Arbor Realty Trust Inc (ABR) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. And welcome to the second quarter 2011 Arbor Realty Trust earnings covered call. My name is Keisha, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to hand the conference to Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Thank you Keisha, and good morning everyone.

Welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended June 30, 2011. 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 conditions, liquidity, and a result 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 on these forward-looking statements which speak only as of today. Arbor undertakes no obligate to publicly update or revise these forward-looking statements, to reflect events or circumstances after today. Or the occurrences of an unanticipated events.

And with the Safe Harbor behind us, I would now like to turn the call over to President and CEO, Ivan Kaufman.

Thank you Paul. And thanks to everyone for joining us on today's call. And, Paul will take you through the financial results through the quarter.

But first, I would like to spend some time talking about some of our accomplishments, operating philosophy and outlook for the remainder of 2011. As we stated on our last few earnings calls, that we are extremely pleased to have repositioned our balance sheet a limited in all of our short-term recourse legacy debt. And to be focused on our core lending business. With the goal of increasing our platform and our core earnings over time. In the second quarter, we remained active originating five loans totaling $43.6 million, with a weighted average yield of approximately 7%.

As previously disclosed, we originated 5 loans in the first quarter totaling $30 million on a weighted average yield of approximately 6.5%. As well as 2 loans in the fourth quarter for $15.7 million at a yield of around 6.5%. Additionally, our pipeline remains strong. And will continue to put our capital into new investments with a target of return of 15% on a non-levered basis or levered-basis. We will look to leverage certain of these investments by financing them with our low cost CDO debt when appropriate. As well as, with additional financing facilities when available in able achieve these targeted returns. In fact, we are pleased to announce that we have recently closed on a new, two-year $50 million bridge loan financing facility in July. With leverage up to 75% depending on the assets being financed.

This new facility will provide us with additional buying power. And increased return on our investments. We will remain disciplined and selective. And we are pleased with the opportunities we have seen in a recovering market to build up our portfolio with high-quality assets. And increase our core earnings over time.

Additionally, we have had great success in monetizing our non-performing and unencumbered assets contributing greatly to our liquidity. Which we are actively deploying into new investment opportunities. Our cash position as of today is approximately $40 million, not including approximately $20 million of -- cash collateral posted against our swaps. And, approximately $28 million of cash available for reinvestment in our CDOs. We also have around $160 million of net unencumbered assets. Many of which are either, CDO eligible or able to be financed through other facilities, which would produce additional liquidity.

These assets, combined with cash on hand and cash posted against our swaps, give us approximately $220 million of value. This is in addition to approximately $220 million of value between the equity in our CDO vehicles and our real estate owned assets, for total value of approximately $440 million. We have also continued to effectively manage our CDO vehicles receiving all of the cash distributions to date, we have 3 vehicles in place. With the ability to invest in new assets -- we have three vehicles in place with the ability to invest in new w since January 2012. And one of our CDOs, which I mentioned earlier counts as $20 million of investible cash for redeployment.

Although there can be no assurance that our CDO vehicles will continue to cash flow in the future, we will remain focused on optimizing and utilizing these facilities when possible. We will also continue to mind the value of our legacy assets. Selectively lend and invest in the appropriate opportunities. And utilize our CDOs and additional financing sources to enhance our returns and increase our core earnings over time. And as we've discussed in the past we have been very successful in repurchasing our debted keep discounts while recording significant gains in obtaining substantial amount of our equity value.

In the second quarter we repurchased $3.5 million of our CDO debt for $1.6 million, recording a gain of approximately $1.9 million. Which combined with the gains in the first-quarter totaled $2.8 million of gains in the debt re-purchases for the first six months. We will continue to evaluate the repurchase for our CDO going forward, based on availability pricing and liquidity. As we touched on last quarter, we have acquired some of the real estate securing our loans and investments in the normal course for lending operations. And, now have for real estate owned assets totaling $152 million, with a net value after debt associated with the properties of around $77 million.

