Arbor Realty Trust Inc (ABR) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Arbor Realty Trust Second Quarter 2007 Earnings Conference Call. My name is Oneka and I will be the operator for today.

(OPERATOR INSTRUCTIONS).

At this time, I would like to turn the call over to Mr. Paul Elenio, the Chief Financial Officer. Please proceed, sir.

Thank you, Oneka. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we will discuss the results for the quarter and six months ended June 30, 2007.

With 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, financial conditions, 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.

With that behind us, I'd now like to turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you Paul and thanks for joining us on today's call.

As you can clearly see from the press release we issued this morning, we had a record setting second quarter in many aspects with a lot of positive news to report.

In a moment, we will review the financial results and accomplishments for the quarter, but first I'd like to take some time to address what's on everybody's mind these days, which is the current state of the market.

I think most people are concerned that the recent levels and the recent events in the subprime and CMBS markets will eventually spill over to the commercial markets and dry up liquidity in our sector.

I am sure we will field some questions on this later, but for now I would like to lay out our current position and why we believe we are well situated to take advantage of this transitional market.

First, let's talk about the credit status of our loans. As we've mentioned several times on our past calls, one of our key objectives was to transition our portfolio to higher credit quality by originating loans more in the middle of the capital structure.

We initiated this strategy well over a year ago in an environment where we felt it was prudent to sacrifice some yields for credit. We were very successful in achieving this goal and as a result, our portfolio is extremely healthy.

This allows our management team to clearly focus on originating new opportunities in an environment where yields are extremely attractive, which will result in very accretive transactions to our pipeline.

Next I would like to focus on our liquidity. We've been very active in following up on all our objectives that we have set in place to strengthen the right side of our balance sheet and capital structure.

We continue to execute into the trust preferred market, adding $52 million of trust preferreds this quarter and now have a total of $270 million of trust preferreds. We monetized our equity kickers, which we have added over $120 million of capital to our equity base.

We increased the capacity within our warehouse lines by $275 million and it added a $60 million working capital line during this quarter. And last but not least, we accessed the equity markets, raising an additional proceeds of $74 million.

This committed focus on strengthening our funding sources and capital base has put us in a good position to have adequate capital to continue to operate our business effectively.

In addition, given the current environment and the lack of liquidity in the commercial lending sector, we are seeing a number of opportunities with very attractive yields.

We will be very selective in pursuing these opportunities, building and strengthening our relationships with our borrowers to add transactions that are accretive to our portfolio.

Overall, we feel that the events that have occurred in the market are those that we have predicted and planned for as part of the critical objectives we laid out for our firm well over a year ago.

As we mentioned, achieving these goals is crucial in order for us to properly position ourselves for this changing environment. We feel we have executed the majority of the goals we have set out to achieve and are now poised to operate efficiently in the current market.

Now I would like to focus on some of our second quarter accomplishments. We had an extremely active quarter with several exciting and rewarding transactions that continue to support our critical objectives.

In fact, we have just completed what we believe to be by far our best quarter as a public company.

We have reaped the benefits from the monetization of three equity kickers, created two new equity kickers, and participated in the purchase of the extended stay hotels, which was partially financed by the net proceeds received from our first issuance of stock since our IPO.

We also set a new record this quarter, originating nearly $1 billion in new loans bringing our total loan investment portfolio to $2.6 billion and continued to reduce borrowing costs, solidify our funding sources, and substantially increase our liquidity and capital base.

Focusing on some of these details, let's start with the performance of the key elements of our business model -- our equity kickers.

These equity kickers continue to be a unique facet of our business approach that significantly differentiates us from our peers. As we said several times, we look to monetize these equity kickers where appropriate.

In the second quarter we achieved record setting results from the monetization of our kickers in one of the Toy Center assets, the 450 West 33rd Street property and the Prime portfolio.

The monetization of these three equity kickers generated more than $100 million in cash distributions, around $20 million in net income, and contributed around $4.00 per share in our economic book value during the quarter. And we believe these kickers still have significant value and appreciation above what we've already realized.

For instance, we sold one of the Toy Center assets, but still owned the other asset on 1107 Broadway. This property has nearly 320,000 square feet and we are currently determining whether we will position it for sale or develop it.

As for the 450 West 33rd Street asset, the partnership retained 50% of the air rights, which is around 800,000 square feet of development rights.

And in terms of the Prime portfolio, this is the fifth distribution we received to date, totaling around $50 million and we believe that there is additional value there as well.

(Generally), since going public in April 2004, our equity kickers have added over $6.00 per share of economic book value. In fact we've generated a positive impact from our equity kickers in 10 of the 13 quarters since transitioning to a public Company.

