Arbor Realty Trust Inc (ABR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Arbor Realty Trust earnings conference call. My name is Chanel, and I will be your operator for today. At this time all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Okay, thank you, Chanel, 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 ended June 30, 2012. 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 will 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 some of our recent accomplishments and talk about our business strategy and outlook for the remainder of 2012.

We are very pleased with this quarter's progress and certainly our ability to access the capital markets in June for the first time in five years, and it is at the forefront of our recent accomplishments.

As we have mentioned on our last several earnings calls, we have been very active in our core lending business as well as in diversifying our portfolio and revenues sources by investing in residential securities. This has resulted in increased core earnings and the reinstatement of our dividend last quarter. And we are very pleased with the opportunities we are seeing in this market to invest our capital and continue to grow our core earnings base.

Our pipeline is strong and continues to grow through our deep originations network, both in the REIT and through or external manager. So accessing approximately $18 million of fresh capital was a very important component in order for us to continue to grow our platform, and is a crucial step in positioning us favorably going forward.

We are very confident in our investment strategies and are quite pleased with our ability to deploy this capital quickly through our core lending originations business, residential securities investments, investing in our legacy assets, and through the repurchase of our CDO debt at significant discounts when available.

This success has increased our core earnings, and as a result we are very pleased to have announced today a 33% increase in our dividend to $0.10 per common share for the second quarter, up from $0.075 for the first quarter.

In a moment Paul will elaborate further on how this growth has translated into an increase in our projected core earnings run rate. Once again, we are extremely pleased with the investment opportunities we are seeing to grow our platform, diversify our revenue sources, and produce significant core earnings and dividend growth going forward.

Additionally, our infrastructure is well-positioned to manage this expected growth without significantly increasing our cost structure, resulting in direct bottom-line profitability.

In the second quarter we originated five loans totaling approximately $58 million with a weighted average unlevered yield of approximately 8% and a weighted average levered yield of approximately 15%.

We also continue to grow our core residential lending -- residential investment platform, purchasing 11 residential mortgage securities in the second quarter, totaling $41 million with a weighted average yield of approximately 5%, and expected levered returns in excess of 20%.

At June 30, 2012, we had $88 million of residential securities outstanding with corresponding leverage of $75 million. These securities generally have an average expected life of 24 to 36 months, and are expected to generate levered returns in excess of 20%.

In addition, in July we originated three loans totaling $32 million with a weighted average yield of approximately 7% and an expected levered return of around 15%, and purchased one residential security for $11 million with a weighted average yield of 5% and an expected levered return in excess of 20%.

As I mentioned earlier, our pipeline remains strong and our goal is to continue to deploy our capital into new investment opportunities with a targeted return of 15% on an unlevered or levered basis. The continued growth and diversification in our investments has increased our core earnings run rate, and we believe we will be able to continue to increase our core earnings in the future.

In addition to raising capital this quarter we are able to increase our available liquidity to deploy into new investment opportunities by recycling our capital through runoff and a monetization of our nonperforming and unencumbered assets, as well as from accessing additional debt facilities.

In the second quarter we generated cash runoff for reinvestment of approximately $36 million. We also obtained approximately $13 million of additional warehouse financing. And as previously announced in a press release in May, we were successful in closing on a $15 million revolving line of credit, which is collateralized by a portion of our CDO bonds that we repurchased at a discount.

This facility provides us with an additional source of capital to fund our business. And we are also pleased with the flexibility of this facility, as well as in our ability to extract additional value from our investments by leveraging some of our CDO bonds that we repurchased from the market.

As we have discussed in the past, we have been very successful in repurchasing our debt at deep discounts, recording significant gains and increasing our equity value. In the second quarter we were very active repurchasing $43 million of our CDO debt for $22 million, recording a gain of approximately $21 million. And in July we repurchased an additional $9 million of our CDO debt for $5 million, resulting in a gain of $4 million that will be recorded in the third quarter.

As of today we own approximately $154 million of our original CDO bond at an $85 million discount to par, which represents significant embedded cash flows that we may realize in future periods. And as I just discussed, we were able to leverage a portion of these bonds creating $15 million of additional liquidity. We will continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity.

