Arbor Realty Trust Inc (ABR) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2010 Arbor Realty Trust earnings conference call. At this time, all lines are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Paul Elenio, Chief Financial Officer. Please proceed. Okay, thank you Chinnel, and good morning everyone, and welcome to the quarterly earnings call for Arbor Reality Trust.

This morning, we will discuss the results for the quarter ended September 30, 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. The fact is, 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. Thanks to everyone for joining us on today's call. Before Paul takes you through the third quarter results, I would like to reflect on how we have successfully repositioned the company and what our operating philosophy and outlook will be for the balance of 2010 into 2011. Over the past three years, and over the last several quarters in particular, we have focused our strategy on strengthening the right side of our balance sheet, managing our portfolio, maximizing liquidity, repurchasing our debt at deep discounts and preserving our equity value with the ultimate goal in mind of returning to our core lending business.

Last quarter, we reported what we considered to be a transformational improvement to the right side of our balance sheet by completing the debt retirement with Wachovia, which combined with the payoff of our $26 million term debt facility last week eliminated all of our short term recourse debt. We were able to accomplish this goal without raising additional equity and diluting our shareholders. As a result of eliminating all of our short term recourse debt, it will be a substantial improvement in our core earnings, liquidity, and operating flexibility, enabling us to return to our core business activities. Our strategy going forward is combined value from our legacy assets, enhance the yield in our portfolio and begin the process of selectively lending and investing in the appropriate opportunities.

One of the advantages we have is the ability to utilize our low course, nonrecourse CDO vehicles to enhance our returns significantly and increase our core earnings over time. We will also continue to focus our attention on effectively managing our portfolio, as well as our liquidity, and take advantage of opportunities to repurchase our debt at favorable pricing when available. Additionally, we will remain extremely focused on selectively monetizing our not performing and unencumbered assets, which will continue to increase our cash position giving us the resources, as I mentioned earlier, to selectively invest in new opportunities going forward.

In fact, our success in monetizing our non performing and unencumbered assets during the third quarter and especially in October contributed greatly to a significant increase in our cash position, which as of today is approximately $70 million, not including approximately $27 million of cash collateral posted against our swaps, and approximately $13 million of investable cash in our CDO vehicles. These cash numbers have already been reduced by $26 million that was used to pay off our term debt facility in October. This facility had a maturity date of December 31, 2010 and it's early payoff will save us interest expense and fees for the balance of the year. Additionally the assets securing the facility are now part of our unencumbered assets, and we expect to refinance these assets over the next several months, recovering the capital used to pay off this facility. So currently, we have around $175 million of net unencumbered assets, and between cash on hand, cash posted against our swaps, and our unencumbered assets, we have around $270 million of value, in addition to approximately $250 million of equity value in our CDO vehicles.

We are also pleased with our ability to manage our CDO vehicles efficiently, receiving all of the cash distribution from these in 2009 and the first three 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, when available and appropriate. During the third quarter, we also continued to selectively repurchase our CDO debt by purchasing $21 million of bonds for a price of around $9 million, resulting in a net gain of approximately $12 million. This is yet another demonstration of our success in purchasing our debt at deep discounts, adding to the approximate $220 million in gains from the first half of 2010, and since this market dislocation occurred over three years ago, we have recorded approximately $285 million of gains from the retirement of our debt at discounts, which we've said many times before, has mitigated the losses we have taken, preserving a substantial amount of our equity value. We do believe that there may 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.

As we have mentioned earlier and on previous calls, the aim of our strategy has been to position ourselves to return to our core lending business, where we are keenly aware we must be disciplined and selective in this recovery and still uncertain market. During the third quarter, we originated one $5.5 million loan with an average yield of around 11%, and in October we originated one $4.7 million loan with a yield of 9%. Combined with our second quarter origination this year, we have originated four loans totaling $15.2 million with an average yield of approximately 10%. To date, we have financed three of these assets through our low course nonrecourse CDO vehicles, increasing our terms on these investments. As we've discussed earlier, we will continue to focus on aggressively monetizing our assets, and working with our borrowers to generate runoff when appropriate, in order to further increase our cash positions and continue to evaluate and pursue new opportunities that have attractive risk reward profiles.

Now I would like to update you on the credit status of our portfolio and discuss our views of the commercial real estate market. The environment over the past three years has 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 have recorded $15.2 million of loan loss reserves during the third quarter related to 11 loans with an outstanding balance of approximately $188 million. Of that amount, $8.1 million were on loans which we had previously recorded our reserves, while $7.1 million were new reserves. We also recorded $5.4 million in losses from restructured assets and recovered approximately $3.8 million on previously reserved loans for net losses for the third quarter of approximately $17 million from our portfolio.