In addition, there is the potential for us to add to our real estate owned assets in the future to additional acquisitions of properties to securing our loan portfolio. We believe we have an experienced asset management team. And are confident in our ability to manage these asset, with the goal of manned maximizing our investments by increasing the NOIs overtime, and repositioning these assets for future disposition. Additionally, we are pleased with the Board's decision authorizing the Company to repurchase up to 1.5 million shares of our stock, as announced in our press release on June 14, 2011. And we feel that this investment of our capital will be accretive to our shareholders. To date, we have purchased approximately 125,000 shares at an average price of around $4.50. And there can be no guarantee as to number of shares we will purchase in the future.

Now, I would like to update you on the credit status of our portfolio and discuss our view on the commercial real estate market. During the second quarter, we recorded $12.1 million of loan loss reserves and a small repayment on one of our real estate owned assets. The loan loss reserve of $11.4 million was related to 3 loans with an outstanding balance of approximately $50 million. Although, $10 million of those reserves were on 1 loan with a UPB of $30 million. We also had some small recoveries of previously recorded reserves during the quarter of approximately $600,000 in addition to the $1 million earned of recoveries in the first quarter. And $18.1 million of recoveries generated in 2010 for total recoveries of approximately $20 million to date.

During the second quarter, we received $54 million in payoffs, pay downs, and monitorization of assets. We financed and modified $112 million of loans and extended $163 million of loans during the quarter. At June 30, we had 10 non-performing loans with a UPB of approximately $60 million. And a net counting value of approximately $25 million, which is unchanged from March. The overall commercial real estate market recovery remains uneven.

Although we have seen some signs of stabilization and recovery of certain segments. We feel that a substantial amount of our issues related to our legacy assets have been resolved. However, our portfolio of investments is secured by properties in multiple asset classes and product types. As well as geographically throughout the United States. And therefore, if there is a further deterioration in certain markets or asset classes, this could result in additional challenges related to some of our loans in our portfolio.

Additionally, there are times that even though our asset values are adequate to support our loans, we experienced losses in our portfolio because some borrowers have suffered dramatically from the recession. And lack of liquidity, which can directly impact the performance and value of our collateral. So, we will continue to aggressively evaluate our investment in borrowers. As well as, market conditions to be determine if any further reserves are necessary.

In summary, although there is still some uncertainty related to certain market conditions and asset classes, which could result in additional losses and our portfolio. We are excited about the macro stabilization that has begun and the opportunities we have seen in the market. We believe that our deep origination platform will continue to provide us with a steady flow of high-quality assets. With increased yields for us to actively invest our capital. We will also continue to turn our portfolio through a run-off and a monitorization of unlevered assets, recycling our capital into high-yielding opportunities. And remain focused on appropriately leveraging these investments, with the goal of increasing our net interest spreads and core earnings the balance of 2011. And for 2012 and return to a dividend paying stock.

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 of second quarter of $10.4 million or $0.41 per share. And FFO loss of $8.5 million or $0.33 per share. We recorded approximate $12.1 million in losses from our portfolio for the second quarter consisting of $11.4 million in loan loss reserves. And a $750,000 impairment on a real estate owned assets. These offset by $2.8 million in recoveries of previously recorded reserves.

However $3.2 million of the recoveries were non-cash and were the result of the monitorization of portion of one or loans in the form of a $32 million non-recourse participation interest, sold at a discount during the quarter. For accounting purposes, this discounted participation was recorded as debt. But at $3.2 million cash recovery of previously recorded reserves. And a corresponding offset a $3.2 million of additional interest expense. And therefore, this transaction had no net impact on our income statement during the quarter.

Despite the recovery, and offsetting interest expense presentation for accounting purposes. Economically, this transaction was a successful monitorization of a portion of one of our loans at the same net value we carrying the loan net on our books. Generating $29 million of liquidity during the quarter. And so after the second quarter activity, we now have $171 million of loan loss reserves on 26 loans, with a UPB of around $319 million as of June 30, 2011. We also continued our effective strategy of repurchasing our debt, at deep discounts when available during the second quarter recording a $1.9 million gain from the repurchase of some of our CDO debt. And we will continue to evaluate the buy back of our CDO get going forward based on availability pricing and liquidity.