These kickers have also generated significant tax deferred cash proceeds which has allowed us to grow our business by investing these funds in new loans and investments, creating consistent earnings growth.

These cash distributions have also greatly increased our capital base without diluting our current shareholders, giving us the flexibility to be very selective in issuing additional equity.

We also added two new equity kickers to our portfolio during the second quarter.

The first is in the form of a 14% profit interest as part of the preferred equity investment related to the purchase of extended stay hotels and the second is a 50% equity kicker as part of the restructuring of the non-performing Lake in the Woods loan that we discussed last quarter. This brings the total number of equity kickers in our portfolio to 13.

As previously announced, we participated in the senior preferred equity investment as part of the purchase of extended stay hotels from the affiliates of Blackstone by The Lightstone Group.

The entities acquired and owned 684 mid-priced extended stay properties in 44 states and Canada and approximately 76,000 rooms.

We provided $210 million of preferred equity, which has a 12% preferred dividend rate and residual profits interest. As of June 30, we sold or participated out $95 million of our preferred equity investments.

Subsequent to June 30, we sold an additional $20 million, which leaves us with $95 million of senior preferred equity with a profits interest of approximately 14%.

We may look to participate out some more of this investment and believe the optimum amount retained to be in the range of $50 million to $75 million, which will carry a profits interest between 10% and 12%.

On the Lake in the Woods deal, we accepted a deed in lieu of foreclosure and brought in a group of experienced operators who purchased a 50% interest in exchange for proxy of $2 million of committed capital. We provided financing for these investments in the form of a $45 million fixed rate loan and retained a 50% profit interest in the property.

The monetization of our equity kicker and our ability to consistently add new kickers to our portfolio is a clear illustration of our unique ability to create significant off-balance sheet value from our investments.

Next I would like to talk about our originations platform.

This quarter we added nearly $1 billion of new loans and investments, of which $860 million was funded. This is the highest quarterly loan volume in our history, demonstrating the depth and versatility of our originations to the network.

As we indicated on the first quarter call, runoff was higher in the second quarter and came in at $618 million, of which $169 million was retained in new loans and $449 million would be sold to refinance outside of Arbor.

This resulted in the net growth of our portfolio of 13% for the quarter and around 28% for the six months. We do expect payoffs in the third and fourth quarter to be higher than in the first quarter, but lower than the second quarter.

Based on the growth we have achieved in the first six months and the strength of our originations network, we feel confident that we will achieve the high end of our previous guidance of 40% net growth for 2007.

In addition, the condo concentration of our portfolio is 9% at June 30, with 8% New York. Approximately 80% of our risk loan balances are secured by pre-sold units with a significant non-refundable deposit, leaving only 2% exposed to the market.

Another critical objective was to increase the stability of our portfolio by originating longer term fixed rate loans. These loans generally include pre-payment protection and by swapping out the rates in our CDOs, we're able to lock in spreads, creating a more stable return for our portfolio.

At June 30th, fixed rate loans were approximately $800 million or 31% of our portfolio, including $230 million of new fixed rate loans in the second quarter. This has also increased the duration of our portfolio considerably from 26 months as of June -- as of December 31, 2006 to 37 months as of June 30, 2007.

Overall, our portfolio is very healthy. We continue to focus on adding depth to our dedicated asset management function and are firm believers in growing this area in line with our portfolio.

We also continue to focus on improving the right side of our balance sheet and our capital structure, which has allowed us to operate more efficiently and with greater flexibility.

Since our IPO in 2004, we have chosen to utilize the issuance of CDOs, trust preferred securities, warehousing lines, and the monetization of equity kickers as our primary funding sources.

With $1.2 billion of debt outstanding for the issuance of three CDOs, we have enhanced our product offerings and can originate loans throughout the capital structure more efficiently.

We also reduced our borrowing costs and increased leverage where appropriate, resulting in superior returns on our investments.

We've issued $270 million of trust preferred securities, of which $52 million at 2.43 over LIBOR was issued this quarter and has generated over $120 million of capital net of estimated taxes and management fees from the monetization of equity kickers.

These funding sources have greatly increased our capital base without diluting our current shareholders.

In the second quarter, we also increased the capacity in one of our warehousing facilities by $275 million. We have improved our advance rates and reduced borrowing costs on the facility by 25 to 50 basis points and closed a $60 million working capital line at 210 over LIBOR.

This quarter was the first time in three years since our IPO that we tapped the equity markets with the issuance in June of 2.7 million shares of common stock in an overnight deal that raised approximate $7 million of net proceeds.

The proceeds from this equity raise were used to partially fund our $95 million preferred equity investment as part of the purchase of extended stay hotels and to fund the growth of our portfolio. This transaction increased shareholders' equity and book value per share and was nominally dilutive to EPS in the second quarter.

