Arbor Realty Trust Inc (ABR) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First Quarter 2005 Arbor Realty Trust Earnings Conference Call. My name is Mia and I will be your coordinator for today.

At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. I will now turn the presentation over to your host for today's call, Mr. Rick Herbst, Chief Financial Officer. Please proceed.

Thank you, Mia. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. On this call we will discuss the results for the first quarter ended March 31, 2005. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.

Before I turn it over to Ivan, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that is 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 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. I will now hand the call over to Ivan.

Thank you Rick and thanks to all of you who are participating on today's call. As the press release we issued this morning indicates, our results for the first quarter demonstrate the continued financial success we have had. It has been just over a year since our IPO, and we are proud of the achievements we have made to date in building a premier real estate finance investment franchise.

These achievements include building a diverse portfolio of assets, expanding our financing facilities and solidifying our excellent management team. These accomplishments and services solid foundation for future performance and certainly have contributed to our excellent financial results this quarter.

Before going through the financial results, I'd like to spend a few minutes discussing our view of today's market and how we are positioning ourselves accordingly. Over the last several quarters we have focused on improving the right side of our balance sheet and we are particularly pleased with the progress we have made in this area.

As we have discussed before, we closed our first CDO transaction in mid-January. It was a $459 million transaction including the issuance of $305 million of non-recourse investment grade debt. This facility gives us excellent long term financing, lowest borrower cost and frees up capacity in our warehousing lines. This being said, we believe it will be beneficial to issue another CDO in the upcoming months.

Due to the market conditions, collateral accumulation and other factors there can be no assurance that a second CDO will be completed. However, we have initiated that effort. In the last 2 months we have issued approximately $75 million of junior subordinated notes in 3 separate trust preferred security issuances. While this is considered debt on the balance sheet, from a business standpoint it is 30 year non-recourse paper and we view it as the lower cost alternative to raising equity for several reasons.

First and foremost, we regard common equity as our most precious financial resource, and will not issue additional common stock for the sole purpose of growing the portfolio. Preserving and enhancing shareholder value continues to be our top priority. We do not want to be in a position where we need to originate loans for investments since we could deploy our capital.

By keeping our equity base at its current level, we can operate our portfolio at optimum leverage efficiency and still maintain adequate growth. Furthermore, we believe we have built up a fair amount of off balance sheet with franchise value with certain of our investments. Issuing additional equity at this time would dilute the value of these investments to our current shareholders, who will be very strategic in managing our financial sources and capital base on a constantly evaluating this strategy as circumstances dictate an abundance of capital in the commercial real estate lending market together with historically low interest rates to support the current pricing levels.

We are aware of and sensitive to the values of today's market and those values are certainly given consideration in our underwriting. Our basic philosophy remains unchanged. We will not make a loan unless we are prepared to own the asset if the need arises. Our ability to participate in all aspects of the real estate -- of all aspects of real estate finance will create unique opportunities in this environment. One of Arbors distinguishing characteristics is that we have expertise investing along the entire range of the capital stack of the transaction, be it a first mortgage, mezzanine loans, preferred equity or direct equity interests.

Because of our comfort level in this broad range of product offerings, the current interest rate and competitive environment generates many opportunities for us to earn excellent risk adjusted returns. Despite the aggressive market, our pipeline remains strong. Our solid network of repeat borrowers has served us well during this period and originations for the quarter were quite strong.

We will remain selective and we'll add to our portfolio only when transactions are accretive to shareholder value and meet all our strategic and overall portfolio objectives. In the fourth quarter we originated approximately $224 million of new loans and investment commitments. The highest level of volume we've ever achieved.

We believe the level of volume is at the upper end of the range of origination activity we will see in the next few quarters. We experienced $211 million of run off this quarter. The most we've ever experienced in previous -- ever experienced. Of this amount, $45 million was retained in new loans and $110 million was due to condo conversion loans paying off.

The condo market continues to be very strong. The remaining $56 million represented borrowers for either sold or underlying properties or refinanced their loans with other lenders offering permanent loans, borrowers not taking advantage of aggressive pricing and or loan proceeds (ph) offered in the marketplace and we think this will continue.

You may recall in the 2 previous quarters we received $1.7 million in distributions from one of the investments in which we have an equity plus (ph) the space and interest. We did not receive such a distribution this quarter. The underlying properties continue to perform well, but reserves are being accumulated upon capital improvements to several of the properties.

The borrower is currently considering various alternatives to maximize the value of certain of these assets. As previously announced, our fourth quarter dividend of $0.55 per share of common stock will be paid on May 15, 2005, and represent the 17% increase over last quarter's dividends. The dividend was increased for the third time since the Company's public offering, and reflect our strong financial performance and the strength of our portfolio.

