Arbor Realty Trust Inc (ABR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Arbor Realty Trust earnings conference call. My name is Veronica, and I will be your coordinator for today.

(Operator Instructions)

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

Okay, thank you, Veronica, 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 31st, 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 financial results, I would like to reflect on how we closed out the year, touching on some of our more significant accomplishments, and then turn my focus to our operating philosophy and outlook for 2011. 2010 was a tremendous year, in that we were able to successfully complete our goal of transforming our entire balance sheet, while retaining a substantial amount of our equity value, and positioning ourselves to return to our core lending business.

We accomplished these goals by retiring all of our short term recourse debt, refinancing and modifying a significant amount of our loan portfolio, monetizing some of our non-performing and unencumbered assets increasing our liquidity substantially, and effectively utilizing our low cost non-recourse CDO vehicles, all without raising additional equity and diluting our shareholders. Clearly, one of the keys to this success was our ability to eliminate all of our short term recourse debt with generating significant gains, reduce our interest expense substantially, and greatly increased our liquidity and operating flexibility.

As we discussed in our last earnings call, we recorded gains of approximately $228 million from the retirement of our debt at deep discounts in 2010, and approximately $285 million in gains from since the market dislocation occurred. These gains, combined with approximately $80 million in gains from our equity kickers, have greatly mitigated the losses we have taken during the significant downturn, preserving a substantial amount of our equity value.

Additionally, in 2010, we had great success in monetizing our non-performing and unencumbered assets, contributing greatly to the significant increase in our cash position, which as of today is approximately $100 million, not including approximately $20 million of cash collateral posted against our swaps. We also have around $120 million of net unencumbered assets, of which approximately $15 million are currently CDO eligible. These assets, combined with our cash on hand, and cash posted against our swaps, gives us approximately $240 million of value, in addition to approximately $240 million of net equity value in our CDO vehicles.

We are also extremely pleased with our ability to manage our CDO vehicles effectively, receiving all of the cash distributions from these vehicles to date. 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. We will continue to look to mine the value from our legacy assets, enhance the yield in our portfolio, and selectively lend and invest in the appropriate opportunities.

One of the advantages we have is the ability to utilize these low cost CDO vehicles to enhance our returns and increase our core earnings over time on a quarter-by-quarter basis. As I mentioned earlier, the aim of our strategy was to position ourselves to return to our core lending business, which we actively began over the last few quarters. During the fourth quarter, we originated two loans, totalling $15.7 million, with an average yield of around 7%. And we finished 2010, with total originations of five loans totalling $26 million, with an average unlevered yield of approximately 8.5%. Four of these loans were financed through our low cost CDO vehicles, greatly increasing our returns on these investments, and the other loan is now eligible to be put into our CDOs as well.

Additionally, as of today, we have a healthy growing pipeline, where we are now actively engaged in looking to deploy our capital through the appropriate, and to the (inaudible) appropriate opportunities and the best risk/reward returns, while seeking to maximizing these returns through the utilization of our CDO vehicles, and other potential financial sources. We will continue to remain disciplined and selective. And we are very excited about the opportunities we are seeking in this recovering market and increase our current earnings over time.

Additionally, as you can see from our financial statements, we've also started to acquire some of the real estate securing our loans and investments. As we discussed on our prior calls, we have always invested heavily in the asset management expertise internally to develop and operate real estate, which gives us the unique ability to diversify our platform and enhance the value of our investments. As of December 31, 2010, we had two real estate-owned assets of approximately $23 million, subject to approximately $21 million of debt. We added another property in the first quarter of 2011, with (inaudible) all the debt on the asset with a carrying value of around $72 million as of December 31, 2010.

Furthermore, we have three additional assets that we believe we will acquire in the next six months. We do believe, in addition to these assets, there is the potential for us to continue to add our real estate-owned portfolio in the future, and we are very confident and comfortable in our ability to manage these assets. We also believe we have the expertise internally to operate these properties effectively, increasing the NOIs over time, and repositioning the assets for future disposition, with the goal of maximizing the value of our investments.

Now, I would like to update you on the credit status of our portfolio, and discuss our views on the commercial real estate market. As all of you are aware, commercial real estate fundamentals and real estate values have remained weak for sometime, which clearly impacted every borrower and our portfolio. We recorded $36 million of loan loss reserves and impairments on our investments during the fourth quarter, of which $24 million was related to one development project. The loan loss reserves were related to nine loans, with an outstanding balance of approximately $262 million.