So in summary, we had a very active second quarter in the capital markets.

We increased one of our warehousing lines by $275 million, reduced our borrowing costs in this facility, issued $52 million of new trust preferred securities, added a $60 million working capital line, and raised $74 million in net proceeds from our equity offering.

This combined with our unique ability to generate significant capital from our equity kickers has substantially increased our liquidity and capital base, all in the face of an environment where people feel access to liquidity has become far more difficult.

We believe that the mix of our capital position and debt facilities is appropriate and we will continue to prudently manage the mix to produce the most cost effective capital.

As you know, we recently announced a quarterly dividend of $0.62 per share of common stock, the same amount as the first quarter dividend, despite the increased number of shares outstanding from our equity offering in June.

We have generated significant earnings for the monetization of several equity kickers this year. Some of these transactions have created tax deferrals, while a portion of these earnings are taxable for 2007.

Management and our Board of Directors have determined that we will take quarterly dividends of $0.62 per share for the remainder of the year and will issue a special year-end dividend in December if required.

We are in the process of calculating our projected taxable income for 2007 to evaluate the needs for the special dividend. Once we complete this analysis, we report a range for that special dividend if necessary before the end of the year and hopefully on our third quarter earnings call.

Arbor Commercial Mortgage has elected to take around $7 million of its incentive management fee, nearly twice the amount as in the previous quarter, as stock. This amount represents 25% of the incentive compensation fee to the management for the quarter.

The managers have elected to take a portion of this fee in cash because they must pay taxes on their time out as the incentive competency -- compensation fee earned. Historically, the management has come out of pocket to pay taxes on this compensation because it's taken it in stock. As we stated many times in the past, the management believes in the value of the stock and is extremely committed to keep its interests aligned with shareholders.

And finally, I'm very excited about the most recent addition to our senior management team, Michael House. Michael is Senior Vice President of Loan Acquisitions and is dedicated to acquiring home loans, B Notes, mezzanine loans and other real estate debt instruments from investment banks and commercial lending institutions. Michael has been involved in all facets of real estate finance, ranging from loan origination and portfolio management to loan work outs, portfolio analysis and loan ratings. He has extensive experience in underwriting and analyzing all property types and has been involved with transactions across most of the nation's major markets. With his depth of knowledge, we look forward to the contributions he will make in growing our portfolio and our originations and increasing our franchise value.

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

Thank you Ivan, and good morning again everybody.

As noted in the press release, our earnings for the quarter were $1.75 per common share on a fully diluted basis, the highest quarterly earnings in our history. As Ivan talked about, we had a very exciting and profitable quarter.

The quarterly numbers were impacted greatly by our success in monetizing three of our equity kickers, which resulted in around $100 million in cash, approximately $20 million in net income, and added around $4 per share to our economic book value.

The details of the accounting related to these transactions was clearly laid out in the press release. As Ivan mentioned, these investments are a key part of our business model and continue to deliver significant earnings and capital to the Company. In fact, we've had a positive impact from one or more of our equity kickers in 10 quarters now and have recorded income from these investments in eight quarters.

In the press release, we also added a schedule calculating our economic book value per share, which includes the cash received from the monetization of the 450 West 33rd Street transaction that was deferred for accounting purposes. We include this transaction in our economic book value because we have received the cash, which has substantially increased our capital base.

As the schedule shows, our estimated economic book value is a little over $23 per share and our equity kickers have added over $6.00 per share to those numbers since inception.

Equally important has been our ability to structure these equity kickers in a tax efficient manner, allowing us to recycle a substantial amount of the capital to invest in new loans and investments, creating a steady earnings stream.

This key aspect of our business model continues to demonstrate significant off-balance sheet value associated with these types of investments, creating long-term shareholder and franchise value.

And now let me take you through the rest of the results for the quarter.

First, and very significantly, our average balance and core investments grew about $380 million from last quarter, which was directly attributed to the significant growth we achieved in the first two quarters of 2007, including record originations in our second quarter.

As a result, our core interest margins increased by 2.3 million, a 14% increase from the first quarter. The yields for the quarter of these core investments was around 9.55% compared to 9.68% for the first quarter.

Our yield in core investments was approximately 9.47% for the first quarter excluding income from the acceleration of fees and IRR look-backs and produced a yield of around 8.89% this quarter, excluding similar items.

The acceleration of these fees occurs frequently when loans repay prior to their scheduled maturity and the impact of these items was greater in the current quarter.

As we discussed last quarter, yield on the loans that paid off in the first quarter was higher than the yields on the new loans we had put on. We saw the full impact of this during the quarter, and this occurred again on our second quarter growth.