In addition, we received $31 million in loan payoffs, refinanced and modified $119 million of loans and extended $235 million of loans during the third quarter. At September 30, the net carrying value of our nonperforming loans was done to approximately $53 million from $74 million at June 30 which was mainly due to our success in monetizing and restructuring our nonperforming loans in the quarter. And of the $53 million of nonperforming loans as of September 30, $25 million is currently on the contract to be sold. What we can gather from these numbers is that for the third straight quarter, we were able to report that the level of our loan losses reserves is down from last year's pace, mostly due to what we believe is movement toward the stabilization of the commercial real estate market. While we believe we are adequately reserved at this time, if real estate values and fundamentals decline, this could result in additional delinquencies and losses. Accordingly, we will continue to focus on aggressively managing our portfolio, and increasing our liquidity.

We are extremely pleased with our success in repositioning the company. Our operating philosophy going forward will continue to be aggressively manage our portfolio, increase our liquidity, repurchase debt at discounts when available, and selectively redeploy our capital into new investments with the appropriate risk-reward profiles over time. We will also focus heavily on maximizing the utilization of our nonrecourse CDO vehicles greatly, enhancing the yield on these investments and increasing core earnings on a long term basis. We are very excited with not only our accomplishments, but with the challenges and opportunities that lie ahead. 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, we had a net loss four the third quarter of $1.4 million or $0.06 per share, and net income of $154.1 million or $6.03 per share for the nine months ended September 30, 2010. We recorded a total of $16.7 million in net losses from our portfolio for the third quarter, consisting of $20.5 million in loan loss reserves and losses from restructured loans, net of $3.8 million in recoveries of previously reported reserves.

We were also successful in liquidating several of our nonperforming and unencumbered assets. This resulted in us charging off the loan loss reserves related to those assets against the balance for loan losses. As a result, we now have $288 million of loan loss reserves on 32 loans with a UPB of around $623 million at September 30, 2010. As we've mentioned before, this environment is clearly had an impact on ever borrower in 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 retaining equity value through the retire of our debt instruments at deep discounts. We were very pleased with our success at retiring the Wachovia debt last quarter, and we continued this success in the third quarter by repurchasing more of our CDO debt back at deep discounts, recording a gain of approximately $12 million, which helped mitigate our quarterly loan losses and preserve our book value. We believe there may be similar opportunities for us to repurchase our debt at discounts going forward, and as Ivan mentioned, we'll continue to evaluate these transactions based on availability, pricing and liquidity.

This has been a very successful strategy for us during the significant downturn, with the buy back of debt instruments at discounts, generating approximately $285 million in gains to date from these transactions. As a result, our book value per share stands at $9.21 at September 30, and our adjusted book value per share is $14.04 at September 30, adding back deferred gains and temporary losses on our swaps. These book value numbers do not take into account any dilution for the potential exercise of the warrants issued to Wachovia as part of the 2009 debt restructuring. Additionally, as Ivan mentioned, we were very successful in October of continuing our strategy of monetizing our nonperforming and unencumbered assets, resulting in a substantial increase to our cash position which currently stands at approximately $70 million. So between cash on hand, cash posted against our swaps and our unencumbered assets net of reserves as of September 30, we currently have approximately $270 million of value, not including the equity value in our CDOs, which today is approximately $250 million net of loan loss reserves as of September 30.

Looking at the rest of the results for the quarter, the average balance in our core investments declined by about $121 million from last quarter, to around $1.9 billion, mainly due to payoffs and paydowns in the second and third quarters. The yield for the third quarter on these investments was around 5.29%, compared to 5.20% for the prior quarter. Without some nonrecurring items, such as additional interest received in both quarters on a loan that exceeded our investment basis in the asset, the yield on these core assets was flat around 4.90% percent for both the second and third quarters. Additionally, the weighted average all in yield on our portfolio was around 4.72% at September 30, 2010, compared to 4.81% at June 30, 2010. This decrease was mainly due to runoff at higher rates and a decrease in LIBOR during the quarter, and this was partially offset by the payoff of some of our nonperforming loans and originations in the third quarter.

