Arbor Realty Trust Inc (ABR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Arbor Realty Trust earnings conference call. My name is Chanel and I'll be your coordinator today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Paul Elenio, Chief Financial Officer.

Thank you, Chanel, and 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 year ended December 31, 2009. 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 of 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. Good morning everyone and thank you for joining us on today's call. At this point, I hope everyone has had a chance to look over our fourth quarter earnings release that we issued this morning. Before I turn things back over to Paul for a review of our fourth quarter financial results, I would like to spend some time focusing on our significant accomplishments and how we have positioned the company appropriately for the future. I would like to start by emphasizing how pleased we are in our ability to successfully restructure our entire balance sheet.

Over the last 30 months beginning in July of 2007, we faced one of the greatest dislocations in US history which has had a dramatic impact on our liquidity, operational capability, and the ability to execute our business plan. And although we have recorded substantial losses during this period, we believe we've been able to successfully navigate through the significant downturn. We do feel there is more work to be done but are very pleased with how we've positioned the company.

We began 2009 with warehouse and term debt outstanding of approximately $525 million with 5 different financial institutions. Through the successful restructuring and pay down of these facilities, the balance was reduced to approximately $336 million as of September 30, 2009 with effectively one financial institution. As announced in today's press release, we were successful in coming to terms with the lender and negotiated retirement of the facility for $176 million or 52.5% of the amount outstanding. Since we reached this agreement, we've been successful in paying down the discounted purchase price by $62 million leaving a balance of approximately $114 million. We are focused on raising the necessary capital to close this transaction and, per the agreement, have until the end of August 2010 to do so. The completion of this transaction will result in a significant gain and increase to our book value per share.

As previously announced, we successfully restructured all of our $290 million of trust preferred securities reducing the current pay rate significantly to 50 basis points for a 3 year period from approximately 2.90 over LIBOR. As of today, we were able to retire $114 million of this debt at a substantial discount in exchange for a combination of bonds and cash. We will record a gain of approximately $26 million from this transaction in the first quarter of 2010.

We believe the significant debt retirements are a major step in positioning ourselves favorably for the future. This will also improve the right side of our balance sheet significantly by reducing our leverage and recourse debt substantially, leaving us poised to take advantage of the opportunities that exist in the market. Additionally, management has been heavily focused on liquidity and as of today, we have approximately $63 million of cash on hand and around $20 million of cash collateral posted against our swaps.

We are very pleased with our ability to manage our CDO vehicles efficiently receiving all of the cash distributions from these vehicles in 2009 and the first quarter of 2010. The effective management of our CDOs has also contributed greatly to the reduction of approximately $200 million in our warehouse and term debt facility in 2009. We will continue to optimize and utilize these facilities going forward by transferring assets and originating new loans where available and appropriate. Although we've taken significant losses, we believe we've done an effective job managing through the downturn by restructuring our balance sheet which includes repurchasing the Wachovia and trust preferred debt at deep discounts. We have also executed effective strategy to manage and mitigate losses including repurchasing other debt and monetizing our equity investments.

In fact, we recorded $54 million in gains from these repurchases during 2009 and around $12 million already in 2010. In addition, as I mentioned earlier, we recorded a gain of $26 million in the first quarter from the retirement of a portion of our trust preferred debt. We believe there could be similar opportunities for us in the area going forward so we'll continue to evaluate these transactions based on availability, pricing, and liquidity.

We also generated $43 million in cash and a gain of approximately $48 million in 2009 from monetizing our equity investments in prime. Now I would like to update you on our view of the market and a credit status of our portfolio. This environment has clearly had an impact on every borrower, on real estate values across all asset classes and geographic locations as commercial real estate fundamentals remain weak.

As a result we recorded $100 million of loan loss reserves during the fourth quarter related to 23 loans with an outstanding balance of approximately $618 million. Of that amount, $52 million were on loans on which we had previously recorded reserves while $48 million were on new reserves. We also restructured several loans during the quarter recording losses of around $25 million from these transactions. We now have $326 million in loan loss reserves at December 31 related to 31 loans with an outstanding balance of approximately $694 million. We also refinanced and modified $284 million of loans and extended $66 million of loans in accordance with their extension options in the fourth quarter. Additionally, we recorded a $9.8 million impairment charge in the fourth quarter related to certain bonds. In 2010, these bonds were exchanged, along with cash, in connection with the trust preferred securities retirement I discussed earlier resulting in a $26 million gain.

