Arbor Realty Trust Inc (ABR) 2011 Q3 法說會逐字稿

Our Arbor Realty conference call will begin momentarily once again your third quarter 2011 Arbor Realty Trust will begin Good day ladies and gentlemen and welcome to the third quarter 2011 Arbor Realty Trust, Incorporated Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Mr. Paul ElenioChief Financial Officer. Please proceed.

Thank you, Chanel. Good morning everyone and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended September 30, 2011. With me on the call today is Ivan Kauffman our President and Chief Executive Officer.

Before I begin I need to inform you that statements made in this earnings call may be deemed forward-looking statements 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 are based on our beliefs, assumptions, and expectations of our future performance taking into account the information currently available to us. Factors that do cause actual results to differ material from Arbors expectations in these forward-looking statements are detailed in our SEC reports.

Listeners are caution not to place undue reliance on these forward-looking statements which speak only as of today. Arbor under takes 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 will now turn the call over to Arbor's President and CEO Ivan Kauffman.

Thank you, Paul, and thanks to everyone for joining us on today's call. In a moment Paul will take you through the financial results for the quarter, but first I would like to spend some time talking about some of our accomplishments and outlooks for the remainder of 2011 and 2012. As we stated on our last two earnings calls, we have heavily focused on our core lending business with the goal of increasing the quality of our platform, our net interest spreads, and core earnings over time.

In the third quarter we originated six loans totaling $29.7 million with a weighted average yield of approximately 7.5% and we have now originated 16 loans totaling $103 million for the nine month ended September 30th with a weighted average unleveraged yield of approximately 7% and a weighted average leverage yield of approximately 16%. We have also expanded our investment opportunities by becoming active in the residential lending arena which is an area we have significant amount of experience in.

We believe these investments will diversify our platform and generate outsized returns and as such in the third quarter we purchased two residential mortgage securities total $4.6 million with an average yield of approximately 6% and 11 returns of around 30% and estimated average life of six to nine months. And in October we purchased two additional residential securities total $25 million with $20 million of leverage that will also generate leverage returns expected to be approximately 30% and an average return of life of 12 to 18 months. In addition to generating $15 million of loans and investments with a weighted average yield of approximately 18% with a target leverage return to exceed 15%.

Additionally, our pipeline remains strong and we will continue to put our capital into new investment opportunities with a targeted return of 15% on unlevered or levered basis. We will look to achieve these targeted returns by continuing to leverage certain of these investments with our low cost CDO debt when appropriate as well as with additional financing facilities when available including the new $50 million bridge loan financing facility we obtained in July. This facility provides leverage of up to 75% depending on the assets financed and as of today we have utilized approximately $25 million of the capacity. We will remain disciplined and selective and are pleased with the opportunity we are seeing in this recovering market to build up our portfolio with high quality assets and increase our core earnings over time.

We also continue to be successful in recycling our capital through run off and monetization of our non performing and unencumbered assets which has increased our available liquidity to deploy into new investment opportunities. Our cash position as of today is approximately $55 million not including approximately $23 million of cash posted against our swaps and approximately $35 million of cash available for reinvestment in our CDOs. We also have around $125 million of net unencumbered assets, many of which are either CDO eligible or able to be financed through other facilities which could produce additional liquidity. In fact, in October we entered into an agreement to sell one of these unlevered assets for approximately $28 million which should close prior to year-end.

These assets combined with cash on hand and cash posted against our swaps gives us approximately $205 million of value. This in addition to approximately $245 million of value between equity in our CDO vehicles and our real estate owned assets for total value of approximately $450 million. Effective management of our CDO vehicles remains a top priority and we have continued to receive all of the cash distributions from these vehicles to date. We currently have three vehicles in place with the ability to invest in new assets until January of 2012 and one of our CDOs while there can be no assurances that our CDO vehicles will continue to cash flow in the future we remain focused on optimize and utilizing these facilities when possible with the goal of enhancing our returns and increasing our core earnings over time.

As we have discussed in the past, we have been very successful in repurchasing our debt at deep discounts and monetizing our equity kicker generating liquidity, recording significant gains and retaining a substantial amount of our equity value. In the third quarter we repurchased 10.7 million of our CDO debt for $5.6 million recording a gain of approximately $5.1 million. Combined with the gains in the first two quarters totalled $7.9 million gains from debt repurchases for the first nine months. We also repurchased some of our CDO bonds in October for a gain of approximately $1.5 million and we will continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity.

