Arbor Realty Trust Inc (ABR) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arbor Realty Trust second quarter earnings conference call. My name is Steven, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS).

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

Please proceed, sir.

Thank you and good morning, everyone, and welcome to the second quarter earnings call for Arbor Realty Trust. On this call, we will discuss the results for the quarter ended June 30th, 2004, our first quarter as a public company. I would also like to point out that the same date represents our first full year of operations as an entity.

Joining me on the call today is Ivan Kaufman, our President and CEO.

Before we begin, I need to inform you that the statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed 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 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 of as of today. 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 out of the way, I'll now turn the call over to our CEO and Chairman, Ivan Kaufman.

Well, thank you, Rick, and good morning to everybody. I just saw in our press release this morning our results for the second quarter demonstrated our success in deploying the capital we raised in April in high-quality, high-yielding assets. We achieved significantly increased earnings and new loan volumes, and we believe we have 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 in general and how we believe our business is currently positioned within the marketplace.

Before speaking about the quarter, I would like to take a moment to reflect on some significant accomplishments we have made both in the last year. Over a relatively short period of time, we have built a premium real estate finance franchise. In our first year of operation, we originated approximately $600 million of new loans and investments.

This demonstrates the acceptance of our product in the market and has allowed us to deploy a significant amount of the capital we raised efficiently and effectively. As of June 30th, there were five equity participation interests, or as we refer to them, kickers, in our investment portfolio.

While we cannot quantify the value of these investments at this time, we do expect that over time these investments could enhance our returns. Our management team has built an infrastructure capable of effectively originating and underwriting loans and investments at current loan volumes.

Our credit quality remains effectively strong, with no defaults or delinquencies. We have distributed $1.23 in dividends over the past year, a return of over 8% to our initial investors. Finally, we have increased the capacity of our credit facility significantly over the same last year, and continued to explore other financing alternatives and opportunities. You'll hear a little bit more later on that.

Now I will speak about the accomplishments achieved in the recent quarter. Our loan volume continues to increase. In the second quarter, we funded approximately $214 million of new loans and investments, with an average loan size of $12 million. We continue to make progress towards of achieving our goals of increasing the average loan price in the portfolio.

As of June 30th, the average size of the loans in our portfolio was $12.1 million, up from $11.6 million last quarter. We continue to successfully compete for loans greater than $20 million, and see significant volume from repeat customers.

We believe that this is reflective of our ability to deliver the right product to our customers in the right period of time. Despite the significant loan volume we have achieved in recent months, the pipeline continues to remain strong. As we have previously discussed, our policy is not to disclose specific information in 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 can provide guidance with a greater degree of certainty, we will reconsider this policy.

As you probably know, the REIT market has been a bit bumpy over the last quarter or so. Likewise, our stock price has had its ups and downs. Our average trading volume over the last three months has been under 40,000 shares per day, which we believe adds some volatility to the stock.

Our shelf registration statement on Form S-11 was declared effective on July 15th. As a result, the investors in our 144A private equity offering are now able to trade that stock. We believe this may enhance the liquidity of our stock going forward.

As I'm sure most of you are aware, the increases in short-term interest rates since the end of the first quarter. Our goal is to generate favorable returns regardless of the interest rates. As of June 30th, approximately 94% of the assets in loan portfolio were variable rate, LIBOR-based loans.

Our warehouse funding continues to be 100% LIBOR based. Overall, we are comfortable with our interest rate risk profile. Most of our assets and all of our debt is floating rate paper and therefore match funded. Because a portion of the loans is funded with our equity, an increase in interest rates would actual increase our net interest spread.

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

Thanks, Ivan.

I'll go through some of the financial highlights of the quarter, and then we'll be happy to take any questions anybody might have. As you saw in the press release, our earnings for the quarter were 39 cents per share basic, and 38 cents per share, diluted. The dilutive effect is primarily because of the warrants held by the 144A shareholders. Even those these were not exercisable until our shelf registration statement on Form S-11 was declared effective a couple weeks ago, the accounting dictates that the dilutive effects must be disclosed.

And you'll note that these earnings exceeded our declared dividend of 35 cents that we paid a couple of weeks ago.

Interest income, which is our primary revenue source, increased by $3.8 million, or 46%, over the previous quarter. This is reflective of a significant increase in our loan and investment portfolio and includes the full quarterly earnings impact of all of last quarter's originations, and some earnings impact of this quarter's originations to the extent they are outstanding during the period. The yield on our loan investment portfolio was 7.79%.

The result of any MBSs on our balance sheet, and we talked about it last quarter. We believe that our loan portfolio satisfies the requirements of the real estate company exemption from registration as an investment company under the Investment Company Act.

As we discussed, in order to provide additional assurances that we satisfied the real estate company exemption from registration, we purchased $57 million of MBSs back on March 31st. The mortgages underlying these MBSs have interest rates that adjust on an annual basis after three years.

So, as a result of the recent rise in interest rates, the MBSs did experience a temporary market adjustment of a little under $1.4 million as of June 30th. The value has come back a little bit since then, but this amount was recorded under cumulative other comprehensive loss on the balance sheet.

We did earn a positive spend of about $250,000 during the quarter on these MBSs. As the MBSs get posted to the rate reached that date, we think the rate-related market discount will decline and we'll come back to par value.

Interest expense is up about 700,000, reflecting the increased borrowings due to the significant loan volumes we had, and partially offset by the use of proceeds from the IPO. Our net interest spread, which is the difference between interest income and interest expense is up about $3.1 million, or 56%. Again, this represents the growth of the portfolio, as well as using the proceeds from the IPO.

