Arbor Realty Trust Inc (ABR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arbor Realty Trust Third Quarter 2008 Earnings Conference Call. My name is [Oneka], and I will be the operator for today. At this time all participants are in listen only mode. We will have a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Paul Elenio, 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'll discuss the results for the quarter and nine months ended September 30, 2008.

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 in this earnings call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of our business, 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. And now that the Safe Harbor is behind us, I'd like to turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul. And thanks, everybody, for joining us on today's call. Earlier this morning, we issued our third-quarter press release, and in a moment, Paul will walk you through the financial results. But first, I would like to spend some time talking about our view of the market and our approach during these very difficult times.

As we mentioned on our last call, we felt we were just approaching the eye of the storm related to the financial crisis. Consistent with that view, we now feel we are right in the middle of the storm, which, by all recent indicators, appears will last for quite some time.

So, as we will talk about on this call, and you can see from some of our announcements this quarter, we are clearly operating our business in the best possible way to successfully navigate through this extremely difficult environment.

And in our eyes, the keys to success are to retain and preserve as much liquidity as possible, and remain very disciplined and focused as it relates to managing credit and our financing sources. Clearly, liquidity continues to be the primary concern for our sector.

Currently, we have around $110 million in cash, between cash-on-hand and cash available in our CDOs, and around $170 million of capacity in our financing facilities. We are working extremely hard to preserve and maximize liquidity wherever possible, which we believe is a key to successfully managing through this difficult and significant downturn.

As indicated in our dividend announcement, we were pleased with our ability to retain capital from some of our tax-planning strategies related to our equity investments. Although we are not in a position to comment on the amount of future dividend, as stated in our press release, we expect to limit dividends to 100% of taxable income for the immediate future.

Another way we'll continue to look to improve our liquidity is by working aggressively with our borrowers to repay their loans, and they're being very selective when extending or modifying loans, as well as deploying our capital into new investments.

We also continue to manage our funding sources aggressively. We have significantly reduced our exposure to short-term debt by converting a substantial amount of our repo financing to non-mark-to-market term debt facilities.

We've also been very proactive in moving assets financing by these facilities into our CDO vehicles, reducing our short-term debt by $137 million during the quarter, and by another $45 million, already, in the fourth quarter. This continued de-levering of our portfolio is critical in this environment.

Additionally, in October, we were successful in completing a one-year extension on a $90 million warehouse facility that had around $45 million outstanding as of September 30th. The facility was extended for one year, but the committed amount was reduced to $70 million. Pricing was increased by only about 100 basis points on average. This now leaves us with only around $15 million in debts related to one facility that has to be repaid by the end of 2008.

So we continue to aggressively reduce our exposure to short-term debt, and with $275 million of trust-preferred securities, $1.2 billion in CDO debt and our term debt facilities, we now have around 90% of our committed debt non-mark-to-market and secured.

We've also been very successful in generating significant cash flow from our equity kickers, which have already been a key component to our business model. To date, we have received around $250 million in cash from these investments, and they have added around $8 per share to our book value, which stands at around $22 on an adjusted basis, as of September 30th.

Clearly, we are disappointed with our stock price, which has created as low as 20% of book value, and around 15% of adjusted book value, which we believe in no way reflects the long-term value of our company and franchise.

We do, however, understand the magnitude of the financial crisis, and the many challenges and obstacles that lie ahead for us and the companies in our sector. Our primary focus will be to continue to do what we believe is prudent for the long-term success of our firm, and not be distracted by short-term conditions in the stock market.

Now, I would like to spend some time updating you on our credit. I can't stress enough how important it is to have the right expertise and experience, as well as the amount of time and focus it takes, to manage your portfolio effectively in this market. This is an area that we have always been very strong in, which is absolutely critical right now with where the financial markets are.

There is very little liquidity available, and borrowers continue to have difficulty securing new financing. And we expect to continue to see some degree of stress on our loans. Therefore, we will continue to be proactive in our approach of assessing potential risk in our portfolio, and record reserves on assets where it is appropriate.

So, through the detailed quarterly review we perform in our portfolio, we booked $3 million of loan-loss reserves on three loans during the quarter, with an outstanding balance of $62 million. We felt these reserves were prudent, based on current market conditions and the value of the operating status of these properties. And we now have $6.5 million in loan-loss reserves related to six assets with an outstanding balance totaling approximately $138 million, as of September 30th.

I also want to give you a quick update on our investments in the Extended Stay and 303 East 51st Street. First, on Extended Stay, as we mentioned last quarter, there has been a significant reduction in RevPAR over the last few quarters, and we are projecting about a 5% to 6% cumulative decrease in RevPAR for 2008. This is a trend we expect to continue for the short term, but we hope to eventually see some stabilization towards the end of 2009.