Additionally, during the third quarter we were also successful in monetizing one of our equity kickers received in cash and recording a gain of approximately $3.6 million. We are also very pleased to have all but completed the previously approved stock buyback program. To date we have repurchased 1.45 million of the 1.5 million shares of our stock authorized under the plan at an average price of $3.85. Clearly with a book value of approximately $8 per share and an adjusted book value of around $12 per share we believe this investment of our capital is extremely accretive to our shareholders.

Now I would like to update you on the credit status of our portfolio and thus our view of the commercial real estate market. During the third quarter we recorded $11.5 million of loan loss reserves related to two loans with an outstanding balance of approximately $39 million. We also had some small recoveries of previously recorded reserves during the quarter of approximately $1.3 million in addition to the $1.6 million of recoveries in the first two quarters and $18.1 million of recoveries generated in 2010 for total recoveries of approximately $21 million to date.

During the third quarter we refinanced and modified $88 million of loans and extended $120 million of loans. We also received $19 million of pay offs and pay downs during the quarter for the nine months ended September 30th we generated approximately $115 million of cash from pay offs, pay downs and a monetization of certain assets. In addition, as previously discussed in October, we entered into an agreement to sell one of our unlevered assets for approximately $28 million which should close prior to year-end. Additionally, at September 30th we had ten non-performing loans with a UPB of approximately $50 million and a net carrying value of approximately $14 million which is down $11 million from June 30th mainly due to the partial pay down and modification of one of our non-performing loans during the third quarter.

Overall the commercial real estate market recovery remains uneven. Although there has been some signs of stabilization recovery in certain segments we feel that a substantial amount of our issues related to our legacy assets have been resolved. However, further deteriorating in certain markets or assets classes as well as a lack of liquidity available to some borrowers we have suffered dramatically from the recession could result in additional challenges related to some of the loans in our pipeline. So we will continue to aggressively evaluate our portfolio and our borrowers as well as market conditions to determine if any further reserves are necessary.

In summary, we are excited about the investment opportunities we have seen and the overall macro stabilization that has begun in the commercial real estate sector. We are confident that our deep originations network will continue to produce high quality investment opportunities with attractive returns for us to grow our platform and increase our core earnings and although there is still some uncertainty related to certain market conditions and asset classes which could result in additional losses in our portfolio, we are quite pleased with the pipeline of new business we have generated and our continued ability to recycle our capital through run off and a monetization of unlevered assets. Clearly our primary focus will continue to be to invest our capital at the high yielding opportunities and appropriate leverage investments with the goal of increasing our net interest spreads and core earnings and return to a dividend paying stock. I will now turn the call over to Paul to take you through some of the financial.

Okay. Thank you, Ivan. As noted in the press release we had a net less for the third quarter of $2.4 million or $0.10 per share and a FFO loss of $642,000 or $0.3 per share excluding non cash depreciation expense during the quarter.

Additionally, FFO for the third quarter was basically break even excluding non cash stock-based compensation expense of approximately $500,000 to our directors during the third quarter. We recorded $11.5 million in losses from our portfolio for the third quarter and these losses were partially offset by $1.3 million in recoveries of previously recorded reserves and after the third quarter reserves and charge offs of previously recorded reserves we now have approximately $170 million of loan loss reserves on 23 loans with a UPB of around $292 million as of September 30, 2011.

As Ivan mentioned earlier, we also continue to repurchase our debt at deep discount and monetize our equity kickers during the third quarter recording a $5.1 million gain from the repurchase of some of our CDO debt as well as a $3.6 million gain from the monetization of one of our equity interests. At September 30th our book value per share stand at $7.89 and our adjusted book value per share is $12.26 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 warrant issued as part of a 2009 debt restructuring.

Additionally, as Ivan mentioned we currently have approximately $55 million in cash on hand and $23 million of 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 September 30th we currently have approximately $450 million of value. Looking at the rest of the results for the quarter the average balance in our core investments were relatively flat at around $1.6 billion for both the second and third quarters.

The yield for third quarter on these core investments was around 4.61% compared to 4.64% for the second quarter. Excluding a non-recurring pre-payment penalty received on a early payoff in the second quarter the yield on these core assets was around 4.54% for the second quarter compared to approximately 4.61% for the third quarter. This increase in yield was primarily due to higher yields on third quarter originations and the partial pay down and modification of one of our non-performing loans during the third quarter. Additionally, the weighted average all in yield on our portfolio also in creased to around 4.60% of September 30th compared to around 4.50% at June 30th again due to higher yields on new production.