At June 30, our book value per share stands at $8.07. And our adjusted book value per share is $12.15, getting back to their gains and temperate losses on our swaps. These book value numbers do not take into account any dilution for the potential exercise of warrants issued as part of a 2009 debt restructuring. Additionally, as Ivan mentioned, we currently have approximately $40 million in cash on hand, and $20 million cash posted against our swaps. And between this cash, our REO assets, unencumbered assets, and equity value in our CDOs net of reserves as of June 30 we currently have approximately $440 million of value.

Looking at the rest of results for the quarter the average balance in our core investments was relatively flat around $1.6 billion for both the first and second quarters. The yield for the second quarter on these core investments was around 4.64% compared to 4.50 % for the first-quarter. Excluding a nonrecurring prepayment penalty received on an early pay off in the second quarter, the yield on these core assets was relatively flat at around 4.54% compared to approximately 4.50% for the first quarter. Additionally, the weighted average [ball on] yield in our portfolio was also flat at around 4.50% at both June 30 and March 31, 2011. The average balances on our debt facilities also remain relatively flat from last quarter, at approximately $1.3 billion. The average cost of funds in our debt facilities is approximately 3.87% for the second quarter. Compared to 4.08% for the second quarter. Without one-time non-cash interest expense charge of $3.2 million related to the monitorization of one of our assets that I mentioned earlier.

Excluding the unusual in impact on interest expense from certain swaps, for both the first and second quarters, our average cost of funds was approximately 3.80% for the second quarter compared to round 4.0% for the first quarter. This decrease was mainly due to the maturity of certain interest swamps late in the second quarter. Additionally, our estimated all in debt course was about 3.68% at June 30, compared to around 3.94% at March 31. And this decrease, again, was primarily due to the burn-off of certain interest rate swaps during the quarter. The overall normalized interest spreads in our core assets increased 50% to approximately 0.75% this quarter from approximately 0.50% last quarter. Primarily due to the reduction of interest expense for the maturity of certain interest rate swaps during the quarter. Also as Ivan mentioned, we are actively deploying our capital, as well as utilizing our existing, and potentially new financing sources with the goal of increasing our net interest spreads and returns over time.

Additionally, as we mentioned on our last call we acquired two sets of properties that we are securing certain of our loans in the normal course of our lending operations. Property operating income related to our REO assets increased to $2.8 million compared to last quarter. Largely due to the acquisition of our portfolio of multi-family properties at the end of the first quarter. With the preliminary estimated NOI excluding depreciation expense in the range of $1.5 million to $2.0 million annually on those property. This was partially offset by a decrease in income from a portfolio of hotels we acquired in the first quarter that are seasonal in nature. The late acquisition in the first quarter also accounted for a substantial amount of the $3.4 million increase in property operating expenses, and $1.5 million increase in depreciation expense during the quarter. So overall, operating expenses increased approximately $600,000 more than operating income during the quarter. Mainly due to the seasonal nature of our portfolio of hotels. With projected annual NOI excluding depreciation expense of approximately $3 million, the bulk of which occurs in the first quarter.

As of June 30, we have REO assets of approximately $152 million, subject to approximately $75 million of assumed debt. And there is the potential for us to add to our REO assets in the future in the normal course of our lending operations. Which could add a more significant impact on our financial statements going forward. Next our average leverage ratios were around 71% on our core lending assets, and around 82% including the trust preferred as debt for the second quarter compared to 70% and 81% respectively in the first quarter. And our overall leverage raises on a spot basis were 3.4 to 1 at June 30 of 3.3 to 1 at March 31. The slight increase in the average leverage ratios was primarily due to the monetization of a portion of the 2 of our assets during the quarter, in the form of non-recourse participation interest. Which were recorded as debt for accounting purposes. Partially offset by reductions in our CDO debt from run-off in CDO I.

Additionally, as Ivan mentioned, we were successful in closing a on our new warehouse lending facility in July, which depending on utilization could affect our leverage ratios going forward. There are some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents decreased approximately $25 million from last quarter, primarily due to be deploying some of our capital into newer originations. Partially offset by payoffs and pay downs and the monetization of 2 of our assets through non-recourse participations during the quarter. Which also accounts for the majority of the $34 million increase in notes payable. Restricted cash and a CDO vehicles increased apostolate $12 million from last quarter largely due to approximately $20 million of run-off in the second quarter of CDO I which was subsequently used to pay down debt in July. Partially offset by the movement of some of our unlevered assets, into our CDO vehicles during the quarter.