We were very pleased with our ability to recover $13.5 million of previously recorded reserves in the fourth quarter, and $18.1 million of recoveries this year. In addition, we received $80 million in loan payoffs and paydowns, refinanced and modified $47 million of loans, and extended $140 million of loans during the fourth quarter. And for the full-year 2010, we were able to generate approximately $220 million in cash from payoffs and paydowns. Additionally, at December 31st, we had nine non-performing loans with a net carrying value of approximately $26 million, down from ten loans and $53 million as of September 30th, mainly due to the sale of a $25 million non-performing loan during the fourth quarter. What you can see from these numbers, is that the level of our loan loss reserves is down significantly in 2010, as compared to 2009. We believe this is an indication that there has been movement towards the stabilization of the overall credit commercial real estate market, and in some segments, signs of recovery.

In summary, we are extremely pleased with our accomplishments in 2010, especially in our ability to reposition the Company and return to our core lending business. Our operating philosophy going forward, will continue to be to aggressively manage our portfolio, mine the value of our legacy assets, and actively redeploy our capital into new investments with the appropriate risk/reward profiles. We also look to optimize utilization of our non-recourse CDO vehicles, as well as other potential financing sources, to enhance our yield and our core earnings over time. We are very focused on the successful execution of this strategy, as the primary goal continues to be maximizing the return to our shareholders. 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 $41.1 million, or $1.62 per share, a net income of $112.9 million, or $4.39 per share for the year ended December 31, 2010. We recorded a total of $23.8 million in net losses from our portfolio for the fourth quarter, consisting of $36.2 million in loan loss reserves and losses from restructured loans, a $1.1 million impairment charge related to one of our equity investments, net of $13.5 million in recoveries of previously recorded reserves.

We closed out the year with $91.2 million in net losses from our portfolio for 2010, of which $109.3 million were made up of a combination of loan loss reserves, loss and restructured loans, and impairment on our equity investments, partially offset by $18.1 million in recoveries of previous reserves. We were also successful in liquidating one of our real estate held for sale assets in the fourth quarter, recording a gain of $1.3 million from this disposition. Additionally, we continued our success in liquidating several of our non-performing and unencumbered assets during the quarter, resulting in us charging off the loan loss reserves related to those assets. As a result, we now have $205 million of loan loss reserves on 30 loans, with unpaid principal balance of around $531 million at December 31, 2010.

As we've mentioned before, we have been very effective over the last few years in executing our strategy of retaining equity value, through the retirement of our debt instruments at deep discounts. And although we did not buy back any debt in the fourth quarter, we were very pleased with our success in retiring the Wachovia debt in June, as well as some of our trust preferred securities, and in our CDO debt of deep discounts during the year. In fact, we recorded approximately $228 million in total gains from the extinguishment of debt during 2010, and approximately $285 million in gains to date.

As a result, at December 31st, our book value per share stands at $8.25, and our adjusted book value per share is $12.59, adding back deferred gains and temporary losses on our swaps. These book value numbers do not take into account any dilution from 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 the fourth quarter of continuing our strategy of monetizing our non-performing and unencumbered assets, resulting in a substantial increase to our cash position, which currently stands at approximately $100 million. So, between cash on hand, cash posted against our swaps, and our unencumbered assets net of reserves as of December 31st, we currently have approximately $240 million of value, not including the equity value in our CDOs, which today is approximately $240 million as well, net of loan loss reserves as of December 31st.

Looking at the rest of the results for the quarter, the average balance in our core investments declined by about $163 million from last quarter, to around $1.7 billion, mainly due to payoffs and paydowns in the third and fourth quarters. The yield for the fourth quarter on these core investments was around 4.75%, compared to 5.29% for the prior quarter. Without some nonrecurring items, such as additional interest received in both quarters, on a loan that exceeds our investment basis in the asset, the yield on these core assets was around 4.60% for the fourth quarter, compared to 4.88% for the third quarter.

This decrease was primarily due to our decision to suspend the recognition of the accrual rate of interest on four loans collateralized by one development project, partially offset by the payoff of some of the non-performing loans in the fourth quarter. And although, we are contractually entitled to an accrual rate of interest above the current pay rate, on several loans in our portfolio, we are now only recording interest income equal to the cash collected on all loans in our portfolio. Additionally, the weighted average all-in yield in our portfolio was around 4.60% at December 31, 2010, compared to 4.72% at September 30, 2010. This decrease was again, mainly due to the reduction of interest income recorded on some loans with an accrual rate of interest, partially offset by the payoff of some of our non-performing loans during the fourth quarter.

The average balance on our debt facilities decreased by around $43 million from last quarter to around $1.3 million, which was mainly due to the payoff of a $26 million term debt facility, and the repayment of a $5 million participation interest related to one of our loans in the fourth quarter, as well as the repurchase of $21 million of CDO bonds at a discount late in the third quarter. The average cost of funds in our debt facilities was approximately 4.10% for the fourth quarter, compared to 4.47% for the third quarter.

