Arbor Realty Trust Inc (ABR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2011 Arbor Realty Trust Incorporated conference call. (Operator Instructions). I will now like to turn the presentation over to your host for today's call Mr. Paul Elenio. Sir, you may proceed.

Okay. Thank you, Francine. Good morning, everyone.

Welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the result for the quarter ended March 31, 2011, with me on the call 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 conditions, 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 details 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. events.

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

Thank you, Paul, and thanks to everybody for joining us on today's call. Before Paul takes you through the financial results for quarter, I would like to reflect on some of our recent accomplishments and talk about our operating philosophy and outlook for the remainder of 2011.

As we mentioned on our last earnings call, we are extremely pleased with our success in having positioned the firm to return to our core lending business which we actively began over last few quarters. we are also pleased to be operating our platform with greater flexibility and no short-term recourse debt all while preserving a substantial amount of our equity value.

As previously disclosed in the fourth quarter we originate 2 loans totalling $15.7 million and in first quarter we originated 5 loans totaling $30.3 million with weighted average unleveraged yield approximately 6.5% in addition to us garnering a 25% equity pickup on 1 of these loans. Four of these loans are financed through our low cost CDO vehicles which will include short terms on these investments.

We also have a growing pipeline and will continue to deploy our capital into the opportunities that provide us with the best risk reward returns and look to maximize the returns on these investments utilization of our CDO financings and other potential lending sources when available. We'll remain disciplined and selective and are pleased with the opportunities we are seeing in this recovery market to build up our portfolio with high-quality assets and increase our core earns over time.

Additionally, we have had great success in monetizing our non performing and unencumbered assets which contributed greatly to our cash position and as of today, is approximately $85 million not including approximately $20 million of cash posted against (inaudible) swaps and approximately $20 million of cash available for reinvestments in our CDOs. We also have around $115 million of net unencumbered assets which combined with our cash on hand and cash posted against our swaps gives us approximately $220 million of value. This in addition to approximately $235 million of value between the equity in our CDO vehicles and our real estate owned assets for a total value of approximately $455 million.

We also have been effective in managing our CDOs receiving all of the cash distributions from these vehicles to date. We have three vehicles in place with the ability to invest in new assets until January 2012, in one of our CDOs. While there can be no assurances that our CDO vehicles will continue to cash flow in the future, we'll remain focused on optimizing and utilizing these facilities when possible.

As I mentioned earlier, we'll also continue to mind the value of our legacy assets selectively lend and invest in the appropriate opportunities, and utilize our CDO financings to enhance our returns and increase our core earnings over time. As we have discussed in the past, we have been very successful in repurchasing our data deep discounts recording significant gains and retaining substantial amount of our equity value.

In the first quarter, we repurchased $1.5 million from our CDO debt for $600,000 recording a gain of proximately $900,000 and we'll continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity. Additionally, as we mentioned in our last call, we started to acquire some of the real estate securing our loans in investment taking title to two properties during the first quarter totaling $132 million subject to $55 million our first lien debt.

Paul will take you through the accounting related to these transactions in a moment. I will stress that we believe we have an experienced asset management team with a diverse set of skills including the ability to develop and operate real estate which gives us the ability to better manage and enhance the value of our investments. In addition to these assets, there is potential for us to continue to add to our real estate owned assets in the future to additional acquisitions of property securing our loan portfolio.

we are confident in our ability to manage these assets with the goal of maximizing the value of our investments by operating these properties effectively increasing the NOI's overtime and repositioning theses assets for future disposition. Now, I would like to update you on the credit status of our portfolio and discuss our views of the commercial real estate market.

During the first quarter we recorded $2.6 million of loan loss of reserves and losses on our investments. These, the loan loss reserves were related to four loans with an outstanding balance of approximately $28 million. We were pleased with our ability to recover $1 million of previously recorded reserves related to 2 assets in the first quarter and in addition to the dollar $18.1 million of recoveries we generated in 2010.

In addition, we received $42 million in loan payoffs and pay downs. Refinanced and modified $164 million of loans and extended $139 million of loans during the first quarter. At March 31st, we had 10 non performing loans with a UPB of proximately $60 million and a net carrying value of approximately $26 million.

As you are aware commercial real estate fundamentals and real estate values have remained weak for some time which clearly impacted every borrower and our portfolio. We do believe there has been movement towards a stabilization of the commercial real estate market of late, and some segments there have been signs of recovery although the overall market remains uneven.

we have been aggressive in managing the credit issues related to our legacy assets through the refinance and modification of a substantial amount of our portfolio and by recording the appropriate reserves on our assets to date. While we believe we are adequately reserved at this time, and that we have cleaned up a substantial amount of our books, our portfolio of investments is secured by properties in multimedia assets classes and product types as well as geographically throughout the country.

Additionally, what we have seen in some instances is that although our asset values are adequate to support our loans, some of our borrowers have suffered dramatically from the recession and lack of liquidity which can directly impact the performance of our collateral and potentially lead to additional delinquencies and losses in the future related to our portfolio. So we'll continue to aggressively evaluate the portfolio as well as the market conditions and the strength of our borrowers to determine if any further reserves are necessary.