In addition, the weighted average all in yield of our portfolios was 8.84% at June 30, 2007, down from around 9.07% at March 31, 2007.

We continued executing our strategy of improving the credit quality and stability of our portfolio by focusing on loans more in the middle of the capital structure.

This strategy has resulted in lower yields on our portfolio as some of our high-yielding loans continue to pre-pay, a trend we expect to continue over the next couple of quarters, as these higher credit quality investments have generated excellent investment returns based on our leverage capabilities and our reduced borrowing costs.

Also, as Ivan mentioned earlier, this transitional environment offers opportunities to originate investments with attractive yields. We believe we will be able to take advantage of this environment and selectively originate investments with strong risk adjusted returns.

Our overall cost to fund was approximately 6.82% during the quarter. This amount includes the reduction of interest expense, capitalized interest on the Lake in the Woods property. This is the required accounting treatment for real estate owned assets that are intended to be sold.

Backing this out, our average cost of funds was approximately 6.92%, as compared to 6.89% for the prior quarter. This increase was mainly attributed to utilizing the trust preferred securities we issued in April and increases in our warehouse balances outstanding during the quarter.

This was partially offset by reduced borrowing costs in one of our existing warehouse facilities by 25 to 50 basis points.

The average balance in our debt facilities grew by $388 million from last quarter, $8 million more than the increase in our average core investments.

This was primarily due to a $47 million increase in the average restricted cash balance in our CDOs from $137 million in the first quarter to $184 million in the second quarter.

This increase was partially offset by the cash received from our equity raise and the monetization of the 450 West 33rd Street deal, which was used to pay down debt and fund new investments.

The average leverage on our core assets was around 82% for the second quarter, up from around 81% for the first quarter. Including the trust preferreds as debt, the average leverage was 93% for the second quarter as compared to 92% for the first quarter.

This average leverage does not include much of an impact from the cash received from the equity raise and the monetization of our equity kickers, which took place at the end of the second quarter and was partially used to repay debt.

As a result of these transactions, our overall leverage ratio on a spot basis was down to 2.6 to 1 at June 30th as compared to 3.1 to 1 at March 31st. If you include the trust preferred security as debt, the overall leverage ratio is 4.6 to 1 at June 30th and 5.6 to 1 at March 31st. We do expect our leverage ratios to increase in the third quarter, as we deploy the cash received from these transactions in new loans and investments.

There were no other significant changes in the balance sheet that we had not already addressed, so I would now like to talk about the changes in our expenses for the quarter. Operating expenses did increase from the previous quarter. This reflects increased compensation expense from the addition of Michael House, our new Senior Vice President of Loan Acquisitions, and the continued growth of the dedicated asset management business consistent with portfolio growth as well as increased professional fees related to Sarbanes-Oxley requirements.

In addition, the incentive management fee was significantly higher than last quarter due to large gains from our equity kickers during the second quarter.

Stock-based compensation expense, which is a non-cash expense, increased $800,000 or nearly $0.03 per share, largely due to stock grants issued to key employees in April of 2007.

Finally we did include the scheduled summary summarizing our equity participation interest this quarter.

As I anticipated, we did originate two new investments with equity kickers during the quarter, which brings the total number of equity kickers in our portfolio to 13.

As reported earlier, we received around $100 million in cash and recorded $20 million in net income during the quarter from our equity kickers.

In addition, as reported in the press release, we also recorded $900,000 of income on IRR look-backs from the 135 Greenwich Street transaction. The borrower sold the asset during the quarter and our loan and IRR look-back were repaid in full.

The significant earnings we have generated from our equity kickers and IRR look-backs continue to demonstrate our ability to consistently generate additional value from our investments.

With that, I'll turn it back to the operator and we'll be happy to answer any questions you have at this time.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of James Shanahan with Wachovia. Please proceed.

Thank you very much and good morning. Congratulations on one for the record books, a remarkable quarter. I wanted to ask a question about maybe asset yields and investment opportunities.

Can you compare/contrast not just the kind of opportunities that you're seeing so far, nearly halfway through the third quarter, but -- versus Q2, but also the types of structuring improvements that you're seeing in loans that are possible in the market today?

Sure. Thanks, Jim. I mean clearly the events over the last few weeks have really addressed the market in terms of the liquidity and number of funding sources out there. And it's given us a unique opportunity to be extremely selective as to how we want to enter our portfolio.

What we're seeing roughly is a widening anywhere from 50 to 300 basis points, depending on where you are in the capital structure. That itself is significant, but more significant is the last part of your question, and that is the structural aspects of the loans that are being put in the market and on our books.