Our investment is still performing, and assuming LIBOR stays where it is, or continues to come down, we believe there will be sufficient cash flow to service our debt and cover the anticipated reduction in RevPAR in the near term. However, if RevPAR declines further than anticipated, and there is sustained increase in LIBOR, this investment could be impaired. Therefore, we will continue to closely monitor and actively manage this asset, and be proactive in assessing and evaluating any potential risks.

On the 303 East 51st Street project, as previously disclosed, we started the foreclosure process, and are aggressively pursuing obtaining the fee interest in this property. And between our in-house expertise and our outside advisors, our goal is to protect the integrity and the value of this asset, and monetize the value as quickly as possible.

Overall, we are satisfied with the credit quality of our portfolio given the current environment, but these were extremely difficult times, and we are not immune to the effects in this market. Certainly, no one can accurately predict how long this recession will last, but we are preparing our firm for the worst. We are operating our business expecting that the commercial industry will continue to struggle throughout 2009. If this is the case, we will likely incur losses for predicting the amounts, and timing will be very difficult.

We do believe that a significant portion of our portfolio consists of high quality real estate, and is backed by good sponsorship. However, given the environment, we will remain extremely aggressive in managing every asset, and the goal of minimizing losses and resolving issues quickly.

Turning to our portfolio activity for the quarter, we added $41 million of new loans and investments, and had $120 million of runoff. We also re-originated $34 million of loans and extended $104 million of loans, in accordance with their extension options.

As you can see, in this market, it is very tough to accurately predict repayments, but our best guess is in the range of $50 million to $150 million of runoff in each of the next few quarters. We will continue to preserve capital, and will be extremely selective in making new investments, which will continue to shrink our portfolio [bid] over the short term.

In summary, these continue to be very difficult times, in a very challenging operating environment, and we see no signs of improvement in the near future. We are pleased with our overall accomplishments to date, given the circumstances, and believe we have managed our portfolio well in this market.

We will continue to aggressively manage our legacy issues and credit facilities, and focus heavily on liquidity, capital retention and reducing our short-term borrowings during this significant downturn. Focusing on these areas will be the key for us to manage through this environment. I will now turn the call over to Paul to take you through some of the financial results.

Okay. Thank you, Ivan. As noted in the press release, our earnings for the third quarter were $0.10 per share on a fully diluted basis, and were $0.49 per share after adding back the one-time non-recurring write-down of our equity investment in CBRE.

Based on certain factors, GAAP required us to write down this investment to $1.35, which was the stock's closing price on September 30, 2008. This resulted in a non-recurring charge to earnings of $12.7 million during the quarter, but only reduced our book value by approximately $3 million. This was due to marking to market this investment through our equity section in previous quarters, and from a reduction of the incentive-management fee this quarter related to this one-time charge.

As of September 30, 2008, our book value per share was $18.25, and adding back deferred gains from our equity kickers and unrealized losses on our interest-rate swaps, our adjusted book value per share was approximately $22.

The third-quarter numbers did include a $3 million provision for loan losses, or around $0.09 a share on three loans with an unpaid principal balance of $62 million. We now have $6.5 million of loan-loss reserves on six loans totaling around $138 million at September 30, 2008, and there were no new non-performing loans during the quarter.

We will continue to take a proactive approach in evaluating our portfolio, recording reserves where we think it's appropriate, and remain extremely aggressive in managing our assets with the goal of resolving potential issues quickly.

We also recorded a $1.6 million loss during the quarter from our equity interest in the Alpine Meadows Ski Resort. This represents our portion of the losses from operations, including depreciation expense. As we mentioned last quarter, this business is seasonal, and is not part of our core operation. There will be fluctuations in our EPS related to this investment, as there are losses in the summer months, and income in the winter months.

We are estimating that we will have a loss in the range of $750,000 to $1 million for the fourth quarter, but believe our share of the operation for a full year, going forward, will be about break-even, including depreciation expense.

So, due to depreciation expense related to this investment, as well as depreciation from our real estate owned asset, we have elected to introduce funds from operations this quarter as an additional financial measure, which came in at $0.12 for the third quarter and $0.51, adding back the one-time non-recurring write-down of CBRE.

I'd now like to take you through the rest of the results for the quarter. And first, our average balance in core investments declined about $10 million from last quarter, which was less than our net runoff this quarter, due to the funding -- due to us funding some unfunded commitments, and the timing of runoff in the second quarter.

The yield for the quarter in these core investments was around 7.82%, compared to 7.91% for the prior quarter. Without the acceleration of fees, the yields in these core assets was around 7.62% for the third quarter, and around 7.86% for the second quarter. This decrease was primarily due to placing the 303 East 51st asset on non-accrual during the second quarter, the full effect of the yield compression from the second-quarter portfolio activity in the third quarter, and a slight decline in the average LIBOR rate during the third quarter.