Additionally, we currently have approximately $28 million in investible cash in CDO III. Also, total CDO debt increased approximately $24 million compared to last quarter. Mainly due to runoff during CDO wondering the first quarter, which is used to pay down debt in the second quarter. Additionally, as I mentioned earlier, we had $20 million of run-up in CDO I in the second quarter. Which was used to further pay down our CDO debt in July. Addition to other comprehensive losses increased by about $2 million a quarter. This is primarily due to a decrease in the market-value of interest rate swaps from a change in the outlook and interest rates. GAAP requires us to flow the changes in value of certain interest rates through our equity section. We also recently issued 105,000 fully vest shares to independent directors in July, which have approximately $500,000 non-cash expense to our third quarter.

Lastly, our loan portfolio statistics as of June 30 show that about 68% of the portfolio was variable rate loans, and 32% were fixed. By product type about 60% of the portfolio was bridge, 20% junior participation interest, and 20% mezzanine and proffered equity investments. By asset classes, 41% was multi-family product, 35% office, 9% hotel, 11% land, and 1% condo. Our loan to value is around 87%, our weighted average median dollars outstanding was 58%. And geographically we have around 41% of our portfolio concentrated in New York City.

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

(Operator Instructions). Your first question comes from the line of David Chiaverini with BMO capital markets. Please proceed.

Good morning guys.

Good morning, Dave.

The yield on new loans, I noticed -- I heard you say 6.5% in the first quarter. What was it for the new originations for the second quarter? I missed them.

The second quarter, Dave, blended at about 7% all in yields.

7%. And how much of those went into CDO three -- or CDO's in general?

Of the new product in the second quarter to date none of those are being financed in our CDOs. But we are sizing them now to see which ones are appropriate to go into those vehicles.

Yes. For us -- it's Ivan speaking. For us it is an issue of seeing if they're CDO eligible and getting the optimum-mix of which loans should go into our CDOs. And which loans should go into the new line that we have arranged to get the maximum utilization out of that vehicle.

Okay. Okay, great. I noticed there was a pretty decent decline in the cost of borrowing -- in the quarter. I know some of it is from a lower LIBOR. I LIBOR was down between 5 and 10 basis points in the quarter. What was behind the rest of the decline in the cost of borrowing?

The majority of the rest of the decline, Dave, was the burn-off of some of our interest rate swaps, again, some fixed-rate loans of that either matured or extended into variable rates. So, getting a little bit of a benefit from having those of swaps burn-off on assets we lock in at spreads years ago. And LIBOR had moved to down, so we were at a low built-in spread. Now those swaps are burning off and those costs of those swaps are reducing interest expense.

Okay. And regarding portfolio growth, it was nice to see the first time in about 4 years that the portfolio actually grew quarter-to-quarter. Now that the replenishment periods are ending -- well have ended on 2 of the 3 CDOs, and the other one is going to be ending January of next year -- in terms of the portfolio and portfolio growth, should we expect it to remain stable through this year. And, now that you have a new $50 million facility form multi-family lending. What can we expect from portfolio growth, should it start to decline, and kind of run-off, as a CDOs runoff? Or do you expect that -- are you going to attempt to get additional financing to keep the portfolio up. Just, what are your thoughts there.

Well, there are couple of offsetting factors. First of all, we are seeing a healthy pipeline of new loans to put in -- on board. And in fact, with the recent back up in the market, especially the securitization market, we have actually seen not just a good flow but healthier spreads. We've been fortunate in putting a new line in place, which should allow us to originate more loans and show some growth.

On top of that, we've been extremely successful in monetizing some of our non-performing loans. And turning those into new performing loans. And also, a lot of the non-performing loans were not leverageable, so we are able to turn non-performing loans into new loans. And also take those new loans and then, leverage them more effectively. That of course maybe offset by potential payoffs and CDO 1 and CDO 2. Clearly any payoffs that occur in CDO 3 we have the ability to releverage-up those assets and those lines.

So, I would expect to see some level of growth in our portfolio. Our estimates here are probably to originate $25 million to $30 million per month. If we have more run-off and able to leverage a little bit more, we can always turn that up a little bit if we choose to.