The average balances on our debt facilities also remain relatively flat from last quarters at approximately $1.3 billion. The average cost of funds on our debt facilities was approximately 3.51% for the third quarter compared to 3.87% for the second quarter without a one time non cash interest expense charge of $3.2 million related to the monetization of one of our assets in the second quarter.

Excluding the unusual impact on interest expense from some of our swaps for both the second and third quarters our average cost of funds was approximately 3.63% for the third quarter compared to around 3.79% for the second quarter. This decrease was mainly due to the maturity of certain interest rate swaps late in the second quarter.

Additionally our estimated all in debt cost was around 3.64% at September 30th compared to around 3.68% at June 30th. So overall normalized net interest spreads in our core assets increased by 30% to approximately 0.98% this quarter from approximately 0.75% last quarter primarily due to increased yield on new originations and reduced interest expense from the maturity of certain interest rate swaps late in the second quarter.

Additionally as we mention end on our last few calls we have acquired some properties that we're securing certain of our loans in the normal course of our lending operations. Property operating income related to our REO assets decreased approximately $300,000 compared to last quarter largely due to the seasonal nature of income related to a portfolio of hotels we acquired in the first quarter and property operating expenses increased $400,000 from last quarter mainly due to some ramp-up and one time costs from the decision to hire a new property manager related to a portfolio of multi-family properties we acquired at the end of the first quarter. At September 30th we have three REO assets we are holding for investment totaling approximately $149 million subject to approximately $75 million of assumed debt for a net value of approximately $74 million.

We believe we have an experienced asset Management Team and are confident in our ability to manage these assets with the goal of maximizing the value of our investments by increasing the NOIs over time and repositioning these assets for further disposition. Next our average leverage ratios were relatively flat at around 70% on core lending assets and around 81% including the trust preferred debt for the third quarter compared to 71% and 82% respectively in the second quarter.

And our overall leverage ratios on a spot basis were also relatively flat at 3.5 to 1 at September 30 and 3.4 to 1 at June 30th. This was due to reduction in our CDO debt from run off, partially offset by the partial utilization of our new warehouse lending facility that we closed in July.

There were some changes in the balance heat compared to last quarter that are worth noting. Cash and cash equivalent increased approximately $17 million from last quarter partially due to transferring certain unlevered assets into our non-recourse CDO vehicles which was partially offset by new originations nets of pay off an pay downs during the quarter. Restricted cash in our CDO vehicles decreased approximately $31 million from last quarter largely due to the transfer of certain unlevered assets into the CDO vehicles combined with $20 million of run off in the second quarter that was used to pay down CDO debt in the third quarter. And we currently have approximately $35 million of investable cash in CDO three.

The purchase agreements and credit facilities increased by approximately $15 million due to the partial utilization of our new $50 million debt facility combined with leverage on the residential mortgage securities we purchased during the quarter. In addition, other comprehensive losses increased by about $4.6 million for the quarter. This was partially due to a decrease in the market value of interest rate swaps from a change in the outlook on interest rates, GAAP requires us to flow the changes in value of certain of our interest rate swaps through our equity section and treasury stock increased $2.8 million from last quarter due to the repurchase of the Company stock in accordance with our stock buyback program.

And lastly our loan portfolio statistics as of September 30 show that about 69% of the portfolio was variable rate loans and 31% are fixed. By product type 60% was bridge, 22% junior participations and 18% mezzanine and preferred equity investments. By asset class 40% was multi-family, 35% was office, 9% hotel and 11% land. Our loan-to-value was around 86% a weighted average median dollars outstanding was 57% 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 take any questions you may have at this time. Operator.

Thank you. (Operator Instructions). Your first question comes from the line of Lee Cooperman of Arbor Realty.

Thank you very much. Good morning.

Morning, Lee.

A few questions. One is what are the actual shares outstanding at November 3rd?

Right now, Lee, we have 24.2 million shares outstanding.

Okay. Secondly, from the standpoint of re qualification, do you guys have the ability to reload your repurchase program or are you kind of stopped out?

At the present time we believe we're stopped out. We are evaluating as management whether there are other means to figure out how to increase our capacity in addition to the Company being tapped out. I personally am tapped out as well given the re qualifications to limit my repurchases as well.