Our cash position as of today is approximately $35 million, not including approximately $22 million of cash collateral posted against our swaps.

We also have around $125 million of net unencumbered assets. These assets, combined with our cash on hand, cash posted against our swaps gives us approximately $180 million of value. This is in addition to approximately $290 million of value between the equity in our CDO vehicles and our real estate owned for a total value of approximately $470 million.

We have also been extremely effective in managing our CDO vehicles, receiving all cash distributions to date while maintaining sufficient cushion in all our tests. And while there can be no assurances that our CDO vehicles will continue to cash flow in the future, we will remain focused on managing these vehicles effectively.

We do feel that based on the terms and quality of the assets in these vehicles we will continue to receive the benefit of these nonrecourse, low-cost financing facilities for several more years.

We also feel that based on our performance of our CDOs and the diversity of our platform we will have a competitive advantage in accessing the debt and equity markets that will be available in the future, which combined with our liquidity, existing credit facilities and portfolio run-off will be used to fund our future growth.

Now what I would like to do is update you on the credit status of our portfolio and discuss our view of the commercial real estate market. During the second quarter we recorded $8.6 million of loan loss reserves related to one asset in our portfolio. We also had a $1.8 million in recoveries of previously recorded reserves during the second quarter, including a gain on the disposition of a real estate owned asset.

And these recoveries, combined with recoveries we generated in 2010 and 2011, gives us total recoveries on previously recorded loan loss reserves of approximately $27 million to date. During the second quarter we refinanced and modified $8 million of loans, and extended $80 million of loans.

At June 30 we had 8 nonperforming loans with a UPB of approximately $46 million and a net carrying value of approximately $15 million, which is relatively flat compared to March 31.

Overall, the commercial real estate market continues to recover slowly, although we continue to see signs of more rapid improvement and stabilization in certain segments, especially in commercial multifamily lending arena. This is an asset class that we have a tremendous amount of expertise in, which continues to produce significant investment opportunities for us to grow our platform.

Additionally, we believe we have done an outstanding job of managing our legacy portfolio, significantly improving the quality of our assets and the predictability of our income stream.

We also feel that we have put substantially all our legacy issues behind us. Although it is possible we would have some additional write-downs in our portfolio on our legacy assets based on market conditions, we feel that any potential remaining issues will be minimal, and we are optimistic that we will have recoveries from our assets and gains from our debt repurchase to offset any potential additional losses. However, the timing of any potential losses, recovery and gains on a quarterly basis is not something we can predict or control.

In summary, we are extremely pleased with our accomplishments, especially in our ability to access the capital markets and increase our current earnings run rate and dividend this quarter.

We are excited about the opportunities that exist in our pipeline, and are confident that our originations network will continue to produce investment opportunities with attractive returns for us to invest our capital, grow our platform, and increase our core earnings going forward.

We will also continue to access available debt to appropriately leverage these investments, with the goal of continuing to increase our net interest spreads, core earnings and dividends over time.

And clearly with the yield we are paying on our stock from our growing dividend, combined with an adjusted book value of $11.19 per share, we feel that our current stock price is not reflective of our true franchise value.

Our primary focus will continue to be increasing the value to our shareholders by growing our platform and increasing our core earnings and dividends over time.

I will now turn the call over to Paul to take you through some of our financial results.

Okay, thank you, Ivan. As noted in the press release we have had FFO of $17.1 million or $0.68 per share for the second quarter and net income of $15.5 million or $0.62 per share.

As Ivan mentioned, we continue to repurchase our debt at deep discounts, recording $21 million in gains from the repurchase of some of our CDO debt in the second quarter, and a gain of approximately $4 million from CDO debt buybacks in July.

We also recorded $8.6 million -- an $8.6 million loan loss reserves related to one asset in our portfolio, and had $1.8 million in recoveries of previously recorded reserves during the second quarter, including a gain on the disposition of a real estate owned asset.

After these reserves and charge-offs of previously recorded reserves we now have approximately $188 million of loan loss reserves on 20 loans with a UPB of around $272 million as of June 30, 2012.