Okay. From a credit perspective-- it is healthy in nonperforming loans. Have come down tremendously over the past couple of years. But the current environment. How would you characterize the -- health of the portfolio and your borrowers. Yes, I was is asking about -- I don't know if they heard the question -- but I was just asking about the credit -- and can you guys still hear me? (technical difficulty)

I do know at what point you dropped off. So --?

Okay, no problem. So, my last question was just about credit and how nonperforming loans have come down a lot. And the provision -- was still relatively low up a little bit from the first quarter. But just any commentary on the health of your borrowers and what you are seeing?

Well -- clearly our portfolios is in reasonable shape. I think the biggest complexity we are seeing in the market, and a lot of people are seeing in the market, is when dealing with your loans you were dealing with special services. And when you're dealing with special services, it takes a long time to resolve a particular asset. And sometimes, the technicalities and resolving those assets have nothing to do with the underlying asset itself. But the delay in duration of resolving those assets, which could impact the performance of those assets. And that is what is creating a delay in getting some of our resolutions. And timely, resolutions and also predictable resolutions.

So, that is some of the uncertainty we are facing. So, the invention of the special servicer making decisions, in terms of managing the collateral and protecting the different participants, has created uncertainty for us in some of these resolutions. And sometimes they take a lot longer, and sometimes the lack of decision making on part of the special services also could lead, in certain circumstances, to potential deterioration of collateral. And that is why, sometimes, there is a level of uncertainty that we can't get our hands around.

The good news is there are very few assets that are in that category, they have narrowed down to just a couple. And, that is why we are fairly comfortable, as we have said in our last calls, that we are well-through managing our legacy assets.

Okay. And outside of those loans, the currently identify nonperforming loans, what you are hearing from your borrowers are the trends are positive and healthy from what you're hearing from them?

Yes, I think clearly the trends are much more positive. There are a certain markets that are moving back and almost where they were. Pre-2008, like New York City, and New York City is unbelievably strong market. And some of the tertiary markets are starting to pick up steam as well. The multi-family market has continued to improve, steadily. And the core markets, they've improved more dramatically. And now, in the tertiary markets they are starting to pick up, as well.

So you know we're very comfortable with multi-family. We are doing a lot of multi-family lending. I would say probably 80% of the loan that we're putting on are multi-family oriented, the new ones. And we're very comfortable with that.

But overall, there is improvement in the market, and the market is not 100% consistent. But we do feel a level of improvement. Clearly the last asset class to improve in the tertiary markets, are lands. But, even that is starting to pick up a little bit of interest these days.

Okay. Thank you for that color.

(Operator Instructions) Your next question comes from the line of Bruce Harting with Barclays Capital.

-- In the stronger markets what is the profile of the people you are lending to? How does that change to from pre-financial crisis? And what are the -- and I imagine they're meeting your tougher standards, can you just remind us what some of those tougher underwriting standards are?

Sure. I think there are 2 aspects to it.

There's one the bar type and B the documentation. Clearly, as the market was getting overheated. We, as well as Wall Street and everybody else -- were getting more liberal on the type borrowers we were lending to. And that was included borrowers who are less experienced and less capitalized. And clearly in today's market looking at borrowers who have deeper experience, more liquidity, and greater history. So, the borrowers themselves is better.

Number two, the level of leverage is significantly less than it was. Number three, we are doing the majority home loans. Doing very few mezzanine loans. Predominantly home loans.

Number four. We are really avoiding tertiary markets, and staying in primary markets. And number five, our documentation is -- going back to where we used to do more normalized. And the last part is, we are not buying loans from Wall Street. Which is where we got very, very hurt. And those loans were the ones that had poor enter-credit reporting as well as interjected special services. So, we really have gone back to our roots. And are really doing solid lending to good borrowers on whole loans without all the documentation and structure, in asset classes and in areas that we are much more comfortable.

Thanks.

Keisha, are you there?

There are no further questions in queue at this time. I would like to now with a hand the conference back to Paul and Ivan for any closing remarks.

Thank you everybody for your participation, and look forward to our next conference call. Thank you.

Thank you for your because the patient in today's conference. This concludes the presentation. You may now disconnect your lines. Have a good day.