The average balance on our debt facilities decreased by around $256 million from last quarter, to around $1.4 billion, which was mainly due to the completion of the retirement of the Wachovia debt on June 30, 2010. The average cost of funds in our debt facilities was approximately 4.47% for the third quarter, compared to 4.04% for the second quarter. Excluding the unusual impact on interest expense from our swaps, our average cost of funds is approximately 4.16% for the third quarter, down from around 4.29% for the second quarter, again, primarily due to the retirement of all of our Wachovia debt on June 30. In addition, our estimate all in debt cost was relatively flat at around 4.20% at September 30, compared to around 4.17% at June 30, 2010. So overall, normalized net interest spreads in our core assets increased to approximately 0.72% this quarter, from 0.60% last quarter, primarily due to the full impact of reduced interest expense due to the retirement of the Wachovia debt.

Next, our overall leverage ratios were around 63% on our core assets, and around 73% including the trust preferred debt for the third quarter, compared to 72% and 81% respectively in the second quarter. And our overall leverage ratios on a spot basis were 3.1 to 1 at both September 30, and June 30. The decrease in the average leverage ratios are due to the significant reduction in debt from the successful retirement of the Wachovia facilities on June 30. Other expenses were down slightly from last quarter, primarily due to stock-based compensation expenses in the second quarter from the issuance of 90,000 fully vested shares to our independent directors in April. There were no significant changes on the balance sheet from last quarter. However, as Ivan mentioned, we did pay off our $26 million term debt facility last week, which effectively eliminated all of our remaining short term recourse debt.

And lastly, our portfolio statistics as of September 30 show that about 65% of the portfolio was variable and 35% was fixed. By product type, about 59% with bridge loans, 14% junior participations, and 27% were mezzanine and preferred equity investments. By asset class, 36% of our portfolio is multi family, 31% was office, 18% hotel, 9% 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 36% 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.

(Operator Instructions) And your first question comes from the line of Steve Delaney with JMP Securities.

Hello, good morning, guys. How are you?

Hello Steve. How you doing?

Hello Steve.

Fine, I'm -- so just trying to connect the dots on all the workout activity, and thank you for the amount of detail you provide there, it's very helpful. The one number I could not connect back to either the P&L or the loss from reserve balance; is this market value adjustment of $7.7 million on the two modifications related to loan assumptions? How did that run through on the accounting? Did that go back into the reserve or is it in the P&L somewhere?

Sure, Steve, it's Paul. Those items -- there's accounting rules that talk about when you unwind transactions or borrower that you're the lending against sales of transaction and you provide financing to the new borrower, that you have to look at the market rates of the loan, and so those market value adjustments are due to what the market value of the loans are today compared to maybe the loan you gave to the new borrower. And those items do flow through your -- they get hung up on your balance sheet as kind of against your loan. They flow through your P&L through your provision and then what happens is you -- over time you can take that back into income as you creep back up to the original loan value that you've now discounted.

Okay. Got it. So you're saying it's included in your $16.7 million net credit expense for the quarter?

Correct.

But it will be recovered over time as you just ACREIT that -- the discount to fair value? On the loan.

That's correct. So as the loan gets closer to maturity you keep ACREITing that discount back into income and you get the loan back up to its original value.

Okay. Great. And then second thing on the large recovery that you had in $14 million in October, I guess two questions there. One, how did that fortunate result come about? It's one thing to have a small recovery, but that's pretty unusual to have basically a full recovery of your reserve. And then the second part, is how are you going to account for that recovery? Will it just go back into the general loan loss reserve or will that go through the P&L?

It wasn't full recovery of reserve, it was a partial recovery of reserve.

Okay.

It was a large transaction and it was a transaction we were working on probably for two years to get that recovery, so just took a lot of expertise and a lot of work to get to that recovery. I guess when we did recover the asset, we wrote it down all the way and we were successful in achieving that recovery. In terms of the accounting of that number, I'll leave that to Paul.

Sure. Steve, the accounting is exactly what you had mentioned, is that will be a full recovery into the P&L. It's a partial recovery of a prior reserve but it will reduce any, if there are any provision for loan losses in the next quarter.

That $14 million will appear in the fourth quarter.

In the fourth quarter as income or a credit against any other reserves if there are any.

So, if you had sort of the same level of $16 million or whatever, that credit right there would pretty much cover your -- any additional cost in the fourth quarter? I know we're just talking theoretically.

That's correct, that's correct.

Okay.

Yes, so it was a great recovery, took a lot of work, it was very substantial number and I think that, you know, for the fourth quarter it's going to be a very nice number.

And Steve, that obviously increased our cash position in the fourth quarter as well.

Yes, great. And obviously probably helped you with your loan payoff. So Paul, what's the -- just one number I guess I could wait for the queue, but what was the total active loan count, the number of loans at September 30?

