Arbor Realty Trust Inc (ABR) 2004 Q3 法說會逐字稿

Good morning and welcome to the Arbor Realty Trust third quarter 2004 Earnings Conference Call. At this time all participants have been placed in a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Rick Herbst, Chief Financial Officer. Sir you may begin.

Thank you Cheryl. Good morning everyone and welcome to the third quarter earnings call for Arbor Realty Trust. On this call we will discuss results for the quarter ended September 30, 2004. This is our second quarter as a public company. Joining me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before we begin I need to inform you that statements made on 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 our Arbor's expectations and these forward-looking statements are detailed in SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes 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 behind us I'll now turn the call over to Arbor's Chairmancy, Ivan Kaufman.

Thank you Rick and thank everybody for joining us today. As you saw last night press release our results from the third quarter demonstrates our continued growth both in assets and earnings. As a result of the success that we have had to date in deploying the capital we raised in April IPO. Our earnings, assets portfolio, new loan volumes and credit quality demonstrates our ability to build a premier real-estate finance franchise.

Before I ask Rick to take you through the numbers, I'd just 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 that market.

Just about the market. During the last six months we have seen an influx of capital into the commercial real-estate lending market. We believe this increased capital together with relatively low interest rates has contributed to the buoyant real-estate market that currently exists. As always we are very much aware of values in the market we do business in and will not compromise our underwriting and credit standards for the sake of closing a transaction.

Our philosophy remains unchanged. We will not make a loan unless we're prepared to own the asset if need arises. As the size of our portfolio reflects, we've had great success in deploying our capital.

Our remains strong and we will add to our portfolio when transactions are accrued up to shareholders' value and meet our overall portfolio objectives.

Some of these objectives include duration, geographic concentration at the type diversity and in addition certain characteristics relating to the creation of our CPO we'll try to speak to in a moment.

We will not nor do we need to chase deals that do not satisfy our credit standards that are investment objectives. With respect to origination in the third quarter we funded approximately 165 million new loans and investments.

As you can see here we are making progress toward increasing our average loan sizes portfolio. As of September 30 the average size loans in our portfolio was 13.8 million up from 12.1 million the prior quarter. We continue to successfully compete for loans greater than 20 million and see significant volume from repeat bars.

Based on our ability to deliver customized solutions in a timely fashion, we are involved up front with bankers and other sophisticated lenders. We believe this is reflective of our belief deliver tailor made products to our customers.

Preserving and enhancing shareholder value continues to be our top priority. And we believe optimizing our capital structure is critical in creating shareholder value. We regard common equity as a most precious financial resource and are very sensitive to dilution resulting from simply issuing additional common stock for the sole purpose of growing a portfolio. We will be very strategic in managing our financing sources and capital base has spent considerable time and effort this quarter focused on the right side of the balance sheet. We are encouraged by the progress we have made to date.

During the quarter we announce the hiring of Gene Kilgore to run our CDO efforts. We've assigned an engagement letters with a large institution to assist in structure our first CDO. We have made significant progress on the marketing materials and with the rating agencies and plan to commence marketing over the next several weeks.

Once implemented we believe the CDO lower our borrowing costs, provide longer term financing and provide us with greater flexibility in our product offerings.

We are exploring all of financing alternatives to give us even more flexibility while preserving and enhancing shareholder value. We have signed a term sheet for an unsecured revolving debt facility we believe to close in the fourth quarter. In addition we're making progress through obtaining other forms of unsecured debt.

Many investors have been interested in some of our equity participation interests, which we refer to as equity kickers. These kickers generally take a poll of profit interests in the properties underlying our loans. Arbor may receive funds from excess operating cash flow when the property's sold to refinance.

Not all of the kickers will result in revenues to Arbor and for those that do it generally takes some time for the property to approve operations to a level sufficient to generate excess revenues. They are currently six investors in our portfolio which have kickers attached. This quarter we will receive our first distribution from one of these investments in the amount of 667 thousand dollars. This distribution represents excess operating cash flows from the properties of one of our borrowers at prime retail portfolio.

As you may recall we interred into this transaction with this operator in an acquisition in December of 2003. Our bar has been able to refinance certain properties, reduce borrowing costs, reduce operating expenses and improve rental revenues. As a result operating results have increased to the point that the bar is able to distribute excess cash flow to investors.

Assuming their operation remains at this level we would anticipate regular distributions of this magnitude from this particular project. In addition to the equity kickers that we generated over the last year there were several loans in the portfolio that also have IRR look back features. These loans include a feature whereby a plum maturity to borrowers required to make a payment that will result in a contractually predetermined rate of return to Arbor. Receipt of these IRR look back payments upon maturity of these loans will further enhance our returns.