At June 30 our book value per share stands at $7.58, and our adjusted book value is $11.19, adding back deferred gains and temporary losses on our swaps.

Additionally, as Ivan mentioned, we currently have approximately $35 million in cash on hand and $22 million of cash posted against our swaps. In between this cash, our REO assets, unencumbered assets and equity value in our CDOs, net of reserves recorded as of June 30, we currently have approximately $470 million of value.

Looking at the rest of the results for the quarter, the average balance in our core investments was relatively flat at around $1.6 billion for both the first and second quarters. The yield for the second quarter on these core investments was around 4.91% compared to 4.84% for the first quarter. This increase in yield was primarily due to higher yields on our second-quarter originations and security purchases.

Additionally, the weighted average all-in yield in our portfolio increased to around 4.95% at June 30, compared to around 4.85% at March 31, again, due to the full effect of higher yields on our new investments.

The average balance on our debt facilities also remains relatively flat from last quarter at approximately $1.3 billion. The average cost of funds on our debt facilities was approximate 3.10% for the second quarter compared to 3.54% for the first quarter. Excluding the unusual non-cash impact of certain interest rate hedges which are deemed to be ineffective for accounting purposes had on interest expense, our average cost of funds was approximately 3% for the second quarter compared to around 3.42% for the first quarter. This decrease was mainly due to the maturity of certain interest rate swaps in the second quarter which reduced interest expense.

Additionally, our estimated all-in debt cost was around 3.05% at June 30, compared to around 3.35% at March 31. This decrease is due to the full effect of certain interest rate swaps that matured in the second quarter, partially offset by the addition of the $15 million revolving line of credit in the second quarter.

So overall normalized net interest spreads in our core assets increased by 35% to approximately 1.91% this quarter from approximately 1.42% last quarter, primarily due to increased yields on new originations and the maturity of certain of our interest rate swaps.

And more significantly, our net interest spread run rate increased 27% to approximately 1.90% or approximately $39 million annually at June 30, compared to approximately 1.5% or approximately $35 million annually at March 31. This was primarily due to the effect of higher yields on our second-quarter originations and the maturity of our swaps.

Additionally, property operating income related to our REO assets decreased approximate $700,000, and property operating expenses increased approximately $250,000 from last quarter, largely due to the seasonal nature of income related to a portfolio of hotels that we own, as well as from some one-time expenses associated with the transition of the managers of the properties and certain capital expenditures.

As of June 30, we have two REO assets we are holding for investment, totaling approximately $127 million, subject to approximately $54 million of assumed debt, for a net value of approximately $73 million. As of today we believe these two assets should produce NOI before depreciation and other non-cash adjustments of approximately $3 million for 2012, the bulk of which will be recognized in the first two quarters due to the seasonal nature of our hotel portfolio, and $3 million to $4 million annually going forward from these REO assets.

This projected income, combined with our net interest spread run rate at June 30, 2012 of approximately $39 million on our loan and investment portfolio, gives us approximately $42 million to $43 million of annual estimated core FFO earnings before potential loss reserves and operating expenses looking out 12 months based on our run rate at June 30, 2012.

Clearly this growth in our core earnings has contributed greatly to the 33% increase in our dividend this quarter, and we are optimistic that we will continue -- to be able to continue to increase our core earnings and dividends over time.

Operating expenses were relatively flat from last quarter, with the exception of an increase of approximately $500,000 in non-cash expenses related to stock-based compensation issued to our independent directors in the second quarter.

Next, our average leverage ratios on our core lending assets decreased compared to last quarter to around 69% and 80%, including the trust preferreds as debt compared to 72% and 83% respectively.

And our overall leverage ratio on a spot basis, including the trust preferreds as equity, was down from 3.7 to 1 at March 31 to 3.1 to 1 at June 30, due to a decrease in total debt outstanding combined with an increase in equity from our capital raise and our second-quarter earnings.

There were some changes in the balance sheet compared to last quarter that are worth noting. Restricted cash in our CDO vehicles increased approximately $39 million from last quarter, largely due to second-quarter runoff that will be used to pay down CDO debt in the third quarter.

