Arbor Realty Trust Inc (ABR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2010 Arbor Realty Trust Earnings Conference Call. My name is Katrina and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Paul Elenio, Chief Financial Officer. Please proceed.

Okay. Thank you, Katrina. Good morning everyone. And welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended March 31, 2010. 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 risks 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.

I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul. And thanks to everyone for joining us on today's call. Before Paul takes you through the first quarter results, I would like to talk about our strategy and accomplishments and how we have successfully positioned the company for the future.

Picking up where we left off last quarter, we continue to execute our strategy of effectively managing our portfolio and increasing our liquidity and repurchasing debt at deep discounts when available. As mentioned on our last call, we are extremely pleased with the results of these efforts to successfully restructure our entire balance sheet, which has favorably positioned up from our legacy assets, produce a more stable core earnings base going forward, and take advantage of many investment opportunities that we believe will be available in the future.

The first quarter continued our progress of executing our strategy with the successful completion of the retirement of $114 million of our trust preferred debt and the repurchase of $28 million of our CDO debt at substantial discounts. We recorded $47 million in gains from these transactions in the first quarter, while using only a nominal amount of operating cash relative to the size of the debt retirements.

Additionally, as we talked about last quarter, we are very focused on raising the necessary capital to close on the discounted payoff of our financing facilities with Wachovia, which we have until the end of August 2010 to complete. We are pleased to report that the run-off and monetization of certain assets will reduce the amount due on the repurchase plan by another $46 million in the first quarter, leaving a balance due of approximately $114 million, down from the original $106 million purchase price. The completion of this transaction will be a primary focus of the company over the next few months and will result in a significant gain and increase our book value per share.

Clearly, the substantial debt retirements are major step in positioning ourselves favorably for the future. They will improve the right side of our balance sheet significantly by reducing the leverage and recourse debt substantially, leaving us poised to take advantage of the opportunities that will exist in the market.

We continue to focus heavily on increasing and maintaining our liquidity, and as of today, we have approximately $73 million of cash on hand and around $20 million of cash collateral posted against our swaps. We are also pleased with our ability to manage our CDO vehicles efficiently, receiving all of the cash distributions from these vehicles in 2009 and the first two quarters of 2010. And while there can be no assurances that our CDO vehicles will continue to cash flow in the future, we will remain focused on optimizing and utilizing these facilities by transferring assets and originating new loans where available and appropriate. The effective management of our CDOs has contributed greatly to the reduction of our warehouse and term debt facilities, which as I have mentioned earlier, has reduced the amount due on the discounted pay-off with Wachovia.

Although we have recorded significant losses in 2008 and 2009, we've done an effective job of managing through this downturn by restructuring our balance sheet. This includes repurchasing the Wachovia and trust preferred debt at deep discounts as well as restructuring a substantial amount of our assets, creating a higher quality portfolio going forward, and executing an effective strategy of mitigating and offsetting losses from these assets through the repurchase of other debt and monetizing our equity investments. In fact, we recorded $54 million in gains from these debt repurchases in 2008 and 2009, $47 million in the first quarter of 2010, and another $13 million already in the second quarter of 2010.

As we stated earlier, we are expecting a significant gain from the completion of the retirement of the Wachovia debt. We also generated gains of approximately $50 million in 2008 and 2009 from monetizing our equity investments. We believe there will be similar opportunities for us to repurchase our debt at discounts going forward and we will continue to evaluate these transactions based on availability, pricing and liquidity.

So as you can see, these numbers are quite compelling. We are extremely pleased with our ability to preserve a substantial amount of our book value despite losses in our portfolio due to the extreme market dislocation through the monetization of assets and significant discounted debt repurchases.

Now, I would like to update you on our view of the market and the credit status of our portfolio. The environment over the last two years have clearly had an impact on every borrower and on our portfolio as commercial real estate fundamentals and real estate values have remained weak for some time.

We recorded $25 million of loan loss reserves during the first quarter related to 10 loans with an outstanding balance of approximately $150 million. Of that amount, $19 million were on loans on which we have previously recorded reserves, while $6 million were new reserves. We now have $351 million of loan loss reserves at March 31 related to 33 loans with an outstanding balance of approximately $711 million.

We also refinanced and modified $140 million of loans and extended $105 million of loans during the first quarter. As of March 31, we had approximately $200 million of non-performing loans, down from $225 million at December 31. As you can see, the level of our loan loss reserves is down substantially in the first quarter from the fourth quarter, primarily due to what we believe are some initial signs of stabilization in the market for commercial real estate and the worst is behind us. While we believe we are adequately reserved at this time, if real estate values and fundamentals decline in 2010, this will likely result in additional delinquencies and losses. Accordingly, we will continue our strategy of focusing on strengthening our balance sheet, preserving liquidity and aggressively managing our portfolio.

As the market continues to evolve into what will be the new norm for commercial real estate finance, we are beginning to evaluate opportunities to participate in lending again. As I mentioned earlier, we feel the worst is over and having the capability and patience to await the market recovery remains vital to our success.