Got you.

But we are evaluating if there are certain ways for us to increase that capacity.

Got you. Secondly, which measure book value do you guys consider the most realistic measure of business value?

Yes, Lee. We've talked about this in the past. We believe the adjusted book value is more accurate. Clearly it will take some time to realize that adjusted book value because the biggest component or the biggest difference or the only difference between book value and adjusted book value are the value of the swaps that we use to hedge certain of our fixed rate loans that have deteriorated obviously as the interest rate market has done what it has done and it will take time for us to recover that value as the loans and the swaps become closer to maturity. Currently I think we have an average life left in the swaps of around two years. So it will take some time for us to get that value back.

The other component is something we don't necessarily control, which is a deferred gain related to an equity kicker that we modified several years ago and it was deferred for tax advantage reasons. We don't control the real estate so obviously if the real estate is sold or refinanced and that gain is triggered, we will be able to realize for accounting purposes that equity value but keep in mind all that cash was received awhile ago so it is just an accounting we will be recording to increase the equity. So clearly to us the adjusted book value is the right number. It will just take some time to be able to account for that from the accounting perspective.

The last question given the fact you have one of the assets of the Company is some low cost liabilities within your CLOs and let's just say split the difference and just take $8 and $12 and average and say $10, what is a reasonable ROE for you guys to though it seemed to me 10% would not be terribly demanding and I am just curious what number you would use and what time table do we have to get there because that determines when we can start paying dividends which will obviously be beneficial to all the holders.

Sure, Lee. It's Paul. I'll answer that question a couple of different ways. One is obviously it's very hard to predict what the ROE will be going forward with the great degree of certainty because of a lot of factors that we don't have control of yet but some of the positives we have is we are clearly investing our capital and recycling our capital to higher yielding product and our core earnings continue to improve on a quarterly basis. We could look at it one way and say we have a billion six of assets on our portfolio earnings 4.6%, a billion three of debt paying 3.64%. If you do that math and annualize it that's about a $27 million net interest spread today.

That's without improving it going forward with higher yielding investments an recycling the capital. If you were to look at our normalized operating costs as of the nine months and annualize them and add in our ROE properties, we're probably showing right now a core earnings run rate of about $8 million which is clearly less than a 10% ROE on the capital, but the things that we're looking to improve on and we have a every quarter is continuing to recycle the capital to higher yielding investments and increase that net interest spread which has been happening and, two, we've just recently taken back two ROE properties that have been clearly mismanaged we're in there rolling up our she was and we believe we will be able to improve the NOIs of those assets significantly hopefully in the short-term but certainly over the long-term so we will continue to try to grow that core earnings each quarter and hopefully start to get closer to that number you are representing, but we're not quite there yet.

Just an observation and you probably won't respond but it seemed to me that it would be highly improbably that you will end 2012 not be paying a dividend sometime during the year.

I mean it's clearly our ambition to get back to a dividend as quickly as possible, and in addition to the overall view that Paul gave you we are now seeing a reversal in trend when it comes to renewals and extensions on our loan portfolio where there was a period of time where we were adjusting rates down because of the economic under lining performance of the assets we're actually seeing the reverse start to happen where we're able to get additional fees and adjust rates more to where market is. So depending on how requesting and what the acceleration of that is we'll have a large impact in terms of how much we can grow our core earnings even beyond just new originations and leveraging those new originations. And clearly as I indicated we're being able to dispose of some unleveragble assets and we're disposing of a very large one in the fourth quarter into cash. And we believe we can redeploy that cash for example which is currently earning only about 4% into the market and lever that up and that's just one small example of our ability to turn that around. So I think you will see the impact on this on a quarter to quarter basis and that generally that will dictate the speed in how quickly and what amount we can get back to a dividend.

Got you. Well, you're doing a good job and good luck and thank you very much for taking my questions.

Thanks, Lee.

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

Hey good morning guys. Couple questions on the RMBS. Now, this is a business that you really haven't been all that active in recently. Has Arbor purchased RMBS in the past and if not did you guys -- did the advisor hirer somebody that has that expertise or is this sort of new to you guys in total?

First off Arbor's core expertise and management comes out of a residential industry from 1983 to 1995. That's what we built our expertise.

Okay.

