Executive Summary / Key Takeaways

• Arbor Realty Trust operates a resilient, diversified real estate finance model, uniquely combining a capital-light Agency lending and servicing platform with a Structured balance sheet business, providing countercyclical income streams.
• The company is actively managing through a period of market stress characterized by elevated interest rates and declining commercial real estate values, focusing intensely on resolving non-performing loans and repositioning Real Estate Owned (REO) assets.
• Recent financial performance reflects these headwinds, with decreased net interest income and Agency origination volumes in Q1 2025 compared to the prior year, leading to a revised 2025 earnings outlook of $0.30-$0.35 per share quarterly and a dividend reset to $0.30 per share.
• Strategic initiatives, including creating financing efficiencies (like the new $1.15 billion repurchase facility), ramping up originations in growing segments (SFR, Construction, Bridge), and leveraging workout expertise, are positioning the company for potential earnings and dividend growth in 2026.
• While facing risks from market volatility, credit performance, and ongoing legal matters, Arbor's differentiated business model, deleveraged balance sheet, and experienced management team provide a foundation for navigating the current environment and capitalizing on future opportunities.

A Diversified Foundation in Real Estate Finance

Arbor Realty Trust, Inc. (ABR) stands as a nationwide real estate investment trust and direct lender, strategically positioned across the multifamily, single-family rental (SFR), and broader commercial real estate markets. Founded in 2003 with an initial focus on structured finance, Arbor fundamentally transformed its business in 2016 with the acquisition of Arbor Commercial Mortgage's agency platform. This pivotal move established the capital-light Agency Loan Origination and Servicing Business, complementing the existing Structured Loan Origination and Investment Business. This dual-segment model, with its inherent diversification and countercyclical potential, forms the bedrock of Arbor's strategy.

The Structured Business invests across the capital stack, primarily in bridge loans, but also includes mezzanine debt, preferred equity, real estate joint ventures, and direct property ownership (REO). This segment provides exposure to higher-yielding opportunities but carries greater credit and market risk, particularly in volatile periods. The Agency Business, in contrast, originates, sells, and services multifamily loans through government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, as well as HUD programs. By retaining servicing rights on substantially all these loans, Arbor generates a significant, long-dated, and predictable annuity-like income stream, requiring limited capital deployment. This segment's reliance on agency programs and servicing fees provides a distinct competitive advantage and a stable revenue base, contributing over 45% of the company's net revenues.

In terms of competitive positioning, Arbor operates alongside a range of peers in the real estate finance REIT sector, including larger, more diversified players like Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT), as well as those with more focused strategies like Ladder Capital (LADR) and Annaly Capital Management (NLY). Arbor differentiates itself through its unique Agency platform and substantial servicing portfolio, a feature less prominent among many competitors. This provides a stable, fee-based income stream that can partially offset volatility in balance sheet lending. Arbor has also strategically expanded into niche areas like SFR build-to-rent and construction lending, segments where regional bank retrenchment has created opportunities, allowing Arbor to become a more dominant lender. While larger peers may benefit from greater scale and potentially lower funding costs or broader geographic reach (like STWD), Arbor's specialized expertise in agency execution, asset management, and loan workouts provides a competitive edge in its core multifamily and expanding SFR/Construction markets. The company's historical performance, particularly its ability to maintain and grow its dividend and book value relative to peers who have experienced cuts and erosion, underscores its differentiated model and management's capability in navigating challenging cycles.

Regarding technological differentiation, Arbor invests in technology, particularly within its servicing operations, and sees potential for future technologies like AI to improve processes such as valuation. However, the company does not appear to possess a specific, proprietary core technology that provides a quantifiable moat over competitors in its primary lending or investment activities. The competitive analysis suggests Arbor's R&D investment in servicing technology is minimal compared to some peers and fintechs, potentially leading to slower processing speeds in certain areas. Therefore, while technology supports operations, it does not appear to be a primary, quantifiable competitive advantage or a core differentiator in the same vein as its Agency platform or workout expertise.

Navigating Market Stress and Portfolio Management

The current macroeconomic environment, marked by elevated interest rates, tightening capital markets, and declining commercial real estate values in certain sectors, has presented significant challenges for Arbor and the broader industry. This is reflected in the company's recent financial performance. For the three months ended March 31, 2025, net interest income in the Structured Business decreased by 28.1% compared to the same period in 2024, falling from $95.3 million to $68.5 million. This decline was primarily driven by a lower average balance and yield on core interest-earning assets, impacted by reduced back interest collection on loan modifications and a decrease in SOFR. Interest expense also decreased, but not enough to offset the revenue pressure.

The Agency Business also experienced headwinds, with loan originations falling by 28.2% to $605.9 million in Q1 2025 from $846.3 million in Q1 2024. Loan sales saw a similar decrease of 33.0%. Despite lower volume, the company maintained strong margins, with the sales margin increasing from 1.54% to 1.75% and the MSR rate rising from 1.09% to 1.26%, indicating favorable pricing on the business originated. However, lower origination volume directly impacted income from MSRs and gain on sales. Servicing revenue, while substantial ($25.6 million in Q1 2025), decreased from $31.5 million in the prior year, primarily due to lower earnings on escrow balances as interest rates on cash declined.