I think when there was a huge amount of excess liquidity in the market, the loan to values were going higher and higher from 90% to 95% to 97% to 98%. And the deals themselves were being structured very, very poorly and that's one of the things that caused us to move really towards the middle of the capital structure.

We're seeing return to better structured deals, more deposits by the borrower, more reserves required by the borrowers, the return of the profit completion guarantees and the interest reserves on the profit carve-outs.

So not only are we getting and seeing more opportunity to get a significant amount of yield, but we're also seeing the opportunity to go back into some of the junior parts of the capital structure because they're not as junior and they're much better structured.

And those -- that's a great combination to be able to come out into the market and originate.

What do you think that, I guess as a follow-up, what do you think that the potential is here for where the margin could go given your origination targets, pre-payment expectations?

Any thoughts around where your asset yield could go, say by year-end?

I think it's very hard to forecast that and maybe Paul will have a comment after I'm done.

The question is where are we in the market and how long will this last? Will there be further deterioration and lack of liquidity? And I don't have the answer to those. So we're proceeding very cautiously, looking at each opportunity.

First what we're doing is focusing on loans we're going to close in our existing pipeline and that came in over the last 30 or 60 days and where we can increase the margins on those opportunities. Second, on all new opportunities, we're being extremely selective.

What we don't want to do is get to be too aggressive right now because if the market does dip a little bit, we want to have plenty of dry powder to take care of those opportunities.

And the second part is, as you know, the firm has always been extremely good at moving very quickly on extremely lucrative opportunities. And that's where we can really get going on premium yields and potential equity kickers and we want to make sure we have adequate capital to take advantage of those opportunities because they don't come along that often. When they do come along, we want to be able to access them.

Paul, do you have any comments on that question?

Sure. Jim, I think Ivan's right. It's a little tough to predict at this point if we're starting to see the opportunities yet. They're not necessarily in the portfolio yet, so the third quarter probably won't be impacted greatly by those opportunities because we are seeing -- it takes some time to get a good portfolio and also to be accretive to EPS.

And we are, as I mentioned in my comments, still seeing some run off of higher yields while we were moving to the higher credit quality assets.

So I think the third quarter probably will have not much of an impact. We're hoping we'll have an impact for the fourth quarter, but it's probably going to be another couple of weeks before we have our hands around what we think that will affect the fourth quarter by.

Thanks. I'll get back in the queue. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Don Fandetti with Citigroup. Please proceed.

Hi. Ivan, just a quick question. I just curious what you're hearing from some of the larger real estate players that you guys do business with? Whether it's Lightstone?

I mean are these guys looking at this environment, saying they've got to pull back a little bit or are they moving forward aggressively?

I think, depending on who's out there, what's going on. I mean clearly a lot of the larger players who have active contracts in place to close their loans have a high level of concern that the lenders are going to be able to honor those commitments or applications and at what spreads and what structure and that's really where the focus is for a lot of people.

And I think for those people who have the dry powder, the day has finally arrived where they feel, I think, they can make the kind of investments that they're accustomed to and get the kind of returns and they're going to be sitting back patiently. So that's kind of the environment out there.

Okay. And just to clarify, we're obviously hearing from a lot of big companies, where the commercial real estate lenders are basically taking a little bit of a pause here in anticipation of wider spreads in the market.

It sounds like you guys are kind of moving forward or are you doing the same thing? I'm just trying to clarify.

Well we certainly have wider spreads and we'll evaluate each opportunity, so they'll -- you'll first have to deal with your account in pipeline and then second you have to look at new opportunities and your borrowing base.

I think to step out of the market totally would be an error. I think to proceed cautiously and go into the best deals with the appropriate -- then you sit back and see whether this decline is going to continue.

Remember most of the decline that's occurring is really a result of spillover from other sectors, not directly in our sector.

Yes. You have experience. Obviously you've been through the cycles and ran a residential company.

And what leads you to believe that we won't ultimately -- we just don't have sort of a delay here where commercial real estate's going to roll over too. It's just going to take a little bit more time?

Well there's nothing to indicate, at all, in terms of commercial statistics that we're going to see increased delinquencies in the commercial side.

I think some of the fear that's been driven into our sector, which is legitimate, is the ability to securitize commercial loans and the ability to create CDOs. That clearly is a back up as everybody's taking a pause. That always returns. It's just a matter of timing and pricing.

And remember that pricing and those characteristics ultimately pass through to the consumer and hopefully it'll be transparent. And real opportunities come from leveraging off of the liabilities side, which we have locked in and locking in a larger spread that exists today. But I do believe there'll be a certain time when things level off and it'll all be passed through on your borrowing side and on your lending side.

Okay. Thanks.

Your next question comes from the line of Steve DeLaney with JMP Securities. Please proceed.