As Ivan alluded to a moment ago, we are currently evaluating various opportunities to fund our portfolio growth more efficiently to further enhance shareholder value. One of the alternatives we are actively pursuing at the moment is a CDO structure that could fund a significant portion of our existing portfolio.

If such a structure can be implemented, it would provide us with improved flexibility, duration and a cost structure that is beneficial compared to our current facilities. While we can make no assurances that such a structure will be put in place, we are encouraged by the progress we have made so far.

Operating expenses were up somewhat from the previous quarter, primarily due to certain costs of being a public company, as well as increased base management fees, which are based on equity. While our staffing costs are relatively flat, we continue to invest in our asset management staff to support the growth of the portfolio. We believe the asset management group is critical to successfully and actively managing the credit risk within the portfolio, and we are committed to maintaining the appropriate levels of asset management staff as the portfolio grows.

So, with that, I'll turn it back to the operator. We'll be happy to answer any questions you may have at this time.

(OPERATOR INSTRUCTIONS).

And our first question comes from Don Fandetti of Wachovia.

Please go ahead.

Good morning. Ivan, congratulations on a good quarter. A couple of quick questions, I was wondering if you could, Ivan, give us a little bit of color on the market, whether it's mezzanine or bridge lending, where you see the most opportunities from a product standpoint, whether it's office, multifamily, and talk about the competition in spreads?

Well, we're seeing the opportunities for Arbor very similar to what they've been over the last couple of quarters. We still have a significant pipeline and significant demand in all different aspects of the capital structure. While every day we hear there's somebody new in the marketplace, we still seem to be one of the first calls on a significant amount of the business that has built up our loan volume.

But, clearly, every day there is a new competitor. The market seems to be pretty vibrant. I think the mix of our current portfolio is somewhat consistent with the mix in our pipeline, and we feel relatively confident that we'll be able to maintain the kind of mix that we set out to do, which is somewhat represented in our existing portfolio.

As you know, Don, our strength clearly has always been on the multifamily sector, with the objective to diversify into other asset classes. We're clearly achieving that diversification, but the core of our multifamily product is still very, very strong for us.

OK, and are there any updates on the hiring front?

Well, currently, we're looking at a few alternatives internally. Fortunately, our asset management group is very well structured and very secure. We're actually looking at increasing our expertise in the B note acquisition aspect of our business, and we're engaged currently with a few individuals. The B note seems to be a very active part of our business. It requires a certain level of expertise. I currently handle a good deal of those discussions and those negotiations, as we've been building that business. Since we've developed a nice reputation with Wall Street and with the cash to borrowers, we've made a big attempt here to bring in some senior management to offload that responsibility into another senior executive.

OK, two quick questions in regards to a securitization or a CDO. We've seen some of your peers, when they do a CDO transaction will layer in REIT unsecured debt. Would you include that in your structure? And also, can you talk about the benefits from a securitization from a match funding and maybe an income statement perspective?

Sure. It's not our intention to layer in unsecured REIT debt at the moment, although we are looking at those alternatives in a different manner. With respect to the CDO structure, we have made significant strides with our collateral base and with the agencies in getting them shadow rated and moving forward. And we're very close to signing an engagement letter with a Wall Street house to move that forward. We're probably six months ahead of our own contemplated schedule to move forward on the CDO front.

Relative to the benefits of the CDO structure, many people in the marketplace did not believe that the collateral mix that we had was eligible for a CDO. And the fact of the matter is we have worked with the rating agencies over the last six to eight weeks, and we've gotten great reception and feel fairly confident with our ability to move forward with our collateral base. The benefit to the CDO is, number one, is not to be reliant on any third-party institution.

Once you've done a CDO, it's kind of like a debt shelf, and you fix your spreads and you kind of use the debt as a shelf to be able to substitute or manage your originations and your run-off in a very effective manner.

From a pricing perspective, we feel we'll achieve a significant amount of savings. And I guess, lastly, the term is significantly longer. We can go out - we're going to go out five years. We can have the opportunity to go out longer. Another piece which is very significant, as you know, we're basically a LIBOR-based lender. By doing a CDO, it'll open up a whole new market to be able to do a fixed-rate product as well.

We'll be able to swap out effectively for the five-year term, originate five-year product, three-year, or whatever it is. And that'll open up a whole new arena of originations on the fixed rate side. So we think it'll be quite innovative for our collateral base, and while the benefits are going to be significant to us, our only concern is that our competitors will look at our technology and perhaps look to duplicate that, and that may create a little bit of competition within our own sector. But hopefully we'll have built a significant enough franchise with our different vendors that we'll still have a good enhance (ph) on everybody else in the business.

OK, and one last question, if I could. I may have missed this, but can you talk about credit versus 30, 60 days ago? Your feelings?

Yes, I mean, our credit and our portfolio continues to improve. I don't have the interest rate coverages with us. We can get that to you later, but we continue to make significant strides in the quality of our collateral, our coverages, our loan design (ph).

I believe our coverage right now in our portfolio Rick pointed out to me is a 1.57 debt service coverage ratio, which is an improvement over a few months ago. So, one of the benefits that we've had in terms of lowering our borrowing costs, increasing our financing capability, is to do better credit loans, which has improved our portfolio on the overall.

OK, thank you.

As a reminder, ladies and gentlemen, if you wish to ask a question, please press star, followed by one, on your touchtone telephone.

It appears there are no further questions at this time, sir.

OK, there being no further questions, I thank you again for your interest in Arbor. We remain committed to providing our investors with appropriate information to make an informed investment decision. If you have any specific questions on the information we've talked about today, or the press release, please feel free to give me a call directly.

Thanks for listening, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.