Arbor Realty Trust Inc (ABR) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Arbor Realty Trust First Quarter Earnings Conference Call.

My name is Liz, and I will be your coordinator for today. At this time, all participants are in a listen-only mode.

We will, however, be facilitating a question-and-answer session towards the end of the conference. If at any time, during the call, you'll require assistance, simply key star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would, now, like to turn the presentation over to your host for today's call, Mr. Rick Herbst, Chief Financial Officer.

Please go ahead, sir.

Thank you very much. And good morning, everyone, and welcome to the first-quarter earnings call for Arbor Realty Trust. As you know, this is our first earnings call, since we completed our initial public offering one month ago. Joining me on the call, today, are: Ivan Kaufman, our President and Chief Executive Officer; and Dan Palmier, our Executive Vice President and Director of Asset Management.

Before we begin, I need to inform you that statements in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible over certain future results of our business and our 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 and 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; and we undertake no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events.

With that, I will turn the call over to Arbor's Chairman and CEO, Ivan Kaufman.

Thank you, Rick, and thank you all for joining us today. As you saw in our press release, this morning, our results for the first quarter demonstrated our significant success in deploying the capital we raised last July in high-quality, high-yielding assets. We achieved significantly increased earnings and new loan volumes, and we believe that we've demonstrated our ability to effectively manage our portfolio.

Before I ask Rick to take you through the numbers, I'd like to provide a quick overview of the company and then share a few thoughts on the market and in general and how we believe our business is currently positioned within the market. Consistent with our first call as a public company, I'd like to take this opportunity to provide you with a brief overview of our business model.

Arbor Realty Trust is a real estate investment trust focused on the business of investing in real estate related bridge and mezzanine loans, preferred equity investments, mortgage related securities, and other real estate related assets.

We actively pursue lending and investment opportunities with property owners and developers, who need internal financing until permanent financing can be offered. Our structure finance investments generally have maturities of three to five years, depending on type, and a typical ranging size from $1 million to $30 million.

We are externally managed and advised by Arbor Commercial Mortgage, a national commercial real estate finance company operating through 15 offices in the US that specializes in debt and equity financing for multi-family and commercial real estate assets.

Our management agreement with Arbor Commercial Mortgage was developed to capitalize on synergies with the origination, infrastructure, existing business relationships, and management expertise. Arbor Commercial Mortgage has granted us to write a first refusal to pursue all structured finance investment opportunities that they identify.

Our loan volumes continued to increase. In the first quarter, we funded approximately $193 million of new loans with an average loan size of over $21 million. These numbers demonstrate our continued success towards achieving our goals of increasing the average loan size in the portfolio.

As of March 31st, the average size of the loans in our portfolio was $11.6 million. We continue to successfully compete for loans greater than $20 million. About two-thirds of the loans we've originated, since our formation in last July, have been with repeat borrowers. We believe that this is reflective of our ability to underwrite and close loans in a timely and efficient manner.

As a result, we have access to quality transactions on a priority basis. These transactions are often complex, and our borrowers require timely execution and performance. We believe our ability to structure and close these transactions will benefit our borrowers, our portfolio, and our shareholders. I'm pleased to report that, in April, we funded $60.5 million in new loans and investments.

Despite the significant loan volume, we have enjoyed in recent months, the pipeline continues to remain as strong as it has ever been.

However, it remains difficult to predict the likelihood or timing of when or if the loans will close. Therefore, we hesitate to give specific information on the pipeline. Similarly, we will not be providing specific earnings guidance at this time, as the size of the portfolio is still such that the timing of originations, which is difficult to predict, may have a material impact on earnings.

As the portfolio continues to grow and we believe we could provide better guidance with greater degree of certainty, we will reconsider this policy.

We completed our IPO in April. Despite the overall weakness in the REIT markets during the last few days of our road show, the demand for our stock was very strong; and we're able to price our offering at an attractive price for both Arbor and our investors. The IPO represents a significant achievement for Arbor -- one, which will allow us to obtain our growth goals in the coming quarters.

As you may be aware, short-term interest rates have increased over the last 30 days or so. Our goal is to generate stable earnings returns regardless of interest rates. As of March 31, approximately 92% of the assets in our loan portfolio were variable-rate LIBOR-based loans.

Our warehousing funding continues to be a 100% LIBOR-based. As a result, the recent interest rate -- rising interest rates or a continued increase in interest rates would not materially impact our results.

A 100-basis-point increase in LIBOR would have a minor negative impact on our annual net interest income for our loan portfolio, because 63% of the loans are currently subject to interest rate flaws; thus, our interest costs would increase more than the interest income.

However, if rates continue to rise, the impact of the interest rate flaws would be eliminated; and our net interest spread would actually increase. From this scenario, we would earn an increased yield on the amount of loans that we fund is with our own capital.

Regarding the MBSs on our balance sheet, we believe that our loan portfolio satisfies the requirements of the Investment Company Act. In order to provide additional insurances that we satisfy the real estate company exemption on the registration in investment company, we purchased 57.2 million of agency-sponsored home loan pool certificates on March 31st.

The mortgages underlying these certificates have interest rates that adjust on an annual basis after three years. These purchases were financed primarily through borrowings under our existing credit facilities.