Excluding the unusual impact on interest expense from our swaps, our average cost of funds was approximately 3.96% for the fourth quarter, down from around 4.16% for the third quarter. And our estimated all-in debt costs going forward was around 3.90% at December 31st, compared to around 4.20% at September 30th. This decrease is again, primarily due to the payoff of the term debt facility, and a participation interest in one of our loans, with an interest rate exceeding our overall cost of debt. The overall normalized net interest spreads on our core assets decreased to approximately 0.64% this quarter, from 0.72% last quarter, primarily due to the reduction of interest income recorded on some loans with an accrual rate of interest, partially offset by the payoff of some of our non-performing loans during the fourth quarter, and payoff of a term debt facility and participation interest in one of our loans.

However, as Ivan mentioned, we are actively engaged in the redeployment of our capital, and utilization of our CDO vehicles, with the goal of increasing our net interest spreads over time. Additionally, we have been acquiring some of the properties that were collateralizing certain of our loans in the normal course of our lending operations. As of December 31, 2010, these assets have not had a significant impact on our financial statements.

In the first quarter of 2011, we acquired one property that we have an $85 million performing loan against, with a weighted average interest rate of approximately 3.75%, and a net carrying value of $71.5 million at December 31st, 2010. As a result, we will record this asset on our books at fair value in the first quarter, eliminate our loan and consolidation, and record income or loss from this property including depreciation expense, instead of interest income going forward. And as we said earlier, there was a portfolio of assets that we expect to acquire in the next six months, as well as the potential for us to continue to add to our real estate-owned assets in the future, which could have a more significant impact on our financial statements going forward. As a result, we will report FFO as an additional financial measure going forward, to better reflect our operating performance of these assets.

Next, our average leverage ratios were around 67% on our core assets, and around 77%, including the trust preferred as debt for the fourth quarter, compared to 63% and 73% respectively in the third quarter. And our overall leverage ratios on a spot basis were 3.2 to 1 at December 31st, and 3.1 to 1 at September 30th. The increase in the average leverage ratios was primarily due to the payoff and paydowns of our unlevered assets, which contributed greatly to the significant increase in cash on hand at December 31st, 2010.

Other expenses were relatively flat from quarter-to-quarter, with the exception of the $18.8 million incentive management fee recorded in the fourth quarter. As we've previously disclosed, Arbor Commercial Mortgage, our manager, repaid $3.6 million, or half of the prepaid management fee related to the Prime transaction, with approximately 701,000 shares of ART stock in the fourth quarter. In accordance with the management agreement, the remaining amount due of approximately $3.6 million was deducted from the $18.5 million incentive management fee that was earned, resulting in a net fee due to our manager of $14.9 million. In accordance with the manager agreement, our manager has elected to receive 25% of the remaining fee, or approximately 667,000 shares in ART stock, and 75% or approximately $11 million in cash.

There are some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents increased approximately $75 million from last quarter, primarily due to payoffs and paydowns of our loans and investment portfolio, the return of some of the cash posted as collateral against certain swap contracts from an increase in the value of these instruments, as well as our success in moving some of our unlevered assets into our CDO vehicles, which also accounted for the majority of the $32 million decrease in restricted cash. This increase in cash on hand was partially offset by the payoff of the term debt facility, and the funding of our originations during the fourth quarter.

As Ivan mentioned, we are pleased to report that we currently have around $100 million of cash on hand, prior to the $11 million in cash that will be paid to our manager this month. Other assets also decreased by approximately $10 million, mostly due to the cash received from the increase in the value of certain interest rate swaps. Notes payable on repurchase agreements decreased $31 million during the quarter, due to the payoff of $26 million term debt facility, and a $5 million participation interest, which effectively eliminated all of our remaining short-term recourse debt.

In addition, other comprehensive loss decreased by about $15 million for the quarter. This again, was primarily due to a significant increase in the market value of interest rate swaps, from a change in the outlook on interest rates. This also makes up a majority of the increase during the quarter and other liabilities. GAAP requires us to flow the changes in value of certain of our interest rate swaps through our equity section.

And lastly, our portfolio statistics as of December 31st, show that about 68% of the portfolio was variable rate loans, and 32% was fixed. By product type, about 66% was bridge, 15% junior participation interest, and 19% mezzanine and preferred equity. By asset class, 38% was multi-family, 34% was concentrated in office, 13% hotel, 10% land, and 1% condo. Our loan-to-value was around 89%. Our weighted average median dollars outstanding was 60%, and geographically, we have around 38% of our portfolio still concentrated in New York City. That completes our prepared remarks for this morning. I will now turn it back to the operator to answer any questions you may have at this time. Veronica?

(Operator Instructions) And your first question comes from the line of Lee Cooperman from Omega Advisors. Please proceed.