We are extremely pleased with our ability to substantially improve our liquidity and restructure our entire balance sheet through the retirement of significant amounts of our debt at deep discounts. This again will produce large gains and improve our balance sheet tremendously, which will position us favorably to evaluate and take advantage of the many opportunities that lie ahead. We've also taken the necessary steps to manage our portfolio effectively and this remains an extremely critical function during these times.

We are very pleased and fortunate to have a seasoned management team and feel that we have not only survived perhaps the worst commercial real estate market dislocation in US history, but positioned ourselves favorably to extract value from our legacy assets and to take advantage of the eventual market recovery, and we are very excited about the challenges and opportunities that lie ahead for our company.

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 net income for the first quarter of $26.4 million or $1.04 per share.

As in previous quarters, we did have a few large items that affected the numbers. We recorded $25 million of loan loss reserves during the quarter and we now have $351 million of loan loss reserves on 33 loans with a UPB of around $711 million at March 31. As Ivan mentioned, this environment has clearly had an impact on every borrower and our portfolio and we will continue to take a proactive approach in evaluating our portfolio and actively managing and monetizing our assets.

Additionally, we continue to effectively execute our strategy of minimizing losses through the retirement of our debt instruments at deep discounts. We are very pleased with our ability to retire $114 million of trust preferred debt and repurchased $28 million of our CDO debt at significant discounts, recording $46.5 million of gains from these transactions in the first quarter.

We also took advantage of a market opportunity to sell two of our CMBS securities at a premium to our basis recording $3.3 million in gains from these sales in the first quarter as well. These sales did result in us having to reclassify our remaining held-to-maturity securities to available-for-sale and record approximately $18.6 million of unrealized losses from a change in the market value of these securities as a reduction of our equity during the quarter. We do believe there will be similar opportunities to repurchase our debt at discounts going forward and we will continue to evaluate these transactions based on availability, pricing and liquidity.

The completion of these transactions has significantly improved our balance sheet, and as we discussed earlier we are heavily focused on completing the repurchase of our Wachovia debt, which will also result in a large gain and increase the book value per share. So as a result, the first quarter numbers, our book value and adjusted book value per share increased slightly from quarter-to-quarter with a book value per share of $4 at March 31 compared to $3.81 at December 31, and adjusted book value per share was $8.28 at March 31 compared $7.96 at December 31, adding back deferred gains and temporary losses on our swaps.

It is important to note that these numbers do not include the effect of the anticipated significant gain from the completion of the Wachovia debt retirement. And as I mentioned earlier, the first quarter numbers were also reduced by approximately $0.75 per share for the change in accounting related to our securities during the quarter.

Looking at the rest of the results for the quarter, the average balance in core investments declined about $118 million from last quarter, mainly due to pay-offs, pay-downs and exchange of some our bonds as part of the trust preferred retirement during the first quarter.

The yield for the quarter on these core investments was around 4.67% compared to 4.42% for the prior quarter. Without some non-recurring items related to non-performing impaired and restructured loans, the yields on these core assets was around 4.90% for the first quarter compared to around 5.30% for the fourth quarter. This decrease was primarily due to first quarter run-off at higher rates and reduced rates in refinanced and modified loans in the first quarter.

Additionally, the weighted average all-in yield in our portfolio was around 4.75% at March 31 compared to 5.15% at December 31, 2009, and again this decrease was due to higher rates on loan passed and lower rates in refinanced and modified loans during the quarter, which will also have some impact going forward due to the timing of these transactions in the first quarter.

The average balance on our debt facilities decreased by around $83 million from last quarter, which was due to pay-offs and pay-downs in the fourth and first quarters. The average cost of funds on our debt facilities is approximately 4.30% for the first quarter compared to 4.21% for the fourth quarter of 2009. Excluding the unusual impact on interest expense from our swaps, our average cost of funds was relatively flat from quarter-to-quarter, but approximately 4.25% for the first quarter compared to around 4.20% for the fourth quarter. In addition, our estimated all-in debt cost was also flat at around 4.25% at both March 31, 2010 and December 31, 2009.

So, overall normalized interest spreads in our core assets decreased to approximately 0.70% this quarter from 1.10% last quarter, primarily due to run-off and reduced rates and refinance of the modified loans.

Next, our average leverage ratios were around 70% on our core assets and around 82% including the trust preferred debt for both the first and fourth quarters. And our overall leverage ratios on a spot basis were 5.2 to 1 at March 31 compared to 4.2 to 1 at December 31. This increase is due to significant reductions in trust preferred debt and the successful retirement of $114 million of these instruments during the first quarter. Operating expenses were down slightly from quarter-to-quarter, primarily due to less foreclosure-related expenses in the first quarter as compared to the fourth quarter.