At December 31, the total amount of our non-performing loans increased to around $225 million from $200 million in September 30th. This was primarily due to the additional of five new non-performing loans with a carrying value of approximately $60 million, partially offset by the payoff of one loan at a discount with a carrying value of around $33 million before reserves. If real estate values and fundamentals continue to decline in 2010, this will likely result in additional delinquencies and losses. Accordingly, we will continue to focus on strengthening our balance sheet, preserving liquidity, and aggressively managing our portfolio as we have been since this downturn began over two years ago. As the market continues to find its way, we are beginning to evaluate opportunities to participate in lending again.

Although we feel the worst may be behind us, this is still a very difficult environment to navigate through and you must have the patience and capacity necessary to await the market recovery. We are extremely pleased with our ability to substantially improve our liquidity and restructure and retire a significant amount of debt at deep discounts. This again will produce large gains and improve our balance sheet significantly. We have also taken the necessary steps in managing our portfolio effectively, restructuring and monetizing loans, and recording the appropriate amount of reserves at this time. As we continue to move ahead, we can't emphasis enough the importance of effectively managing our portfolio. This remains a critical component during these times. And as I've said before, we are fortunate to have a very tenured and seasoned management team to help guide us through this current environment. I will now turn the call over to Paul to take you through some of the financial results.

Thank you, Ivan. As noted in the press release, we had a net loss for the fourth quarter of $133.7 million or $5.27 per share. As in previous quarters, we did have a few large items that affected the numbers. We recorded $99.8 million of loan loss reserves and $24.5 million of losses from restructured and paid off loans during the quarter. We now have $326 million of loan loss reserves on 31 loans with a UPB of around $694 million at December 31, 2009.

As Ivan mentioned, commercial real estate fundamentals continued to weaken and these reserves reflect current market conditions and our proactive approach in evaluating our portfolio, and actively managing and monetizing our assets. Additionally, we recorded an impairment charge of $9.8 million on one of our securities held to maturity during the quarter. The security was reclassified to held for sale and written down to its fair value due to the fact that we exchanged the security as part of the retirement of $114 million of trust preferred securities. The details of this transaction were laid out in this morning's press release. But just to summarize we are extremely pleased with our ability to retire a significant amount of trust preferred debt at a substantial discount which will generate a gain of around $26 million in the first quarter of 2010 while using only $10.5 million of corporate liquidity.

The completion of this transaction has significantly improved our balance sheet and increased book value per share. Looking at the rest of the results for the quarter, the average balance in core investments declined about $40 million from last quarter mainly due to payoffs and pay downs during the quarter. The yield for the quarter on these core investments was around 4.42% compared to 5.35% for the prior quarter. Without some non-recurring items related to impaired, non-performing and restructured loans, the yield on these core assets was around 5.30% for the fourth quarter compared to around 5.45% for the third quarter. This decrease was primarily due to reduced rates on refinanced and modified loans as well as an increase in nonperforming loans in the fourth quarter. Additionally, the weighted average all-in yield on our portfolio was around 5.20% at December compared to 5.35% at September 30th.

Again, this decrease was due to lower rates on refinanced and modified loans and an increase in non-performing loans during the quarter. The average balance on our debt facilities decreased by around $40 million, as well, from last quarter, which again, was due to payoffs and pay downs. The average cost of funds in our debt facilities was approximately 4.21% for the fourth quarter compared to 4.50% for the third quarter. Excluding the unusual impact on interest expense from our swaps, our average cost of funds was approximately 4.20% for the fourth quarter compared to around 4.21% for the third quarter. This increase was primarily due to the full impact of new pricing in the Wachovia debt restructuring which we closed in the third quarter. In addition our estimated all-in debt cost was around 4.25% at December 31, 2009 compared to 4.20% at September 30, 2009. So overall normalized net interest spreads in our core assets decreased to approximately 1.10% this quarter from 1.30% last quarter, primarily due to reduced rates and refinanced and modified loans, an increase in non-performing loans, and higher weighted average interest costs from the full effect of increased pricing on the Wachovia restructuring.

Next our overall leverage ratios were around 69% on our core assets and around 81% including the trust preferred debt for both the third and fourth quarters. And our overall leverage ratio on a spot basis was 4.2 to 1 at December 31st compared to 3.2 to 1 at September 30th. This increase is due to the reduction in net asset values from the 4th quarter loan loss reserves and losses from loan restructurings. Operating expenses were down from quarter to quarter, primarily due to $1.7 million in foreclosure-related expenses in the third quarter and a $4.1 million success-based fee to our external manager for debt restructurings in the third quarter as well. There were some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents increased $37 million from last quarter, primarily due to cash received from discounted payoffs and the return of some of the cash posted as collateral against certain swap contracts, from an increase in the value of these instruments during the quarter.