As of March 31st, these certificates had a coupon rate of 3.8% and were funded with borrowings at a rate of LIBOR-plus 10 basis points. To the extent our LIBOR increases, the net spread earned on these certificates would decrease.

The recent interest rate environment has impacted the recent stock prices for the portfolio of mortgage REITs as a group. Certainly, we have experienced some of the price sensitivity that has affected this sector, although to a lesser extent, than the group as a whole.

We believe this is a result of the fact (ph) that we are not as interest rate sensitive as those mortgage REITs, whose portfolios primarily consist of purchased financial instruments. We are confident in our ability to grow the portfolio and provide appropriate risk-adjusted returns.

At this point, I would, now, turn the call over to Rick to take you through some of the financial results.

Thank you, Ivan. OK. In a minute, I'll run through some of the financial highlights for the quarter, and I will be happy to take questions any of you might have. As noted in the press release, you saw this morning, our earnings for the quarter were 38 cents per share; and this is right in line with our projections, when we declared our first-quarter dividend, back in March.

Interest income, which is obviously our primary revenues source, increased by 2.8 million and was up 53% over the previous quarter. This is reflective of the significant increase in our loan investment portfolio and includes the full quarterly earnings impact of all of the fourth-quarter originations as well as some earnings impact from the first-quarter originations to the extent they were outstanding during the period.

The yield on our portfolio increased to 7.94%, which is up a bit from the previous quarter. I should point out that, virtually, all of the interest income and expense pertains to loan portfolio. The MBSs, Ivan just talked about, which during the positive spread, were purchased on March 31st. So there was really no P&L impact on that during the quarter.

Interest expense was also up significantly about 1.7 million, and that reflects the increased leveraging of the portfolio. We really look at it from a net interest spread point of view, which is the difference between interest income and interest expense; and the interest spread was up about 1.1 million, or 26%.

We started the quarter with a leverage ratio over the loan portfolio of slightly over 1 to 1 ratio, and we finished the quarter slightly over 2 to 1. For the quarter, the average is about 1.6.

The proceeds from the recent IPO were used immediately to repaying of borrowings -- repay borrowings, and that leverage ratio was immediately reduced. This will also have the impact of reducing our cost of funds, which was higher in this quarter than the last quarter, because we had to fund our new originations with higher cost funding. That's because our credit facilities provide us with borrowing capacity on a loan-by-loan basis, and pricing varies depending on the asset with the loan taken.

We do have the ability to draw down on our capacity, as we deem necessary. Therefore, we try to draw down on the highest cost borrowings last. Conversely with the proceeds from our IPO, we try to pay down the highest cost borrowings first. So the reduction of the borrowings from the IPO proceeds would not only reduce the outstanding amount of borrowings but will reduce the average cost of the borrowings that remain outstanding.

Regarding the operating expenses, they were actually down slightly from the previous quarter. The previous quarter included some higher corporate overhead expenses. We would expect these expenses to trend up a bit from the level of this quarter, as we continue to extend our asset management staff to support the growth of the portfolio as well as start to incur the costs of being a public company.

We believe the asset management group is critical to successfully and actively managing the credit risks within the portfolio; and we are committed to maintaining the appropriate levels of asset management staff, as the portfolio grows.

With that, I will turn it back to the operator; and we'd be happy to currently answer any questions any of you may have at this time.

Ladies and gentlemen, at this time, if you wish to ask a question or make a comment, please key star followed by one on your telephone. If your question has been answered or you simply wish to withdraw yourself from queue, please key star followed by two.

Your first question comes from the line of Donald Fandetti of Wachovia Securities. Please go ahead.

Good morning everyone. Ivan, I was wondering if you could provide us an update on what you're seeing in the New York City in mezz lending (ph) arena, both from a deal volume perspective and also competition?

Well, the landscape hasn't changed that much in the last 90 days. Clearly, there have been a lot of different companies that have filed over the last couple of weeks to participate in this sector.

We have not, you know, seen any increase in competition at least that would impact in any way the demand for our product line.

The greater concern on a different level is, you know, perhaps, the state of the real estate sector and the fact that some of the senior lending is perhaps getting a little bit more aggressive, which has caused us a great deal of caution perceiving some of the opportunities that are presented to us.

But, overall, we're seeing, you know, a healthy demand for our product; and the impact of additional capital coming to this sector has not significantly impacted on the product that we're seeing.

OK. And, lastly, if could just comment on your feeling today in terms of credit versus six months ago for your portfolio?

It helps only a little bit of that over the time (ph), but we review our portfolio on a weekly basis; and our portfolio has actually healthier now than the six months ago. I think the greater caution is with the product that we were looking at originating for new business, not in our pipeline; we're very comfortable with the pipeline, but we are extremely cautious with the business opportunities that we're looking at.

OK. Thank you.

As a reminder, ladies and gentlemen, it is star, one to ask a question.

I am showing no further questions in the queue, gentlemen. Please go ahead.

Thanks.

Well, we'd just like to thank you for your time and your confidence in the company on the IPO; and we look forward to a continued relationship. Thank you everybody.

Ladies and gentlemen, that concludes your call for today. We thank you for your participation, and please disconnect your lines.