Our manager, Arbor Commercial Mortgage, has once again elected to take a 100% of the consensus management fee, more than $1 million this quarter, in stock. As we stated many times in the past, the manager believes in the value of the stock and is extremely committed to keep its interest aligned with shareholders.

Our board has requested analysis of the impact of internalizing the management structure and will be presenting this analysis to them in the near future. Interest rates continue to fluctuate and REIT investors are generally sensitive to such movement. Overall we are confident with our interest rate risk profile. As we have stated before, our goal is to generate stable recurrence regardless of interest rate. As of March 31, 90% of the assets in our loan portfolio were variable rate LIBOR based loans and all our warehousing funding continues to be 100% LIBOR based. Because we have a greater amount of assets repricing and liabilities repricing, an increase in interest rates actually increases our net interest margins.

I will now turn the call over to Rick to take you through some of the financial results.

Thank you Ivan. As noted in the press release, our earnings for the quarter were $0.58 per common share on both the basic and fully diluted basis. That represents a 12% increase over last quarter's diluted EPS. Numbers in the press release are fairly self explanatory, but I'll highlight a few points I believe may be of interest. Interest income and interest expense both increased by about 11% over the previous quarter, which translated to an increase in interest spread of about 1.7 million or 13% over last quarter.

So not only did our average balances grow, but also the yield on our assets increased more than our cost of funds. I should point out that the yield for the quarter did include earnings on a few one time type transactions and backing those out result in a yield for the quarter between 10 and 10.5%. You'll not approximately $450,000 of income from equity affiliates. This represents income received from one of our equity investments on 450 West 33rd Street. The data on this property was financed during the quarter and the equity owners, including ourselves, received a distribution. The refinance cleaned out the preferred equity holders and we believe this will enhance the value of our equity kicker over time.

Operating expenses did go up from the previous quarter. This reflects the cost of new hires made as well as certain professional, recruiting and marketing expenses incurred in the quarter. And we are starting to incur and accrue for professional fees related to the Sarbanes Oxley requirements, which have kicked in for us this year. On the balance sheet I'd like to point out a couple of changes since last quarter. On the asset side, most notably is the restricted cash amount of $73 million. This amount primarily consists of funds received when loans from the CDO paid off, which has not yet been redeployed as of March 31.

Most of that amount has since been redeployed, however. The overall leverage at year end was a bit higher than at year end. It was about 2.1 debt to equity ratio, up from 1.7 at year end. This increase was the result of the nature of the CDO as well as the impact of the new credit facilities we have added. And we expect this leverage ratio to stay at this level or above in the coming quarters.

One unrelated note, then I'll turn it over to questions. I have received a few questions on our filing last week of our S3. And that filing relates only to the 144 A shares. We're not registering any new shares, but the old 144 A shares needed to be reregistered. It's currently in the SEC and we hope to be hearing something back from them in the very near term to declare that effective and put that one behind us.

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].

Your first question comes from Don Sandetti (ph) of Smith Barney. Please proceed.

Good morning everyone. Pretty good quarter. Few quick questions. Ivan, can you talk a little bit about your outlook for prepaids in the portfolio?

Well, clearly we've had a significant level of prepaids. And as I mentioned they were the result of some of the condo loans that we had where the sales were certainly a lot more accelerated than we anticipated due to the strong market.

And the second aspect of that was due to the fact on a lot of these LIBOR based loans, borrowers were able to get fixed rate loans given where the yield curve is and how attractive the CNBS market it. While we don't expect there to be the same level of prepaids, we do expect there to be accelerated prepaids given the yield curve this quarter and next quarter but that should clean things out.

It is clearly our intention to try and capture some of those prepaids by converting some of the LIBOR based loans into fixed rates loans and then re-swapping them back into CDOs and have longer term, non fixed rate payable loans in our portfolio.

Okay. If I look at your origination volumes, which were pretty strong this quarter, can you pick one or two of your larger transactions and just provide some color in terms of the underlying cash loan to value. Just to give us an idea of what you're doing in terms of deal flow.

Let's take a quick look at -- okay. Let me just go through a couple of transactions that we had. And it's interesting, most of the transactions are from repeat customers as I'm looking at them. We did a multi family loan in Los Angeles, called Cara (ph) Village, which was for the purpose of acquisition and converting from condominium.