Good morning, Ivan and Paul.

Hey Steve.

Congratulations to you on a fantastic quarter. Picking up on the theme of liquidity in the marketplace, I think it's been CDOs two and three had replenishment features. And I wondered if you could comment about your current capacity and I assume that may be reflected by the restricted cash on the balance sheet.

But more importantly, I guess, based on your inside knowledge of the loans that are in those CDOs, can you give us some sense of how much dry powder will be, from a financing standpoint, might be created over the next one to two years so that some of your new originations could be directed to those attractively priced financing sources?

Yes. I think -- Steve, its Paul. To answer the first part of your question, all three of the CDOs we have have replenishment capabilities.

Okay.

Okay? So, all three of them do.

As far as capacity, you're correct, there's about $200 million in cash sitting on the CDOs as of the end of the quarter. We're starting to deploy that now and that has to do with all the runoff we had in the second quarter, which the timing was tough to predict. But clearly that's available liquidity day one to put into new investments.

As far as the assets that are in the portfolio, in the CDO, and how quick they'll runoff and whether we have capacity going forward, we will see some of that runoff. And I think between the $200 million of restricted cash and natural runoff that is now in those vehicles, we'll have ample replenishment to put back into those CDOs for new business.

Great. And you have talked in the past about possibly CDO four, possibly getting done by the end of the year. We saw that earlier this week Gramercy announced, I guess to my surprise, that they were able to get a deal priced.

Is that something that you're still working on and do you still have hopes that there might be another transaction this year?

We'll clearly evaluate that depending on how the market is and what the most cost effective way to borrow at that time is.

We still have significant capacity within our lines and we'll see where those markets are and whether, as far as a delay, it may be prudent, that's hard to predict at that time.

But between our warehousing facilities and between the capacity in our CDOs, we have sufficient and adequate capital to continue to run our business very efficiently.

Thanks, Ivan.

Your next question comes from the line of Joshua Barber with Stifel Nicolaus. Please proceed.

Your next question is a follow-up from the line of James Shanahan with Wachovia. Please proceed.

Thanks. I'd like to follow-up on Steve's question. I -- regarding the Gramercy transaction that he was referring to, what they did that I thought was interesting, recognizing that the only CDOs that could really get done in this environment would be collateralized or by very high quality CMBS or fixed rate loans.

Is there an opportunity to carve out some of these higher quality longer duration fixed rate loans that are in your existing CDOs to create the new one and access additional CDO capacity and then free up even far greater capacity in CDOs one through three? Is that a possibility?

I think you have to study that structure a little bit harder because I believe they acquired CMBS in the open market, which -- and that's a significant part of their CDO. So that's not from loan originations.

In terms of taking existing debt outside of our existing loans that are in our CDOs, we don't plan on taking existing loans out, unless of course there's a payoff and then they have to replenish.

I think going toward a fourth CDO, we'll have to evaluate where the market is and what kind of collateral will be best execution. The nice part is that our first three CDOs have a lot of flexibility in terms of product type.

I will go on a limb to say that the fourth CDO will be probably more on the home loans side and more straightforward collateral, that's probably where the market will be. I think that the CDO market's probably got a little overdone in terms of the kinds of collateral and how -- and the kind of structure that they've put in there.

But based on our first three CDOs we have more than ample opportunity to use that to fund that side of our business and the fourth CDO will be a little bit more plain vanilla.

Okay. And as a follow-up question, regarding the structure and the relationship with Arbor Commercial Mortgage, clearly I think that many of us on the call and everyone there believes that there is greater value in Arbor Realty Trust than the market is certainly recognizing right now.

Is there any talk of maybe -- or any discussion of changing the structure and -- ownership structure or external versus internal management of Arbor Realty? I mean could anything be changing here at the margin or is it business as usual?

We have not reevaluated that. That was evaluated it by the Board probably, what Paul, about a year and a half ago?

Yes, a little over a year ago, Ivan.

Right. So we have not -- that Board has not brought that issue up, but clearly we'll -- with your question, we'll re-examine it and see if it's appropriate at this time to re-examine that issue.

Okay. Thank you.

Your next question comes from the line of Jay Willadsen with Lee Munder Capital. Please proceed sir.

Hi guys. I was just wondering if you can -- your bridge loan portfolio, you expect those to pay off quicker than the rest of the portfolio and now that the environment's changed, what does that do to that portfolio? Do more loans become longer term assets for you guys or is it -- do you expect those to repay as they have in the past?

Well clearly the bridge loans have shorter terms on them and to the extent that they are not hitting their objectives in terms of take outs or performance, we'll look at that as a restructuring opportunity and re-originate that loan in one form or the other.