Me personally and a core part of management. Approximately four years ago the manager got back into the residential arena by putting together a seasoned and experienced team to participate in that dislocated arena and we actually have the management expertise, to especially service residential loans, evaluate securities and whole loans. We have made a number of whole loan investments over the last quarters and we have been evaluating securities for quite some time, have an internally seasoned expertise on the bond evaluation side as well as a credit side. So all of that is done internally and we have been ramping up very, very slowly and very selective in terms of deploying our capital into this arena.

I see. So the purchases in the quarter they were not RMBS, they were whole loans?

The purchases in the quarter were RMBS and they were levered. Some of the prior origination that we have done in the prior quarter were whole loans. So we are doing both actually depending on the opportunities.

Got you. How are you financing the purchases are you able to use the new credit facility for those purchases?

No. We vented into new facilities for these specific securities on a repo basis with select commercial bankers and putting those facilities in place on an ongoing basis.

Got you. And you mentioned the average lives of being 6 months to 9 months for the ones you purchased in the third quarter and then 12 months to 18 months for the ones purchased so far in the fourth quarter. Are you buying securities that they're maturing in that periods they're near the end of their -- they're going to mature soon or are you purchasing securities that in your opinion are going to prepay sooner and you're targeting those?

Our specific strategy is to purchase securities that have a short-term life in the waterfall of securities and not to take any kind of extended mark-to-market or repo risks. So since we are utilizing leverage and since these leverage have mark-to-market provisions we're sensitive to any potential mark to market risk that may occur and we feel that we're mitigating our mark-to-market risk by participating in the class of securities that have very short-term duration.

Got it. Okay. And then moving on to the -- how Arbor bought back some CDO debt in the quarter I was curious what were the discounts paid on that to generate that $5 million gain?

Sure, David. It's Paul. It was about on average that was about a $0.50 on a $1.00 purchase during the quarter.

Okay. Okay. And then lastly as a follow-up to the earlier question about the repurchase any new repurchase authorizations I was curious or interested by the comment about how you stopped that. I didn't realize there was sort of a rule limitation in sort of maximizing the amount your Company could buy back. Could you just remind me what or tell me what those rules are?

Sure. Every REIT has to deal with the closely held test or the concentrated significant ownership into few people test. There is a test called the five or fewer and five people cannot own more than 50% of the voter value of a REIT otherwise you don't qualify as a REIT and because we are, I think, one of the most highly inside owned REITs out there that it puts limitations with our current shareholder base on how much we and the Company can buy without tripping that test.

I see. So those the top five holders are approaching the 50% mark?

Yes, since I'm very large holder and another one of of our directors is a very large holder it creates an issue on the total amount that can be held by any individual so to the extent that we decrease the total amount outstanding it puts pressure on my ability to buy stock or the Company's ability to increase holdings, but as I said we are evaluating ways to perhaps create greater flexibility at the present time because we feel for the Company it's still an attractive alternative and as certain large individuals are ambitious to participate at these levels as well.

Understood. That's all I had. Thank you.

Thank you. (Operator Instructions). Your comes from Lee Cooperman of Arbor Realty.

Yes. Hi. It's Lee again. Just a theoretical question. I'm not advocating this in the slightest at the moment but, Ivan, you own roughly 5 million shares, your director has a lot of stocking I have a lot of stock. If three years from now the market does not recognize us, what are the tax implications or the ability to us to go home and take this -- what you think is $12 of realizable value and the swaps will be we basically go home wind up the Company return everybody their cash and go on to the next phase of our life. Is that something that's plausible or just impractical?

Well, three years out is a long time, but I'm a lot more ambitious than thinking that this is going to be a liquidating trust. I think I can continue to grow the platform, increase our core earnings and do substantially better. I think one of the things that we're trying to evaluate is are there other ways to enhances the value by looking at our ability to buy back more stock or individually hold more, but I'm hoping in three years that the value of this franchises is going to be substantially greater and at this juncture we have no plans on operating this just as a liquidating trust to get to our book value.

I have great respect for your business intellect. I assume with you and your Board maybe owning as much as a quarter of the Company that you would be very careful in this buy back in the sense that recognizing that if you're not buying back under bad stock in a sense you're damaging yourself so I must think you are pretty excited about the ability to buy something back at 30% to value?

Excited enough about it to continue to evaluate other ways to figure out how to do more.

Good. Like to hear that. Thank you.

Thank you.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to management.

We appreciate your participation today. I'm very pleased with our ability to stay focused, achieve our objectives and stay disciplined and put the Company in what we consider to be a very, very favorable position. Thank you.

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