And that was out in Los Angeles. A $32.6 million loan. Net to loan that should be on our books probably 24 to 36 months. On a risk adjusted basis I believe we had about a 15% LIBOR return. This loan also qualifies for being CDO eligible. Another loan that we did was taking an existing loan on a property that we have an equity interest in and also the Med (ph) piece. It was on 450 West 33rd Street. We had a mezzanine loan which was LIBOR based as a piece. So we converted to a 10 year fixed rate loan and now we own a $45 million piece, which is on a 10 year non prepayable loan with superior coverage that existed which we lowered the debt service coverage ratio.

Okay. Great. And from an accounting standpoint, Rick, I noticed that other assets increased. Can you remind me why that line item increases?

Most of that, Don, is due to deferred financing costs from the CDO. Then, in fact, it's amortized over our expected life of the CDO.

Okay. And your debt service coverage at the end of the quarter?

That's something we're still putting together. The LTV stated 79%. We're still getting the March 31 numbers. It will drop a little bit last quarter it was in the mid 140's. It will drop because LIBOR went up about 40 basis points. Probably around 130, but we're still putting that together.

Okay. And Ivan, how do you feel about credit in your portfolio today?

I think our credit's still outstanding. We have no level of concern with respect to of any of the collateral that we own. We're very, very comfortable in each and every one of our loans. Just as comfortable this quarter as we have been in prior quarters.

Appreciate it. Thank you.

Your next question comes from Mark Defrise (ph) of Lehman Brothers. Please proceed.

Good morning. Has there been any shifts in the competitive landscape that you have observed in the last month or so? Or is it still really aggressive on a lot of fronts?

I would still consider the environment to be extremely aggressive. And I guess one of the areas which I just touched on earlier is -- which impacts our business is the prepaids and the CMBS market is extremely aggressive. And many of the institutions who accumulate collateral for that balance sheet are extremely (inaudible). And that's impacting existing loans in the portfolio. Creating more rapid prepaids than we anticipate. So that's certainly an area which has impacted us. I think that they are lending at lower spreads and they are lending more dollars. So they are taking out a lot of our loans prematurely.

And that's an area that clearly stepped up over the last quarter. And that is also impacted by a flattening of the yield curve. You're looking at 60 day LIBOR in the 320 range and you're looking at the 10 year at about, you know, between 400 and 410. And the 5 year is 385 to 395. So, this spread is not that different between the 2. And if they are a little bit more aggressive and more -- fixed rate debt on their balance sheet they'll stretch a little bit and make it worthwhile for the borrowers looking for a LIBOR based loans.

Okay. Do you have any common conversion loans in the pipeline that could potentially prepay in the next couple of quarters? It could create another kind of lumpy quarter for prepayments like we saw this quarter?

Nothing to that extent on an individual. This really represented 100 million was 2 properties. We don't have any others that are that big.

Okay. Can you report - is there anything to report on progress on refinancing of the prime retail portfolio?

I think I'll proceed with caution on that, but we are well into the discussions and negotiations on refinancing those assets. And we're moving that along very aggressively. Clearly with the, 5 year, 7 year and 10 year where it is it is our intention to put on the appropriate kind of debt at the appropriate spread. We have to deal with certain prepayment provisions that exist within some of that debt. And we're looking at doing some partial structures. But, we're deep into those negotiations and discussions at this point.

That's something, Mark, that if and when that ever happened we'd put out a release on that immediately.

Okay. Great. How much longer do you anticipate having to hold your RMBS portfolio? It looks like it's starting to generate some negative carry for you.

That's something that we will evaluate now and take a look at the different alternatives that exist. As you know, we put that on when we were doing our IPO in order to qualify with certain regulatory issues. While there not that relevant today, we'll look to see how we either can A) better finance those or perhaps (inaudible) at the present time. So we're in the beginning of evaluating that now.

Okay. Thanks.

Your next question comes from Don Descino (ph) of J&P Securities. Please proceed.

Hey guys. Nice quarter. Couple of questions. First, Ivan, I have it in my mind that the condo conversion loans often carry some type of equity participation. So, first, am I thinking about that correctly? And second, is there -- were there any equity participations associated with the loans that generated that $110 million of repayments? And then more generally, to what extent do you guys have equity participation in loans in which you no longer have any principal at risk?

Let me address overall the way I look at condo conversions and the loans that we make. Number one, when we're very high in the capital structure we have certain technical issues we have to deal with. And if we're in the equities we have to set it up in a tax full lease (ph) subsidiary which triggers a 40% tax rate. So that's a sensitive item to us. What we will often do in our loans where possible, if we're high up in the capital structure and believe (ph) the asset at a level where we'll try and do an IR lookback. This way we're not subject to a 40% tax rate.