In summary, we are extremely pleased to have repositioned the company and to have returned to our core lending business. we have confident that our deep and versatile origination platform will produce high-quality assets and will continue to actively redeploy our capital to the appropriate investments.

We'll also continue to aggressively manage our portfolio, mind the value of our legacy assets and optimize the utilization of CDO debt as well as other potential financial sources with the goal of enhancing our yields and core earnings over time and maximizing the return to our shareholders. I will now turn the call over to Paul to take you through some of the financial results.

Okay. Thank you, Ivan.

As noticed in the press release we have net income for the first quarter of $267,000 or $0.01 per share an FFO of $700,000 or $0.03 per share. We recorded $1.6 million in net losses from our portfolio for the first quarter. Consisting of $2.6 million in loan loss reserves and losses on restructured loans net of $1 million in recoveries on previously recorded reserves.

We also charged off $42.2 million in previously recorded loans loss reserves related to the reclassification of certain assets to real estate owned and loans which paid off in the first quarter. As a result we now have $164 million of loan loss reserves on 27 loans with a UPB of around $382 million at March 31, 2011.

As we mentioned before, we have been very effective over the last few years in retaining equity value at the retirement of our debt instruments at deep discounts. In the first quarter we managed to repurchase some more of our CDO debt back at a discount, recording approximately a $900,000 gain from this purchase and we will continue to evaluate the buy back of future CEO debt going forward based on availability, pricing, and liquidity.

At March 31, our book value per share stands at $8.55 and our adjusted book value per share is $12.54 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 warrants issued to our (inaudible) as part of the 2009 debt restructuring.

Additionally, as Ivan mentioned, we currently have approximately $85 million in cash on hand and $20 million of cash posted against our swaps, between this cash, our real estate owned assets, unencumbered assets, and equity value in CDO net of reserves as of March 31 we currently have approximately $455 million of total value. Looking at the rest of the results for quarter, the average balance in our core investments declined by about $100 million from last quarter to around $1.6 billion mainly due to as we discussed acquiring some of the properties that were securing some of our loans,and reclassifying them to real estate owned as well as pay ups and pay downs in the fourth and first quarter partially offset by new originations.

Yield for the quarter on these core investments was around 4.52% compared to 4.75% for the fourth quarter. Without a nonrecurring item of additional interest received in the fourth quarter on a loan that exceeded our investment basis in the assets the yield on these core assets was around $4.52% for the first quarter compared to 4.59% for the fourth quarter.

This decrease was primarily due to reduced rates on modified loans partially offset by the reclassification of two loans to real estate owned one of which was non performing combined with higher rates on new originations. Additionally the weighted average all-in yield of our portfolio was around $4.50% at March 31, 2010, compared to 4.59% at December 31, 2010. This decrease was again mainly due to reduced rates on modified loans partially offset by the reclassification of loans to real estate own and higher rates on new original nations.

The average balance in our debt facilities remain relatively flat from last quarter at approximately $1.3 billion as did the average cost of funds in our debt facilities which is approximately 4.10% for the fourth and first quarters. Excluding the unusual impact on interest expense from our swaps our average cost of funds was also relatively flat at approximately 4% for the first quarter compared to around $396 for the fourth quarter.

And our estimate all-in debt cost was around 3.94% at March 31, compared to around 3.90% at December 31. So overall normalized net interest spreads in our core assets decreased to proximately 0.52% this quarter from 0.63% last quarter. Primarily due to the reduction of interest income for modified loans, partially offset by the reclassification of two loans to real estate owned and higher interest rates on new original nations.

Also as Ivan mentioned we are activity engaged in the redeployment of our capital with the goal of increasing our net interest spreads overtime. Additionally we acquired two sets of properties in the first quarter that were securing certain of our loans in the normal course of our lending praying.

One of the acquisitions happened in February and was related to an $85 million performing loan secured by six resort hotels in Florida. The loan had a weighted averages interest rate of approximately $3.75% and a net carrying value of $71.6 million prior to the acquisition. As a result we recorded this asset on our books as real-estate owned at fair value and eliminated our loan in consolidation and we are now recording net operating income from the property including depreciation expense instead of interest income.

We do believe that the NOI before depreciation on this asset will approximate the yield on the original loan for a full year. However, due to the seasonal nature of the operations, we expect the net income from these hotels to fluctuate with the bulk of the net income occurring in the first two quarters of the year.

The second acquisition which occurred at the end the first quarter was related to a portfolio of multifamily properties which was securing a $29.8 million non performing loan. Which had a net carrying value of $11.4 million before the acquisition. These properties were subject to approximately $55 million of first lien debt which we assumed upon acquisition and these assets are reflected on our balance sheet as real estate own at fair value.

Although we are currently evaluating the operations of these properties based on our preliminary estimates, we believe the NOI excluding depreciation expense to be in the range of $1.5 million to $2 million annually. As we said earlier there is the potential for to us add to our real estate assets in the future in the normal course of our lending operation which could have a more significant impact on our financial statements going forward.