Today we are paying the previously announced cash dividends of $.43 per share of common stock to common shareholders as of October 15, 2004. This dividend represents 23% increase over last quarter's dividend and reflects the success we have had to date in effectively deploying our capital and growing our portfolio.

As you saw in the press release our earnings for the quarter for the first time in our history were at a level that generated an incentive compensation fee to our manager, Arbor Commercial Mortgage LLC. This fee represents 25% of the earnings exceeding 9.5% return earnal as described in the management agreement with our manager. The fee for the quarter was approximately $499,000 dollars. The manager has indicated that it will like to receive this fee in stock demonstrating the managers continued commitment to keep its interest aligned with shareholders.

As you probably know our shelf registration statement on form F11 was declared effective on July 15th. As a result the stock offered in our 2003 144A private equity offering became tradable to those investors. We had hoped that this would enhance the liquidity of our stock and based on average trading volumes it appears that this has been the case.

In a moment Rick will discuss the warrant activity during the quarter, what we believe addition stock issues as a result of those warrant exercises will also contribute to the liquidity of our stock. We are committed to improving our liquidity of our stock by continuing to raise Arbor's visibility to our investment community outreach activities.

Interest rates continue to fluctuate and reinvestors are generally sensitive to such movements. Overall we are comfortable with our interest rate risk profile.

As we have stated before our goal is to generate stable returns regardless of interest rates. As of September 30th 96% of the assets in our loan portfolio were variable rates liberal base loans and all of our warehouse funds continue to be on the percent liberal base.

In addition most of our assets and all our debt is slowing rate paper, therefore match funded. Because a portion of the loan is funded with our own equity an increase in interest rates would actually increase our net interest spread.

Now I'd like to turn it back to Rick to take you through the financial result.

Thank you Ivan. I'll go through some of the financial highlights for the quarter and then we'll be happy to take any questions any of you may have.

As known in the press release earnings for the quarter were $.48 per share on a basic bases and $.47 per share diluted which represents about a 23% increase over last quarter. The dilutable fact is primarily due to the unexercised warrants that were held throughout the quarter. We understand that share cans is an important data point for the analyst and the press release included a schedule on the warrant exercises during the quarter and through October 15th which was the record date for the dividend payment.

As of October 15th there were 16.4 million common stock equivalent shares outstanding and 373 thousand warrants outstanding. In addition I reiterate that in October the manager exercised his warrant for 629 thousand operating partnership units. So as a result of all of these warrant transactions through October 15th the manager owns 18.75% of the total equity.

Interest date coverage of our program revenue source increased by 4.9 million or about 41% over the previous quarter which is reflective of the significant increase in the loan investment portfolio, includes the full quarterly earnings impact with all of last quarters originations I mean the second quarter as well as the earnings impact of the third quarter originations to the extent their outstanding during that period.

And as Ivan mentioned the interest income does include about 667 thousand for the pond distribution. So all year the yield on our loan investment portfolio is 8.55%. A pretty good increase from last quarter. Interest expanses up about 2.3 million, reflecting the increased borrowings. The second quarter was a little bit low due to the April IPO. And it took a little time to deploy the capital. But out net interest spread, which was difference between interest income and interest expense, which is the number, we really look at to run our business was up about 2.6 million or 30% again due to the growth of the portfolio.

Operating expenses were fairly flat from the previous quarter with the exception of the incentive comp fee that Ivan mentioned of about a half a million dollars. And I think with that we'll turn it back over Cheryl and be happy to answer any questions anybody has.

Thank you the floor is now open for questions. (OPERATOR INSTRUCTIONS). Please hold while poll for questions.

Our first question is coming from Don Vendetti of Wachovia Securities. Sir, please pose your question.

Good morning, a couple quick questions. Ivan can you talk a little bit about the types of transactions in the quarter? How many were direct deals? How many loans were purchased? Can you talk about that?

Well, as you know we don't purchase loans in the marketplace. Everything is originated with respect to where they were sourced from. Were they sourced from our sales force or directly with Wallstreet. I'll get back to you. We'll do that number as we do other questions and try to give that to you. I don't have that, but we'll calculate that in the next minute or two.

If you were to look back over the past few quarters, do you suspect that mix was kind of 50-50 or was it more toward sourcing deals from financial institutions?