If we're lower in the capital structure, lets say 75 to 80% LTV, you'll just see basically a straight LIBOR based loan at anywhere priced between LIBOR plus 350 to LIBOR plus 600. And that's generally the way we'll look at it. So those are 3 different categories. So, each loan is a little bit different. I believe in the loans that were paid off on 60 Sprint (ph) Street, there was no equity kicker.

No equity kicker. That was a pretty low LTV. That project was pretty far along when we got into it. So that was just a straight bridge loan and the other one was the Hawaii property.

And that had had an IR lookbacks or not?

No.

No. So those didn't contain any IR lookbacks or any equity kickers. Those were, you know, low loan to value loans and basically they were loans provided against condo conversions where the units were sold and we had a very low level of risk. How about other loans that were paid off in equity kickers?

We don't have any -- oh, we have one. We have one loan that's paid off where we have a continuing equity kicker. The other equity kickers in the portfolio we either have the original amount of equity we have or a slightly reduced to give back a little of that capital back. But, the other loans remain outstanding. 450 West was a good example. We had capital in there. It actually got repaid during this refinance. We elected to take a secondary preferred equity position in that deal kind of unrelated to the refinance, but we have both the loan and an equity kicker related to that property.

And just to be clear, that was a completely independent investment decision. You didn't have to reparticipate in that transaction?

No.

Got you. Given the level of prepayment it kind of begs the question, do you guys have any opportunity to negotiate any kind of prepayment protection? Or is it just that you're not willing to give up whatever you have to give up to get that protection?

Well, we have some in certain circumstances. But what you'll see a little bit is when we're able to recapture some of the opportunities first of all from negotiated recapture. So, on 450 West 33rd we took a short term asset announcement and turned it into a 10 year asset with prepayment provisions in it. So, we have a $45 million loan basically we have now a 10 year asset that can't be prepaid. So, we're able to use our position in the asset, negotiate a new loan with longer term yield maintenance provisions. So, we're able to do that which is quite attractive.

We have a group of loans in our portfolio now that we're negotiating with the borrower that do have prepayment provisions on it for another year or 2. Given the yield curve they're looking to go out 10 years because it's a great strategic opportunity to put on 10 year assets, maintain very competitive pricing but the borrower has to come to us to get some of that prepayment position to take advantage of where the market is today.

Got you. And then final question, the restricted cash balance, was that kind of a point in time or was that -- or was the average balance there any kind of material drag on the market?

That was more point in time. We had a couple of pay offs towards the end of March. Since it's a new CDO we don't necessarily have an inventory that would place the collateral. Much of that has been since redeployed. But it was a large number at the end of the quarter.

Great. Thank you very much.

Your next question comes from Steve Delaney (ph) of Ryan Beck. Please proceed.

Good morning gentlemen. I wanted to follow up with the question about the -- if you could talk a little bit about the difference between your effective yield for the quarter of 1107 and the stated pay rate at period end of about 882. You know, looks like little over 200 basis points, which works out to $4 million, I think, for the quarter if the math is right. And I guess, Rick, I heard you -- I think I heard you say that if you pick out a couple of one timers that maybe that effected yield is really 10 to 10.5%.

Right.

So could you talk about that delta of, one, that 4 million sort of a good round figure and talk just a little bit about the composition that gets you from the stated rate up to the effected yield?

Sure. First of all on the one timers we had a couple. We had these IR lookbacks loans and we do not accrue them until we think they are collectible or absolutely collectible. A lot of these properties take a little time to reposition, so it takes a little bit of time to go by before we make that determination. In this quarter we did have one of those where we started to accrue something so we had to do a catch up adjustment from previous quarters. The big difference between the pay rate of 882 and the normalized yield of 10, 10.5, whatever it is, is amortization of origination fees, exit fees, pay and accrue differences of which there are a fair amount of those in the portfolio.

The 882 is just what is being paid current coupon where we have a fair amount of loans and the pay rate might bet 7% and the accrual is 10%. And if we believe that 10% property is far enough along where we should be accruing that, we do. So that's the difference.

Okay. So basically the normal on the fees and the accrued versus pay -- if we looked at a spread from say the just under 9% to slightly over 10%, maybe 100 to 150 basis points would be a more normal increment?

Historically it's been about a point.

About a point. Okay. Thank you very much.

[Operator Instructions].

You have no further questions at this time, Mr. Kaufman. I will turn the call back to you.

Okay. Well, thanks everybody for your questions and participating in the Company. And we remain committed to providing the investors the information they need to make the right decisions. Clearly if you have any questions feel free to contact any of these management officers of the Company. Have a good day everybody.

This concludes your conference. You may now disconnect. Have a great day.