Next our original leverage ratios were around 70% on core lending assets and 81% including the trust preferred debt for the first quarter compared to 67% and 77% respectively in the fourth quarter. And our overall leverage ratios on a spot basis were 3.3 to 1 at March 31st, and 3.2 to 1 at December 31The increase in the average leverage ratios was primarily due to the reclassification of certain of our assets to real estate owned in the first quarter.

There are some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents decreased proximately $34 million from last quarter primarily due to deploying some of our capital and to new originations and the payment of the $11 million management fee from 2010 during the first quarter. The decrease in cash was partially offset by payoffs and pay downs of our loan and investment portfolio during the quarter.

Restricted cash in our CDO vehicles increased approximately $31 million from last quarter also due to runoff in the first quarter. However a substantial amount of this cash was utilized in April through the successful movement of some of our unleveled assets into our CDO vehicles.

As we mentioned earlier, we acquired two sets of properties during the quarter, one of which was subject to first lien debt which accounts for the increase in real estate owned assets and related debt of proximately $132 million and $55 million respectively in during the quarter as wells as a majority of the reduction in loans held for investments from the reclassifies of these assets. In addition other comprehensive losses decreased by about $9 million for quarter. This was primarily due to a significant increase in market valve our interest rate swaps from a change in the outlook of interest rates. This also makes up a majority of the increased during the quarter in our liability.

GAAP requires us to flow the changes in value of certain of our interest rate swaps to our equity section. Lastly, our loan portfolio statistics as of March 31 show that about 67% of the portfolio was variable rate loans and 33% was fixed. By product type, 66% were bridge loons, 13% junior participations and 21% mezzanine and proffered equity.

By asset class 38% is multifamily product. 37% is office, 9% hotel, 11% land and 1% condo. Our loan to value is around 88%, a weighted average median dollars outstanding was 60% and geographically we have around 41% of our portfolio concentrated in New York City.

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

Thank you, sir. (Operator Instructions). We'll stand by for our first question. We have a question coming in from the line of Bruce Harting with Barclays Capital

.

Yes.

Good morning, if you had to prioritize the opportunities your seeing right now in the lending side, relative to available capital or cash flow versus having to raise any capital, how would you sort of prioritize that or rank that, and in terms of the opportunities, is there enough in the flow that you are seeing that the prioritizing that would allow you to sort of grow and to higher earnings faster, just trying to get a sense of the urgency right now in terms of working with what you have on the balance sheet versus new opportunities out there. Thanks.

Hi, Bruce, it's Ivan. That is a great question. And clearly that is a little bit of a moving target. Fortunately it has been a positive moving target for us. We have had certain payoffs and certain [monitorrization] of a lot of our unencumbered assets which have allowed us to redeploy that capital.

In addition, we have a pipeline that is building at a very healthy pace. I think we closed at about $30 million in last quarter and that should be increasing in and our pipeline is growing very significantly. We have about $20 million a room in our CDOs. And we have some other expected payoffs as well as significant cash, as well as, our leverage we are working on as well. So we are looking at monetizing some of our unencumbered assets.

So I think we have significant enough dry powder to handle that growing pipeline. And really begin to return to core earnings. We did have some payoffs that were a little ahead of time so we were a little surprised that some of the loans paid off so we are actively looking to reinvest that capital at higher rates.

As I mentioned on our last call, we are seeing bridge loans priced in the LIBOR 5 and 6 range and we are seeing mezzanine loans in the mid teen range and that is what our pipeline looks like. So what I would expect to see is a growing pipeline. Clearly adequate cash to fund the next couple of quarters and really work on getting those core earnings up. And I think we are really focusing on those core earnings for 2012. We would like to gets them a little bit earlier but I think a lot has to do with where the loans pay off and how quickly we can redeploy that capital but we do have significant cash capital capacity to handle the next couple of quarters based on growing pipeline.

Thanks, where are you seeing your relative to loans that you are working out and then loans, your concentration over the next two or three years in our strategy in terms of geographic opportunities, will there be any change in your strategy in terms of that?

I think one of the things that we certainly learned is we are going to stick with close to the city and the Tristate area as possible. As most peoples in real estate have recognized is that the city although it did fall it didn't fall as rapidly. There was more liquidity in city assets and it recovered quickest. The other sector which was really the core in the franchise of what helped build the Company is the multifamily sector.

So we are sticking to a lot of cash flow assets on the multifamily sector working on B class assets throughout the United States. So that is where you'll see a significant amount of what we are doing. What we won't do where many firms get hurt, extremely careful is buying loans out in the market as opposed to originating them ourselves so the focus will be on our own originations as opposed to purchasing loans. In New York and the Tristate area and multifamily assets.

Thanks, Ivan.

Thanks, Bruce.

As there are no further questions in the queue I would like to turn the call back over to management for closing remarks.

Thanks for listening to our script this morning, we look forward to the next couple of quarters. Thank you.

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