So clearly we have a good part of our portfolio with the longer term fixed rates and the bridge loans will just be seen as an opportunity to figure out how to reorient that loan so it benefits the current marketplace?

So you actually -- it is actually a positive for you guys versus a negative? Because that will refine a lot quicker in the past and now they can be turned out at higher rates and --?

Yes. Remember, we know those loans in our portfolio better than a loan that's out there. So we can really give it a better analysis and price it more prudently.

When you originate a new loan, you're looking at new information, when we have a bridge loan, we're monitoring that and managing that loan, so we have a handle on that and the borrower is extremely well, so we're in a better position.

Okay. Thanks. And I had a second question. On the CDOs, when those are structured, the equity traunch on those, you guys keep that on balance sheet, correct?

That's right.

And how have those acted in this environment? I mean -- I guess what -- how do we see what the true value of those is? Obviously spreads have widened out and they might not be worth what they were a month ago, but how can we see that?

I'm not so sure you can, but I'm also not so sure how relevant it is because the CDOs are fixed over a portion of time, they're locked in non-recourse financing, so once we put that asset into the CDO.

It's being financed at a locked in rate. If it's a fixed rate loan, we're swapping out, it's perfectly natural, the borrowings versus what's being paid.

But the changes in value in those assets doesn't affect the CDO vehicle, because it's locked in over a period of seven to 10 years guaranteed financing.

Okay. I guess I'm coming more from a credit standpoint and at the bid a month ago, 100 cents on the dollar, what would it be today if you tried to liquidate something like that or tried to sell something like that? Or maybe I'm thinking about it the wrong way.

I just think there are a variety and number of factors and it's hard to answer that.

It's really what the core value of that asset is and whether that asset has changed and let's just take for an example, today, if spreads are wider, 50 basis points, on a fixed rate loan, you look at the treasury market, it's down 60 basis points, correct? So a lot of that increase of spread is absorbed by lower interest rates.

But in general, when we put on these long-term fixed rate loans, these assets are improving over time, and the performance of these assets are improving all the time. But we look very closely at every single asset in our portfolio whether it's swapped out or it's not to determine whether there's any issue of deterioration of collateral value and we monitor that every single month and we have no deterioration whatsoever in the market and we'll mark those assets internally and we don't have a concern at the present time at all in our portfolio.

Yes, and I think understanding your question now, that Ivan's right and we don't -- we, every quarter and every really month, we have to go through with our CDO investors analysis of each one of those loans and the equity value. And we've not seen a deterioration in that.

Okay. Did the Homewood Mountain Resort property, did that, the buyers, did that have any effect there?

No, that didn't really affect us at all. In fact we sent our people out this week just to review that asset, being one of our bigger assets and reports back are very comfortable.

Okay. And I think -- the equity kickers, I guess, you've created a lot of value there and I think there's probably a lot left within the portfolio that the market obviously is not giving you credit for. Why they're not, I don't know.

Is there any way you can highlight how much value is left within the remaining equity kickers better?

It's very difficult because as you know, the values fluctuate and change. I mean, for example, we closed a Prime portfolio four or five years ago, after the first year, you couldn't say there was a lot of value and each year that value kept changing.

So those values change a lot and it's too much risk for us to provide guidance on value, number one. Number two, we do provide guidance on key statistics so people can come to their own determination.

What's to my surprise, even with the monetization of a lot of these values, we still get no credit. So whether you say there's value, whether you [give] the value, we've yet to see any differentiation in our stock price. We've added $6.00 of book value, roughly economic value, to our stock price and I don't believe we've gotten the credit in the market for what we've added, let alone for what is still on balance sheet and on registers.

Yes, I don't get it either. Today especially, I just don't understand it. But keep up the good work. Thanks.

Thanks.

Your next question comes from the line of Dean Choksi with Lehman Brothers. Please proceed, sir.

Hey Ivan and Paul. I had a question. How much capacity is remaining on the existing buy-back? And then what's your thought process around buying back the stock here versus redeploying the proceeds from the equity kicker monetizations?

I think we don't -- at the present time, we haven't even looked at what's left to buy back. But clearly, it is our intention to preserve every dollar of liquidity we have. And we think the opportunities in the marketplace are outstanding and even if it's a yield equivalent or a yield beneficial to buying back the stock, we think building out our franchise by penetrating the market is a much better alternative for us right now.

These opportunities don't come along that often in the real estate cycle and we want to make sure that we deploy our capital to not only a great yield, but strengthen our franchise.

Dean, the other part of that question was we did enter into a stock buy-back, as you know, a 10b5-1 plan, and that plan did expire in February of '07. And based on Ivan's comments, I agree, we'd rather have the money to deploy into the new assets.