Additionally, the weighted average all-in yield in our portfolio was around 8.03% at September 30, 2008, compared to 7.56% at June 30, 2008. This increase was primarily due to around 150 basis-point increase in LIBOR for the comparable dates, partially offset by fixed-rate loans and loans with LIBOR floors above the September 30th rate, representing approximately 65% of our portfolio.

In addition, LIBOR has come down significantly since September 30th, and the weighted-average yield on our portfolio was around 7.64% at October 31, 2008, and approximately 7.45%, based on yesterday's LIBOR rates. And, again, LIBOR came down again today.

The average balance on our debt facilities decreased by around $30 million from last quarter, which was more than the decrease in our core investments. As Ivan mentioned, this was primarily due to our continued focus on reducing our exposure to short-term debt by moving loans out of our warehouse and term-debt facilities into our CDO vehicles.

The average cost of funds in our debt facilities was approximately 5.14% for the third quarter, compared to 5.06% for the second quarter. Excluding some unusual items, our average cost of funds was approximately 5.10% for both the second and third quarters.

In addition, our estimated all-in debt costs were around 6% at September 30, 2008, up from 5.10% at June 30, 2008, due to the significant increase in LIBOR related to 65% of our debt that is floating.

As I previously mentioned, LIBOR has come down since September significantly, and we are estimating our all-in debt costs to be approximately 5.35% at October 31, 2008, and around 5% as of yesterday's rates.

Overall, the third-quarter normalized net-interest spreads on our core assets decreased to about 2.55%, from around 2.75%, mainly due to the 303 East 51st Street asset, and the full effect of the yield compression from the second-quarter runoff in the third quarter.

Next, our average leverage ratio is around 74% on our core assets, and around 85%, including the trust-preferreds as debt, for the third quarter, down from 75% and 86% for the second quarter. And our overall leverage ratios on a spot basis were also down to around 2.5 to one for the third quarter, from 2.7 to one for the second quarter, reflecting the continued de-levering of our balance sheet through runoff, and moving assets into our CDOs.

Operating expenses did come in lower than the previous quarter. This was due to around $1 million of non-cash expenses from stock grants issued in the second quarter, and a $3.3 million reduction in the incentive-management fee, mainly due to the non-recurring write-down of CBRE.

This was partially offset by a $1 million increase in loan-loss reserves during the quarter. There are some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents decreased $23 million from last quarter, largely due to the cash received from the monetization of the prime investment at the end of the second quarter that was used to pay down debt in the third quarter.

Notes payable and repurchase agreements decreased $137 million during the quarter, primarily due to our strategy of reducing short-term debt through loan payoffs, and moving assets into our CDO vehicles.

And restricted cash related to our CDOs went down $75 million on a spot basis again, mainly due to runoff, and moving assets from our short-term facilities during the third quarter. In addition, other comprehensive losses increased by about $8 million for the quarter, backing out the mark related to the CBRE investment in the second quarter. This was partially due to a decline in the market value of our interest-rate swaps from a change in the outlook on interest rate. GAAP does require that we flow these changes in value through our equity section.

Lastly, looking at our portfolio statistics, as of September 30th, about 65% of our portfolio was variable, and 35% was fixed. By product type, about 60% was bridge, 13% was junior participation, 16% was mez, and 8% was preferred equity.

By asset class, 35% is multifamily, 27% is office, 18% are hotels, 11%, land, and 4%, condo conversion. The loan-to-value of our portfolio was around 73%, and our weighted-average median-dollars outstanding was 53%, with an average duration of our portfolio of 32 months, without extension options.

Our debt-service coverage ratio was around 124 this quarter, and geographically, we have around 40% of our portfolio concentrated in New York City. 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). Our first question comes from the line of James Shanahan, with Wachovia. Please proceed.

Thank you. Good morning, gentlemen.

Good morning, Jim.

Good morning, Jim.

A question for you, please -- you just mentioned, Paul, the average duration of the loan book at 32 months, on average. What is the average duration of your CDO liabilities -- any idea?

Sure. Well, let's talk about the replenishment periods in the CDOs. CDO-one goes April '09. CDO-two is April of 2011. And CDO-three is January of 2012.

That's just the replenishment period.

That's the replenishment period.

Gene's on the call. Gene, do you happen to have an approximation of what the duration is on the CDOs?

Sure. It's going to depend, in part, of course, on -- once the replenishment ends -- once that ceases, to what extent do assets pay or prepay at what rate? But, I think we would estimate, on the average, that it would probably be two to three years beyond that date.

For each CDO.

For each CDO.

Yes.