As Ivan mentioned, liquidity continues to be a primary focus and we are pleased to report that we currently have around $63 million of cash on hand. Notes payable and repurchase agreements decreased $17 million during the quarter. This is primarily due to our continued strategy of reducing term debt through loans payoffs and moving assets into our CDO vehicles, which also resulted in a $12 million decrease in restricted cash related to our CDOs during the quarter. We were also able to reduce term debt by another $45 million in the first quarter already by moving additional assets into our CDO vehicles. As we discussed in our press release this morning, the agreement to retire all of our debt with Wachovia at a substantial discount provides us with the ability to apply pay downs in the Wachovia facility as a dollar for dollar reduction to the discounted purchase price. So as a result of our ability to pay down the Wachovia debt in the fourth and first quarters, the amount due to Wachovia under the discounted purchase agreement has been reduced to around $114 million from the original payoff figure of $176 million. The ability to successfully reduce this debt by moving assets into our CDO vehicles over time provides us with a lower cost of funds and reduces the amount of capital the company will need to complete this transaction.

As disclosed in the earnings release, book value per share was $3.81 at December 31st, 2009 and adjusted book value was just under $8 a share, adding back deferred gains and temporary losses on our swaps. As Ivan mentioned earlier, we believe there will be selective opportunities to repurchase our debt at significant discounts in the future, and this is an area that we will continue to focus on. Additionally the successful retirement of the trust preferred securities in the first quarter as well as the discounted payoff with Wachovia, if completed, will considerably improve our balance sheet and could result in significant gains and increased book value per share.

Lastly, our portfolio statistics as of December 31st show that about 65% of our portfolio was variable rate, while 35% was fixed. By product type about 61% was bridge, 13% junior participation, and 26% was Mezzanine and preferred equity. By asset class 37% was multi-family, 28% was office, 16% hotel, 12% land, and 1% condo, all of which are relatively unchanged from the prior quarter. Our loan to value was around 92%. Our weighted average median dollars outstanding was 66% and geographically we had around 38% of our portfolio concentrated in New York City. That completes our prepared remarks for this morning and I'd like to turn it back to the operator to answer any questions you may have at this time. Operator.

(Operator Instructions) Your first question comes from the line of David Chiaverini of BMO Capital Markets.

Good morning, guys. A couple of questions for you. Well, it seems like a really good deal getting out of this Wachovia debt for such a big discount. I was wondering why did Wachovia agree to do this and I was curious as to what types of assets were securing this facility?

Trying to figure out the best way to answer that because it didn't happen over a day, it happened over an extended period of time. I just think sometimes it's timing and execution and the right moment so I think we are very fortunate in being able to negotiate a discount. It worked out very favorably for us. The assets that we have in that line today are a significant portion of them or the majority of them are first mortgage liens. I think there are about 14 assets, somewhere in that range. By giving us the opportunity to buy that at a discount, it also afforded us the ability to rework some of those assets with the borrower, infuse additional cash and improve that asset position. So I think Wells saw that it would be beneficial for them and beneficial for us and result in what would be a better result. And some of the losses we took in the fourth quarter had to do with restructuring some of those loans. I think that the discount we got from Wells actually facilitated our ability to pass that back to the borrower and infuse some cash and improve our collateral position substantially.

Dave, a majority of the 14 assets, there are a mix of hotel, multi-family and office but office makes up a decent amount of that product.

I hope that answered your question.

Would you say the performance of those assets were worse or about the same as the overall Arbor portfolio?

We really didn't evaluate that. I could take a look at that. That wasn't really within the picture. I think what was clearly in the picture was that was one remaining line. It was a stumbling block for us, if we didn't put that in a big position, it was a stumbling block for us to go forward effectively. And I think what Wells recognized, to their credit, was by cleaning up this facility and putting it in a favorable position, we would have a very effective company going forward and they were able to see that. So it was whether we'd have a three-year period of managing through those assets at a very high basis which would have been very difficult for the company and for the company to grow in that position. It would have put a real stranglehold around our necks. By cleaning up this facility in the way we did, it allowed the company to really free itself up and manage itself very effectively, become very viable. And, I think, if they looked at the whole picture, which they did, the result was very positive at the end of the day for them and for us to be able to go forward in a positive light.

What was their -- didn't they get some warrants or options when it was renegotiated last year? Do you know what percent of the shares outstanding Wells owns?