Yes, and good -- thank you, good morning. Thanks for the good rundown. Just -- two questions. On your road to achieving respectability, and you've made terrific progress in 2010, I think re-institution of a dividend would probably cap it off. I'm curious, as you look at your internal budgets, since the business is somewhat predictable, do you anticipate that you'll end 2011 as a dividend-paying Company, number one? And number two, adjusted book, I guess, is $12.59, GAAP book, $8.25. Which numbers do you guys look at as being more indicative value of the underlying assets of the business? Thank you.

Hi, Lee, it's Paul. I'll handle the book value, adjusted book value question first, and then I'll ask Ivan to weigh in on the dividend. As you mentioned, the adjusted book is $12.59, the book is $8.25. The differences there are obviously the temporary, we'll call it temporary, decline in the value of our swaps, and a large deferred gain from one of our equity investments we have, that is deferred because of a tax deferred strategy we put in place. We obviously believe that the $12.59 is closer to the real value. It is the real value. It'll just take some time for us to get to that $12.59, as we don't control the timing of when those swaps come back, and also when we're able to bring in the accounting gain from that equity investment. So if you look at some of the commentary we had during the call, if you look at it a different way, we have $100 million of cash, $120 million of unencumbered assets net, as well as some CDO equity of about $240 million. We do have Trust Preferreds on our balance sheet as well, of about $170 million. If you net all that down, it comes to around a $12.00 or $13.00 number. So that number, which is more of an economic number, is clearly closer to the $12.59 adjusted book value, and that's why we feel that number is a solid number.

Hi, Lee, this is Ivan.

Good morning.

With respect to the dividend, clearly it's our objective and goal to return to a dividend as soon as possible. As we've been talking over the last several quarters, we've been positioning the Company at the end last year to clean up our balance sheet which I think we've done an outstanding job, and have begun to refocus on originations, and start to redeploy our capital into interest-earning opportunities. And I think we've effectively gotten to that position. We opened up the spigot a short period of time, to go out into the market, and build our pipeline. Our pipeline is building at a very, very healthy rate. We're looking forward to lending effectively, redeploying our capital, also taking the loans that payoff in our CDOs, replacing them with higher yielding loans. And also turning some of the loans in our portfolio as they come up renewal, and getting high yields out of those portfolios. With that in mind, it takes a quarter by quarter basis. I'm very optimistic that we're making significant progress. What I'm very pleased about is returning to the originations market, and seeing the flow in the pipeline and the quality of business that we're seeing. So while I can't give you any promises, it's clearly our intention to get back to a dividend paying status as quickly as possible.

One last question. Seeing -- given some of your low cost liabilities, and looking out over the next two or three years, if the economy remains in an improving trend, basically that we ought to be able to earn 10%, 12% in our book value?

Yes. Again, Lee, a lot will depend on what the average yields of those investments are, and whether we're able to obtain additional leverage, as well as utilize the CDO vehicles. But it's hard to come up with a return number without having some history over the next couple of quarters to see what the returns on those investments will be. But Ivan can probably --

Yes, but what we are seeing, Lee, is we're able to effectively lend on bridge loans, on first lien bridge loans, and as you can see in the 6% to 8% range, and we can lever those very effectively in our CDOs, and create really good yields. We're also starting to see some very good interest, and putting lines of credit in place to leverage that up, and get to mid teens returns on those. So that's pretty effective. Just a small statistic, as well as our portfolio is about $1.7 billion now, Paul? We went through a period of three years, where we were negotiating with our borrowers and extending, and actually lowering and modifying rates in order to mitigate some of the issues that had faced the economy. I think the trend is now changing significantly, and as loans come up for renewal, if they stay on the books, the rates are actually going the other way. Every 25 basis point increase in our portfolio is a $4 million annual increase in bottom line. So I'm optimistic that now it's our turn, rather than the borrower's turn, when the loans come up for renewal, to be able to increase those rates, or if not, replace them with higher yielding loans.

Okay. Thank you very much. Good luck.

Thank you, Lee.

Thanks, Lee.

Your next question comes from the line of Eric Beardsley from Barclays Capital. Please proceed.

Hi, good morning.

Good morning, Eric.

You said you were thinking about the trend in portfolio repayments in your pipeline. When would you expect to see growth in the portfolio?

I think we're going to begin to see it now. I think we're going to see it on a quarter-by-quarter basis. We have significant amount of cash to deploy. We have some loans that are going to be paying off on our CDOs, which we have a queue of loans lined up in our unencumbered assets to fill loans. We're negotiating now with a few lenders to put a line of credit in place, to be able to leverage some of the new originations that are coming in. So we're pretty pleased. We're going to see that on a quarter by quarter basis, starting as we speak.

Great, thanks.

(Operator Instructions). At this time, there are no further questions. I would now like to turn the conference over to Ivan Kaufman for closing remarks.

Okay. Well, thanks, everybody, for their time. We're very pleased with our results for 2010, and very, very pleased to be able to return to the originations business. And thank you.

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