Is there anything particular about the assets that are in each of these CDOs that would lead to the duration being longer or shorter relative to one another? Are they similar in nature?

They're generally similar in nature. I mean there could be relatively minor differences between the degree of fixed and floating assets that are in each. But, normally, there's not that much variation among them. And, of course, the real key will be -- at the end of the replenishment period, "What's the composition at that point in time?" as opposed to today.

That's really what will drive it. So to the extent we have prepayments or scheduled payments between now and the end of the replenishment on each of the CDOs -- what's the nature of the assets and the prepayment protection -- fixed versus floating? What's the nature of that at the end of the replenishment period? And, clearly, we try to optimize that.

All right. Okay. And, Ivan, a question for you please -- the -- there have been -- the CBRE Realty Finance has had, and continues to have a lot of problems. And they've struggled. And I guess they're going to internalize now, and completely separate themselves from CBRE Realty or CBG.

Is there -- do these -- do the changes they've announced recently increase or decrease your interest in CBF? Do you still have an interest in their long- term liabilities or acquiring the company at some cost? Or, is this kind of -- are you shelving this at this point?

Well, I really -- given the agreements we're under, I really can't comment on any of it. But our intentions have always been very consistent from day one. And to the extent there is an opportunity and there are synergies and we have value, we would pursue it. But, I'm not in a position to really comment any further than that.

Okay. Paul, housekeeping item, please, you discussed on your -- the funding costs -- that there was -- the cost of, I guess -- I guess this was your all-in cost of debt -- 5.35% at October 31st and 5% today?

Right.

What was that number -- I missed it -- as of Sep-30?

At September 30th, it was about 6%, because, as you know, Jim, LIBOR spiked up big at September 30th, and then came rocketing back down.

Okay. And the comparable number would have been around 5% at -- on June 30th?

Yes, 5.10% was the comparable number.

Okay. Thanks very much.

No problem, Jim.

Thanks, Jim.

Your next question comes from David Fick with Stifel Nicolaus. Please proceed.

Yes. Good morning.

Good morning, David.

Can you talk a little bit more about Extended Stay and, specifically, outline any debt that they may have coming due in 2009 or 2010?

There's not much I can tell you about Extended Stay, other than that -- other than the fact that it's a complex investment, due to the fact that you have RevPAR declining, and so much of the cash flow depends on LIBOR.

And when LIBOR goes up, it makes it more difficult when LIBOR goes down. Like now, it makes it more viable. In terms of the parameters on the extension of the debt, I'll have to get it -- get that back to you. I don't have that in front of me.

But there are maturities in '09 and --

It's a five-year -- it was a five-year debt -- what's that?

The lease was a five-year instrument.

Yes. It was a five-year instrument. And there are certain tests to extend and -- to extend that loan. I don't have the exact dates or what those tests are, exactly.

Okay. We'll follow up later. I would also be interested in any property-level mortgages that would also be rolling over during that time period.

I believe that's nominal. It's all one big piece of debt.

Okay, great. Thanks.

(Operator Instructions). Your next question is a follow-up from the line of James Shanahan, with Wachovia. Please proceed.

Great. Thanks for taking my follow-up. I'm looking at the numbers here, and I know some clients have expressed some concern about this -- that just the overall level of reserves, both taken for the loans this quarter and, overall, for loans that you've identified as being impaired -- just -- it seems relatively low.

And I'd like you to, if you can, give us a little bit more information around that level of reserves, relative to the size of the outstanding loans, that might get us more comfortable that you've said the provisions are sufficient and appropriate.

Okay. Jim, it's Paul. Of the $6.5 million of loan-loss reserves we have on the books, it's on about $140 million of assets. As far as your -- the first part of your question on the loan-loss reserves being -- appearing to be, from your stance, low -- the process is a long and complicated, and very detailed one. We look at every asset, every day.

On a quarterly basis, we evaluate them individually. We shop them. We use different types of market assumptions. And, although, obviously, in this dislocated market, risk ratings are starting to increase on certain assets, at this point, those reserves are appropriate.

But, as Ivan said in his comments, we are expecting a significant dislocation here, through 2009. And if that's the case, we're not immune to the effects of this. We've done a great job of managing our legacy portfolio, but it's likely we will incur losses. It's just a matter of how much and when. And that's just really hard to predict.

But right now, based on the evaluations we see, those reserves appear to be appropriate for us. And, of course, our accountants go through that as well, in a lot of detail, using their own evaluation team as well. And we're both comfortable with those numbers.

Okay. Thank you.

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

I'd just like to thank you for your participation. These, as I've said in comments today, are extremely difficult times. We are, clearly, concerned with the commercial real estate environment for 2009, and the general economy. And we'll have to react accordingly, as we see how the next couple of months unfold. So thanks once again, and take care.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you and have a good day.