Sure, we do. They received a million shares of warrants. They were blended at a price of about $4. 500,000 of those shares were a price of $3.50 invested immediately when we restructured the deal. Another 250,000 were done at $4 which is a year out and then another 250,000 was done at $4.50 which is the third year out. The last piece was 500,000.

Okay. So what's your plan in terms of raising the capital needed to pay this off before August 27th?

As we've indicated in our comments today is we've substantially reduced the amount that we have to pay them by about $60 million so the obligation has gone down from, I believe, $160 million something down --.

$176 million

$170 million to $115 million so we are making the job a lot easier for us. We are out in the market right now putting together the necessary financing. And we feel fairly comfortable in our ability to proceed to get this done.

Okay. So it'd be more of a financing rather than an asset sale type or will it be a combination of asset sales and --?

I think what we'll continue to do is whittle down the number. We have some loans that are coming due that will get paid off, number one. We have some loans that we may sell. But I think it will be more primarily of financing.

And then regarding the loan loss provision of $100 million this quarter. Do you have an idea, have you done a projection, I'm not sure if you're comfortable putting out a projection, but where do you see this heading over the next few quarters? Would it be in the same neighborhood or do you see it trending downward this year or what are your thoughts?

We take loan reserves based on where the value of our portfolio is at that time. The question really becomes as to whether the fundamentals in commercial real estate are going to continue to decline or stabilize and that's going to reflect what our loan losses will be. So that really affects where we are going. We are hoping the worst is behind us and that we've cleaned up our balance sheet and our portfolio and that the economy will stabilize. There are certain things that are outside of our control which impact us which are a little bit surprising. One of the things we can't anticipate is when we do have a performing loan from time to time and it's in the single purpose entity, what we're finding is some of these borrowers file and pull our loans into their bankruptcy which impact us and sometimes that's a result of broader economic conditions outside of commercial real estate. All in all, we feel that we've done a very good job in cleaning up our balance sheet and trying to facilitate a clean slate going forward. But if fundamentals do decline, they'll be impacted in our portfolio accordingly.

Okay. And then I'm not sure if you'll have this number handy, but how much of your loans and investments including your real estate-owned are not pledged to CDOs or secured facilities?

We do -- a bulk of them are in the CDOs. We have the 14 assets we mentioned that are part of Wachovia's collateral and then we do have a handful of assets that are unencumbered. But for the most part, the majority of them in there are CDOs and are in the Wells deal that we are looking to retire at a discount and free up. But most of them are in those two facilities with a handful being unencumbered.

We have about a half a dozen assets which are unencumbered.

And do you know what those half dozen represent or like average loan size for each of those? Are we talking like $50 million?

You mean the size? No. They're not that. They are spread out all over. Some are larger than others. I don't have the data right in front of me on those assets but it's a combination of some loans with low UPBs and high UPBs.

Congrats again on negotiating a good deal with Wachovia and retiring the junior subordinated notes at a good discount as well. Thanks.

Thank you.

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

Good morning, would you be able to talk a little about any possible gain you might have from the prime sale through the Lightstone Value Plus REIT to Simon and if you're looking at that at a one quarter event, second quarter event?

No, if you remember, Josh, when we disclosed last quarter, we had exchanged all of our interest in prime for OP units in Lightstone. We haven't seen the full trade yet that they are doing with Simon or whether it will get done. But at this point we are effectively out of our interest in Prime. We had exchanged it and monetized it so we don't anticipate any future gains from that transaction.

Is there some part of the prime retail assets that are actually held through the Lightstone Value Plus REIT?

You mean the ones that they are potentially selling to Simon?

Yes.

I'm not sure. I think there are but again our investment was monetized and we're not sure of the structure of the trade yet. We need to look through it. But we don't anticipate we'll receive any income from that remaining investment.

We are in the process of requesting the documentation from that transaction now which we put in a request to see if it will have any impact on us going forward.

Can you tell us where your CDO tests are, how close you are, if you are at all to the OCR or IC tests on any of the CDOs?

Gene, are you on?

I am, Paul. I think you released that as of year end. Is that the information?

We actually put that in our 10-K which will be out shortly. But it has not been put out yet. But it will be out soon.

Okay. Thanks very much.

Thank you.

(Operator Instructions) There are no further questions. I would now like to turn the call back over to management.

Thank you for listening and for your questions today. Just to reiterate, we are very pleased with the results of what we were able to accomplish for last year and so far the first quarter of this year. It's been a difficult year but restructuring our balance sheet has been a tremendous effort and we've been successful in doing that and thank you for listening.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect and have a great day.