Looking at the balance sheet, there were no real significant changes compared to last quarter, other than as we mentioned earlier, the significant reduction in our debt facilities during the quarter. This was a result of the successful retirement of $114 million of trust preferred debt at a significant discount and a $46 million pay-down on the Wachovia facilities through loan pay-offs and moving assets into our CDO vehicles. This has reduced the amount due to Wachovia under the discounted purchase agreement to around $114 million from the original pay-off 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.

Additionally, there was a presentation change to the balance sheet due to the adoption of FAS 167 during the quarter. This pronouncement requires that companies break out their assets and liabilities separately in the balance sheet, the consolidated variable interest entities in which the assets of those entities can only be used to satisfy debt obligations and such debt is non-recourse to the company. So as a result, we have presented parenthetically on the face of the balance sheet the assets and liabilities associated with our three CDO vehicles, as they are consolidated entities in which this debt is non-recourse to Arbor.

Lastly, our portfolio statistics as of March 31 show that about 67% of the portfolio was variable rate, while 33% was fixed. By product type, about 60% was bridge, 13% junior participation, and 27% was made up of mezzanine and preferred equity. By asset class, 36% was multi-family, 29% was office, 17% hospitality, 13% 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 65%, and geographically we have around 37% of our portfolio concentrated in New York City.

That completes our prepared remarks for this morning. And I'll now turn it back to the operator to answer any questions you may have at this time. Operator?

Thank you. (Operator Instructions). And our first question will come from the line of David Chiaverini from BMO Capital Markets. Please proceed.

Good morning. A few questions for you. The first is -- so, you used about $7 million of buybacks in the CDO debt instead of buying fund towards the Wachovia pay-down, why did you do that? I'm assuming it's to try and manage some of the DOC tests and then if you can give us -- I just want to hear your thoughts there?

No, it wasn't being used -- hi David, this is Ivan. It wasn't being used to manage our test at all. We were just effectively deploying our capital. It's not our plan to use all our liquidity for the purchase of the Wells debt. We have been able to manage it effectively and we think we can continue to manage it effectively without deploying a lot of our liquidity. We think our liquidity can be used to continue to restructure our balance sheet in other effective ways, which produces a long-term benefit to the company both on our earnings and on a tangible book basis.

So, we feel relatively comfortable that we cannot just buyback our own debt, restructure a substantial amount of our debt, participate to new opportunities, as well as effectively manage the Wells transaction.

Okay. And you mentioned that you have so far in the second quarter $13 million gain on extinguishment of debt, was that related to the CDO -- buying back CDO debt as well?

Yes, that's correct.

Okay. And you mentioned with the Wachovia pay-down that you are searching for a -- or considering financing solution to take out that debt -- on the last call -- is that still sort of the plan or are you going to monetize some assets to get down?

We have been effective in achieving a number of things to reduce that debt, moving assets into our CDO vehicles, number one. Number two, we've also been effective in having certain loans pay-off and scheduled additional loans to pay-off. So as that collateral package continues to change -- (a) it's getting smaller and (b) we think the (inaudible) the marketplace have become a little more apparent to us over the next 30 days or so.

Okay. And, related to that, the West 33rd Street -- and you present in the adjusted book value figure of $77 million deferred revenue. How would you be able to monetize that? Is there -- does the asset need to be pulled by the partnership in order for you to get that pursued so you can apply toward?

But -- David, it's actually Paul. The proceeds have been received, the transaction is completed, and we have monetized that transaction back in 2007. The transaction was structured in a tax advantageous way to achieve a very significant corporate objective, which was to retain the capital in the company. So, that transaction is completed. It is a tax advantage structure, a tax deferral. And upon completion of that tax deferral, which I think was five years, that automatically will be recorded as income in the books. But it is a completed transaction, cash has been received, and there is no risk if that transaction is not closing, as it has already closed. And that's why we added back to adjusted book value because that is already a completed monetized transaction.

Okay. So, what's -- you said it was going to five years, so in 2012 is when that will be officially sort of converted into equity?

Yes. A little earlier depending on how we view the tax structure, but that's how it was laid out.

Okay. And the purchase -- the one security purchase of $4.5 million CMBS, I am assuming that was in one of your CDOs?

Correct.

Okay. And then regarding the loan loss reserve, you now have a significant sort of cushion built up, it's about 18% of loans, do you feel that this is now sufficient to cover most anticipated losses through this cycle?

Well, for us, it's clearly our objective to get as much behind us as possible. And we feel that we prudently put the right reserves on our books, and we also feel that there is a level of stabilization within our portfolio and that by taking these reserves we feel that we have been effectively been able to restructure some of these loans and have a higher quality portfolio going forward. As long as the market doesn't take a double dip, we feel relatively comfortable with the reserves that we've booked in the portfolio.

Okay, great. Thank you.

(Operator Instructions). And that concludes the Q&A portion. I will now turn the call back to Ivan Kaufman for closing remarks.

Okay, thank you for your attendance on today's call and we look forward to future calls and what the rest of the year will bring us. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.