I would say that the answer to that is a little complex because many of the deals that are at the financial institutions, we bring to them, that structure with them and many are from our same bar that we have in our portfolio. So I don't have a clean answer to that but clearly a lot of larger transactions are being structured by the street. And whether we bring the bars to them or the bars request that we participate with them and structure a deal along with them and as they originate them it's not 100% clear.

OK that's a good point.

I would say that clearly on a larger transaction in the trend right now is that many larger transactions are being through the street without participation.

OK and sounds like credit's in pretty good shape. Would you care to expand upon that, the metrics, I mean, debt service coverage, how that changed sequentially? Do you have any assets on the watch list or how you think you'll communicate that to investors over time?

I'll take that one Don. There are no assets on the watch list, no defaults of any sort and we are comfortable to credit quality. The LCD as of September 30th is about 76%, I think it was 77 last quarter, debt service cover is 146 or so. It was about 155 and that's primarily the interest rates have shifted up a little so the coverages will come down a little bit but we're very comfortable with the overall portfolio performance.

Ok and the prime portfolio cash flow that is coming in, could that vary as rates go up. I mean is they're floating rate debts on the assets that could cause the cash flows to go down and could they also go up over time?

There is a certain fixed rate that by the way which is very high rate that will eventually be refinanced and there is floating rate debt that could impact the distribution. At the same time we are experiencing an increase in revenues and an increase in leasing activity and some expansion and a lot of off-setter. So I'm pretty comfortable even if there is somewhat of an increase due to operational savings as well as increased revenues. The income strength should be stable increasing.

Okay, I appreciate it. Thank you.

Our next question is coming from Joe Joelson of J&P Asset Management. Please pose your question.

Yeah, Ivan. Congratulations, another superb job. Just a question on capacity for the fourth quarter Ivan to grow. If you executed this CDO, obviously you don't know about the exact terms yet. Is that going to free up some additional growth beyond what you get advance rates on your credit lines?

Okay, let me answer that since we're pretty deeply involved and have a pretty good concept of where our levels are. We don't think the CDO itself will create any tremendous increase liquidity on what we're putting into the CDO. However we think that it will have an immediate impact on ability to get better advance rates on new products based on the ability to have an exit for our lenders. So we should have somewhat of an immediate impact, to be able to go back and have more flexibility than on our warehousing.

So at this point, I was looking through the press release and it wasn't 100% clear, how much capacity you had on your existing lines. It looked like $150-ish million.

Yeah, about that. About that range.

So in terms of the fourth quarter do you think that you're fine with that capacity to grow the business without accessing the equity markets?

We think that between existing capital we have, between the unsecured debt we're putting on and the payoffs we're getting that we have enough capability to continue operate at a similar run rate of the prior quarter for the next two quarters.

That's fabulous cause it's pure cretion at this point I guess?

Yeah, I mean look, we're going to be real careful about our next steps are and as sensitive as you guys are to dilution, I'm that much more sensitive. And with all the equity kickers not on our look backs, I don't want to spread that wealth to new shareholders. And we will be very, very careful. And we've been very well received beyond secure debt market. We think that will add 50 to 75 million dollars of cash to continue to grow. We'll have some payoffs. We'll try to improve our leverage on some of our lines. So we pretty comfortable, we'll be able to operate effectively over the next six months.

And just from the standpoint of the original loans that you guys put into the thing were stripped of the excess return vehicle. So as you replace those the margin should be substantially higher. So how much of the original contribution loans are left at this point?

On the 144A?

Yeah.

Probably less that half at this point. We've already given a million but about 100 million is paid off.

So as that balance goes down over the next 12 months and gets replaced you should continue to experience better margins.

Yeah, I think that's fair to say that new business is a little bit higher margin business from what the contributed assets were.

And then also you'll get more equity kickers as the percent of the whole as well, right?

Well as a percentage of the whole from the opening balance, which was zero will certainly, go up from that.

That's what I mean.

I don't think we're claiming that a percentage of our new originations. It's always been one out of six, one out of ten loans has had as equity kicker and that's probably about the ratio that will stick.

That's right. So anyway fine. I just wanted to tell you guys, I've never seen anyone take their incentive fee on something in stocks, so just as a long term shareholder I think that that's a great signal to the investor group.

Thank you Joe.

Once again the floor is open for questions. If you do have further questions please press star one on your touch-tone phone at this time.

At this time there appear to be no further questions. I'd like to turn the floor back over to Arbor management for a few closing comments.

Okay, well we certainly appreciate everybody's participation in the call and we're going to get back out there as we have a full agenda for the next quarter and we look forward to our next communication.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.