to just over $550 million. 3. **Single-Family Rental (Built-to-Rent)**: Q2 2026 origination volume was $315 million, with an additional $215 million originated in July 2026, bringing year-to-date total volume to $700 million. Management expects strong volume growth in the second half of 2026 following passage of housing legislation with carve-outs for the built-to-rent sector. Full-year 2026 construction lending volume for this segment is expected to reach $500 million to $750 million. 4. **Legacy Non-Performing Portfolio**: Total non-performing assets at June 30, 2026 were ~$1.07 billion, consisting of ~$525 million in delinquent loans and ~$545 million in REO assets. The total legacy portfolio stood at $4.7 billion at quarter-end, down $800 million from Q1 2026. Q2 2026 recorded $14 million in additional REO impairment, $22 million in specific reserves for the balance sheet loan book, and $16 million in additional general reserves for the loan portfolio, for total reserves and impairments of $36 million in the quarter.

Risks & headwinds

- Elevated and volatile interest rates, driven in part by geopolitical uncertainty, have delayed the resolution of non-performing and REO assets, slowing the reduction of earnings drag from this portfolio. - Bridge/balance sheet lending is the most competitive market management has ever observed, with competition on spread, proceeds, and structure, requiring increased selectivity and focus on only large loans with high-quality sponsors. - Foreclosure timelines vary significantly by jurisdiction, with assets in New York and Florida taking much longer to foreclose than assets in Texas, Atlanta or Phoenix, creating uncertainty around REO disposition speed. - There is continued downward pressure on real estate values, requiring ongoing incremental reserve builds for the loan portfolio. - GSE agency delinquencies have increased to 3.3% of the agency book, requiring increased loss reserves, as expected at the bottom of the real estate cycle. - Third-party buyer financing for REO assets frequently falls through, delaying transactions and extending holding periods.

Analyst Q&A

• Q: With Arbor's stock trading at a persistent extreme discount to book value, would management explore strategic alternatives like going private if the discount persists, as other mortgage REITs have done? /

  A: Management stated their core mandate is to maximize shareholder value, and that exploring strategic alternatives is one of the options the firm considers to achieve this goal. No definitive plans were announced.

• Q: What types of buyers does Arbor target for REO sales, and what level of seller financing does it typically provide on these sales? /

  A: Arbor prefers to sell to existing, experienced borrowers it already has relationships with, often pre-marketing delinquent assets to complete simultaneous foreclosure and sale transactions that avoid friction costs. It generally provides seller financing for 75% to 85% of the deal's total capitalization (ranging from 70% to 88% for individual deals) to guarantee transaction execution and avoid delays from third-party financing falling through. Cash sales are rare but do occasionally occur.

• Q: Why have gain-on-sale margins declined, and what is the expected trajectory for margins going forward? /

  A: Margins have fallen because Arbor shifted its agency business model away from small-balance loans encouraged by the prior administration to much larger loans under the current GSE policy regime. Larger loans have lower per-dollar margins but also lower associated labor and commission costs, and offer better risk-adjusted returns. Management expects margins to remain near Q2 2026 levels going forward, with small quarterly fluctuations, as the forward pipeline is dominated by large transactions.

• Q: Is the shift to larger loan sizes also happening for balance sheet bridge lending, and what is the new normal average loan size? /

  A: Yes, the balance sheet lending business has shifted to larger loan sizes to match agency execution requirements, as the small-balance loan thesis was not successful and GSEs no longer encourage that segment. The new minimum loan size is $25 million, with an expected average loan size of over $50 million, consistent with recent originations (Q2 2026 saw three loans totaling $160 million for an average above $50 million).