Your next question comes from the line of Ian Goltra with KIG Investment Group. Please proceed sir.

Yes, good morning Ivan and good morning Paul. Actually Dean just got it and the buy-back question obviously is very real to us folks out here given the lack of realization of your model in the market currently.

So I understand the calculus you're going through and how important it is to deploy in the current environment, but at some point I'm kind of interested in what the calculus is in terms of the tradeoff between new assets and the existing equity?

Yes, I think that we want to get through this cycle, which hopefully will only be 90 days for some. And I think we'll re-evaluate it as we go through the cycle. I mean, clearly if there is further deterioration in the cycle, every dollar of liquidity you have is just a tremendous amount of value in operating a company.

So I think with respect to repurchase and reinstituting that, I think the times will dictate the strategy that we deploy.

I imagine there's some pretty active discussions with the Board then?

Absolutely.

Yes. Thank you.

Your next question comes from the line of David Boardman with Wachovia Securities. Please proceed, sir.

How are you doing, Ivan? How are you doing, Paul?

Hey David.

Just a quick update on debt service coverage and LTVs. What were the LTVs at the end of period? What were the LTVs on your originations? And then what's your debt service coverage as of today?

Sure, David, it's Paul. The LTV came in around 70% at 6/30 up from like the 67% in March, but extended stay, which was about $95 million, did impact that number, so if you were to back that out, it was about $58 million. So it was right around where we were last quarter. The originations that we put in the quarter had an LTV of I think around 74%, 75%, but again extended stay had a big part of that.

Debt cover is 126 and it was 128 last quarter. So pretty much flat and a shock to asset cover, a rise in interest rates doesn't really impact that cover very much because a substantial amount of our portfolio is either fixed rate and doesn't get affected by the moving rate or has LIBOR caps, which we [forced] borrowers to purchase certain of our assets.

So the debt coverage is hanging there pretty much around the same.

Okay. And then maybe you can just provide a commentary on what the large banks are thinking right now with their warehouse lines? Not only just yourself, but maybe to your space in general?

What are the large platforms thinking and then put that maybe in context to where you are within the commercial real estate financial space and how important you are to the Wachovias, B of A's of the world?

Yes, I think you have to differentiate between institutions like Wachovia, who have strong balance sheets, and it's an integral part of their business and their business strategy versus Wall Street, who provided lines to facilitate their B notes and who themselves have liquidity issues. So there is a clear distinction.

I do believe that most of Wall Street, their lines are outstanding. The indication is that, a) they won't be issuing any new lines; b) they'll be evaluating their clients and their relationships; and c) I don't think they'll allow their clients to use their lines other than for the acquisition of loans that they have on their portfolio, which they're longer than they'd like to be. That's what we're seeing.

In terms of the institutions like Wachovia, I think clearly they're going to differentiate between clients like ourselves, who are long-term, been through multiple cycles, have great credit quality, good management and look to use their dollars to effectively help them -- those people grow and have a -- clearly we'll proceed with a significant amount of caution relative to other types of clients that are either new in the business or have some deterioration in their credit quality.

I think any deterioration of credit quality will signal a halt to people's ability to conduct future business, which in return will conduct or provide a lot of opportunities for people like ourselves. But we ourselves have met with all our different lenders.

We're very comfortable with their ability to continue to fund the warehousing segment of our business.

And you have to keep in mind, we've been at this since 1993, '94, '95 while we didn't have CDOs, when we didn't access to securitization markets for our collateral, our balance sheet and we've always had strong, long-term relationships and we've been through multiple cycles through this.

So we've prepared for it, we're accustomed to it and our relationships run extremely deep.

Okay. Thank you very much.

At this time, there are no additional questions in queue. I would now like to turn the call back over to management for closing remarks.

Well I'd just like to thank everybody for their patience. I know the market has been extremely volatile.

It's been clearly tougher on me than anybody to watch our stock price decline and at the end of the day it's a long-term value, our franchise, and perhaps it's opportunities like this that create maybe even greater opportunities for wealth creation.

But we're very confident with what we've achieved. I know we've taken some criticism, about a year, a year and a half ago for reducing our yields a little bit and going toward higher quality. But I've been through these cycles, I've seen the writing on the wall and clearly the most important thing is to have a portfolio that performs well.

Because when things turn around like they are now, if management can't focus on originating new opportunities, once the liquidities rise up and then management's tied up in rearranging their loans, you've really lost the greatest opportunities that the real estate market cycles present itself and they don't come along that often.

I think the company is well positioned, management is very focused, the Board is very sturdy and behind everything we've done and I just want to thank you for your support and continued support of the Company going forward. Thank you very much.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.