The number of loans I can get.

Just approximately.

It's not more than -- I believe it's 100 -- the queue is out, Steve.

I'll go there.

You can ask another question and I'll pull it out for you and tell you what --

Well here's where I was going, and I can find the number. You're giving us 10 nonperformers. I think in prior press releases you mentioned how many were otherwise impaired but not in the NPL; I'm just trying to get to -- if you got 10 NPL's, approximately how many otherwise impaired loans, and then --

That's easy to do. We have $288 million of loan loss reserves against $623 million of total UPV. Of the $623 million of total UPV, $120 million were nonperformings, so the other $500 million we'll call it, or around $500 million are performing loans that we have reserves against and we have about $225 million of reserves against those loans.

Okay. Great. That's helpful and I'll take a look at the queue if I have any issue or have questions I'll call you up, Paul. Thanks, guys.

No problem.

Thanks, Steve.

Your next question comes from the line of David Chiaverini of BMO Capital.

Thank you, good morning. A couple housekeeping questions. First, you mentioned in your prepared remarks unencumbered assets, do I have the number right, was it $270 million?

The unencumbered assets Dave, were $175 million --

$175 million. Okay.

-- combined with the cash of $70 million and cash posted against our swaps of $27 million, we have $270 million in value without the equity value of CDOs.

So it's $175 million and then what are the other two items?

The cash of $70 million that's on hand as of today, and another $27 million of cash we have posted against our swaps. So we effectively have just under $100 million in cash between cash on hand, cash posted against our swaps as collateral and combined with the $175 million of unencumbereds, we're around $270 million of value.

Okay. Now, looking at -- somebody just pulled up the cash, so it's $53 million of restricted cash. So that's not really -- that's not unencumbered, right? Because --

That's correct. But as the numbers we gave in our prepared remarks, if you recall, we mentioned we have $13 million of investable cash in our CDOs currently. We had $52 million at the end of September, and we did a great job of monetizing some of our unencumbered assets in October and utilizing that restricted cash in the CDOs to move those assets in, and then creating cash on hand. So flipping it from restricted cash to cash on hand. To date we have around $13 million of availability to invest new loans in our CDOs cash. We used a substantial amount of that in October.

Oh, I see. So the $270 million is more of a unencumbered asset figure post quarter end?

Correct. It's as of today.

Okay. Very good. And the new loan, the $5.5 million loan, did you say that the yield on that was 11%?

That's correct.

Okay. Thank you. And now related to the CDO OC tests which are -- CDO one and two are getting a little tight. What are your options and potential remedies if the OC tests are breeched?

I guess it's -- we've been effectively managing our CDOs on our tests to continue that cash distributions and I guess we'll continue to do that. And there are different ways to do that. And, as we've discussed on prior calls, also there was some litigation outstanding with respect to the ability to collapse existing own securities to keep those tests alive. I believe that specific litigation is going forward and should be successful, which would give us another option if in fact we get tested on that. I have Gene Kilgore on the phone as well, who manages our CDO. Gene, you want to give some color on that? Maybe he's not on the call.

Gene? Chinnel, is Gene's line muted?

I'm here. Can you hear me?

Hello, Gene.

Yes, hello. Can you hear me?

We can hear you.

Okay, sorry. Yes well, with regard to CDOs, we only have one that is beyond its reinvestment period. The option there is somewhat more limited than it is at our other two CDOs, which are still actively managed. But even within that CDO, you have the ability to do a couple of things; one is, you could purchase assets from the CDOs, and if you purchase those above the recovery assumption then that would have the effect of improving the cushion in your OC tests. And the second thing to remember is, to the extent that there are any amortization payments or paydowns on the notes, that that too has the effect of improving the test. In the other two CDOs, we have the option of purchasing assets, and at a discount, which we certainly have done and in fact, I think the numbers have improved slightly since quarter end as we've done a couple of trades, both in the first CDO and second CDO where the tests are tight. So you retain all the options that I just outlined for the first CDO, plus you have the ability to purchase in assets that at a discount which has the effect of improving the test.

Okay. So would you use some of your unencumbered assets to purchase underperforming assets out of the CDO to improve some of those tests?

Yes, we have from time to time. What we do do is of the unencumbered assets that are eligible, we do sell them into the CDO and depending on the market levels and objectives, they could be sold at discounts to rebuild that. From time to time if we do have nonperforming loans, or loans that perhaps are running off, those get purchased out of CDOs when it's appropriate and available. So it's a whole mixture of different techniques that we do use to optimize those structures.