This challenging backdrop has led to an increase in loan delinquencies and non-performing loans (NPLs). At March 31, 2025, total delinquencies stood at $654 million, down from $819 million at December 31, 2024, but management anticipates continued new delinquencies if the current rate environment persists. The company is actively addressing this through a multi-pronged approach:

• Loan Modifications: Arbor has undertaken significant loan modification efforts, modifying $4.7 billion of loans over the last two years, including $950 million in Q1 2025. These modifications often require borrowers to inject fresh capital ($130 million in 2024) and may include pay and accrual features. This strategy aims to improve long-term collectability and avoid foreclosure.
• New Sponsorship: A key strategy involves bringing in new, experienced sponsors for underperforming assets, either consensually or through foreclosure. This has been successful on approximately $900 million of loans in the last two years, converting non-performing assets into interest-earning ones with enhanced collateral and management.
• REO Management: When other resolution methods are not feasible, Arbor is taking back properties through foreclosure. REO assets increased significantly in Q1 2025 due to foreclosures on seven multifamily bridge loans totaling $196.7 million (net carrying value). The company expects REO assets to reach $400 million to $500 million on the balance sheet. Managing these assets, which often have low occupancy and NOI, is a "heavy lifting" process estimated to take 12-24 months to reposition, creating a temporary drag on earnings. However, management views this as a significant economic opportunity to improve asset performance and increase future earnings.

Financially, the company's liquidity decreased in Q1 2025, with total cash, cash equivalents, and restricted cash falling to $349.4 million from $660.2 million at year-end 2024, primarily due to net cash used in investing and financing activities.

However, the company maintains access to various funding sources, including credit and repurchase facilities, securitized debt, and capital markets. A significant development in Q1 2025 was the closing of a new $1.15 billion repurchase facility with JPMorgan (JPM), which financed assets from two unwound CLOs. This transaction enhanced leverage, reduced pricing, and generated approximately $80 million of additional liquidity, demonstrating Arbor's ability to access efficient financing even in a challenging market. The company has also significantly deleveraged its balance sheet, reducing its debt-to-equity ratio to 2.8 to 1 from a peak of 4.0 to 1, enhancing financial flexibility.

The company's workout expertise and proactive asset management are critical competitive strengths in this environment, allowing it to navigate distressed situations more effectively than some peers. This is supported by recourse provisions in loan documents and the ability to bring in new capital and management.

Outlook and Investment Implications

Arbor's management has characterized 2025 as a "transitional year," reflecting the ongoing challenges in the market and the intensive work required to resolve portfolio stress. The company's revised earnings outlook for 2025 is set at $0.30 to $0.35 per diluted common share per quarter. This guidance incorporates the expected drag on earnings from increased REO assets and delinquencies, the impact of the higher interest rate environment on Agency originations, and anticipated elevated legal and consulting fees ($0.03-$0.05 per share annually) related to external pressures. In line with this outlook, the Board declared a cash dividend of $0.30 per share for Q1 2025, a reset from the previous level.

Despite the near-term headwinds, the investment thesis for Arbor is grounded in its strategic positioning for future growth and its demonstrated ability to manage through cycles. Management expects resolutions of distressed assets to eventually exceed new delinquencies, converting non-interest-earning assets back into income-producing ones. The repositioning of REO assets, while a temporary drag, is seen as a pathway to substantial future earnings growth as occupancy and NOI improve.

Furthermore, Arbor is actively growing its origination capabilities in key areas. The company is on pace to originate $1.5 billion to $2 billion in Bridge loans in 2025, leveraging opportunities in the current market. The SFR business continues its strong growth trajectory, and the Construction lending business is expected to produce $250 million to $500 million in 2025. These new originations, coupled with efficiencies in financing facilities (like the new repurchase line and expected robust CLO market), are anticipated to drive higher levered returns and contribute significantly to future earnings.

Management believes that as the transitional issues of 2025 are worked through and if market conditions, particularly interest rates, become more favorable, the company will be well-positioned to grow earnings and dividends again in 2026. The Agency pipeline, which saw a significant increase when rates dipped, demonstrates the potential for a rebound in this high-margin business segment.

Key risks to this outlook include the potential for a more prolonged period of elevated interest rates, further declines in commercial real estate values, higher-than-expected new delinquencies, challenges in executing the REO repositioning strategy, and the outcomes of ongoing legal and regulatory matters. The company's reliance on credit and repurchase facilities also exposes it to potential margin calls, although management highlights strong lender relationships and covenant compliance.

Conclusion

Arbor Realty Trust is navigating a complex real estate finance landscape, marked by both significant challenges and strategic opportunities. The company's core strength lies in its diversified business model, combining the stable, capital-light Agency platform with a dynamic Structured business. While the current environment has led to near-term earnings pressure, reflected in the revised 2025 guidance and dividend reset, Arbor is proactively managing its loan portfolio through modifications, new sponsorship, and REO repositioning, leveraging its deep workout expertise. The strategic focus on growing originations in SFR, Construction, and Bridge lending, coupled with efforts to enhance financing efficiencies, positions the company for potential earnings and dividend growth beyond 2025. Investors should weigh the near-term risks associated with portfolio performance and market volatility against the long-term potential offered by Arbor's differentiated platform, strategic initiatives, and management's track record of outperformance through cycles. The successful execution of the REO repositioning plan and the trajectory of interest rates will be critical factors to monitor for the company's path to recovery and future profitability.