So it sounds as if you would use these sort of strategies to keep those cash flowing, as opposed to letting the OC tests -- if they're going to fall below the tests and fail, rather than letting them cure themselves from the cash flow being diverted to the senior bonds, rather than just letting them just cure themselves, you will actively try to keep them cash flowing?

Clearly on a historical basis we've kept our cash flowing and I think we'll continue to operate in a similar vein over the next several quarters, but we have been effective in maintaining those cushions. As I said in my script, they've cash flowed every single quarter.

Okay. And then, did I hear right that there was $31 million of loan payoffs in the quarter?

That's correct.

Can you remind me of what the payoffs have been over the past few quarters or year to date?

Sure, we had $31 million of payoffs this quarter, about $60 million in runoff last quarter and the first quarter we had around $54 million in runoffs. So, year to date we've definitely done about $140 million to $145 million of runoff.

Okay. Okay. And is there a way for you to sort of see or anticipate how much runoff there is or is it kind of a, if it happens, it happens and it's kind of like a last-minute surprise, like "Oh, a borrower paid us back" as opposed to they give you an indication a couple months ahead of time that they may be paying off? I was just curious how that works.

I think the market's constantly evolving and clearly there's a little bit more liquidity in the market today and a lot more lending, and with values stabilizing, I think that combination has given borrowers some greater options. So, I think as the market gets more competitive, as values stabilize and borrowers have different optionality, and specifically in today's markets, too, assets are trading at very high levels. So that's another option to the borrower, to actually sale an asset, as opposed to refinance. So I think it's constantly evolving. It's hard to give guidance on that because we ourselves get impacted on a quarterly basis. But I'm definitely am more optimistic in terms of the borrowers having greater opportunities to take out some of their loans. Some of the facts also are when the loans are up for extension, whether there's a bump in rate and what their options are relative to the rates that we have, and options that are in the market. But going forward , it is a little bit difficult to give guidance. We ourselves were very, very surprised with our ability to facilitate these payoffs which was very instrumental in allowing us to complete a debt repurchase with Wachovia without going for outside debt. So we are able to create more cash and more availability, and our CDO vehicles prove that level of

Okay. Thank you.

Thanks, Dave.

(Operator Instructions) Your next question comes from the line of Eric [Birthly] of Barclays Capital.

Good morning Eric.

Hello?

Eric, your line is open.

Sorry about that. Hello. Morning. Of the bridge loan that you funded in the quarter, just wondering what type of property that was and where you thought your focus would be going forward?

Paul, which loan was that? That was a -- that was a property down in Tahoe which was a cash flowing asset net leased that produced really, really good coverage that had to be done very quickly. It was a smaller opportunity in a market that we knew extremely well. I think what we're seeing on a go-forward basis is a little bit smaller opportunities which were less competitive, so I think we'll be focusing on loans in the range of probably $2 million to $10 million, so they will be a little bit smaller in size, number one. Number two, we're seeing a lot of loans that were perhaps distressed that people are buying back the notes at discounts and putting back together and we're providing the capital to facilitate that to occur.

We're seeing a lot of bridge loans on properties that perhaps were, went through a difficult time and now getting stabilized and the bridge loans are performing for the purpose of stabilizing that asset before a permanent loan could be taken out. We're also seeing some pretty good mezzanine opportunities, albeit smaller loan opportunities for existing loans that still have yield maintenance on but can't be refined for another year or two or three, that have good coverage, but the borrower needs some additional capital to make CapEx into the property in order to improve that asset and get it repositioned. So a lot of it is repositioning assets, but I will tell you that in a larger loan area we're seeing greater competition, but what we can do because of our cost structure and originations capacity and because the manager is so active in the multi family side of the business, we're seeing additional opportunities in the $2 million to $10 million area.

Great. Thanks. In terms of portfolio composition, is there any target to move toward one asset type or another or are you being opportunistic here?

I think that our sweet spot has always been, and we like to stay as close to it as possible, is the multi family of lending side of the business. Clearly that's where the firm began. We'd like to have as much concentration as possible. So in terms of asset class, we'd like to have as much multi family as possible. In terms of geographic location, clearly being in New York City, the five burrows, the major markets like San Francisco, Boston, DC; I mean we like to stay in those major markets as well.

Great, thanks.

And there are no further questions. I'd now like to turn the call back over to Mr. Paul Elenio, Chief Financial Officer.

Okay. It's Ivan Kaufman. Well thank you for your time today and your participation. We are really pleased with where we are today and the ability to transform the Company and move forward get active in our core lending business. And thank you for your time. Have a nice day.

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