Repurchase agreements and credit facilities increased by approximately $21 million due to the addition of the $13 million in warehouse financing and the use of $10 million of the $15 million revolving line of credit we closed in the second quarter.

And CDO debt decreased approximately $61 million from last quarter due to our second-quarter CDO debt repurchases and CDO runoff in the first quarter, which was used to pay down CDO debt in the second quarter.

And, lastly, our loan portfolio statistics as of June 30 show that about 65% of our portfolio was variable able rate loans and 35% are fixed. By product type about 66% of our loans were bridge loans, 20% junior participation, and 14% mezzanine and preferred equity investments.

By asset class, 45% of our portfolio is multi-family, 31% is office, 10% hotel and 10% land. Our loan-to-value was around 82%. Our weighted average median dollar outstanding was 52%. And geographically we have around 36% of our portfolio concentrated in the New York City -- in New York City.

That completes our prepared remarks for this morning, and I will now turn it back to the operators to take any questions you may have at this time.

(Operator Instructions). Steve DeLaney, JMP Securities.

I have a couple of things this morning. Thank you for the details on the growing RMBS portfolio as far as the yield and the ROE. That 5% yield, and also the leverage that your 75% of borrowings suggest, indicates to me these are fairly high-quality bonds, when we look at the nonagency RMBS spectrum of bonds in terms of yield and leverage. I wondered if you had available you could share with us the average dollar price -- your cost basis in these bonds?

We don't have that available as we speak, but we could definitely get -- make that available to you.

Okay. All right. Could you say, Ivan, whether these are more say front-pay type bonds or more [promise] in quality? I'm just trying to get the spectrum of whether -- where you stand in terms of the credit risk profile of what you're buying?

Yes, the credit -- it is more of a cash flow and a priority of cash flow. So they are high-quality cash flow bonds. The underlying quality asset is not as material to us, it is really the disposition of the asset --

No, I understand.

On a granular basis.

Right, the cash is king --

Yes.

In that respect. Got it.

This is Paul. They are, as Ivan said, more front-pay cash flowing bonds. And as far as a cost basis, what we did disclose is how much in bonds we have outstanding as of June.

And for the most part these bonds are pretty (technical difficulty) at par. There may be slight premiums or discounts here at add, but for the most part they are pretty much par trades.

Very important. That is what I was trying to get at with respect to -- we know how the lenders tend to look at bonds and haircuts and that type of thing, and the market likes bonds that trade at par is the bottom line.

Yes, and I think the key for us too is the duration is short.

Yes.

And, in fact, the return on the capital is coming much quicker. So we're trying to keep the duration between 24 and 36 months.

That is helpful. Thank you. Now you guys this morning -- I have heard you mention this before, and I will just make sure I'm understanding it and that we communicate this properly to investors.

Ivan, you are using the concept of value, and it seems you're taking your cash, you're taking your unlevered assets and you're basically carving out the nonrecourse part of the balance sheet. And I think you mentioned a figure of $470 million, which works out to about $18 per common share.

Can you just in plain, common English help me understand when you look at the Company and you look at this concept of value what you're really trying to communicate?

Paul, why don't you walk through the economic analysis, that would be helpful.

Absolutely. Steve, what we are trying to do here is there are a couple of ways to look at the Company's value. We look at the adjusted book value as the real value, which comes in at $11.19.

But lots of investors like to look and stay away from GAAP and say, well, economically what do I have? So we have tried to put in front of you guys an economic value. And so we look at our cash and liquid assets and equity we have in assets over our debt, and we say that is our value.

Now that $470 million of value does not take into account the trust preferreds. We left that out because certain people feel that they are obviously thirty-year equity type paper, and it may not be appropriate to look at that at its face.

But if you were to do that and put the $470 million that we quote as value, and then take off the trust preferred at par, you get very, very close to that $11.19. Actually it comes in probably around that number.

So the TRuPS are about $150 million?

Right. So we say -- what we are trying to demonstrate here is that not only is book value $7.58, but more importantly adjusted book value is $11.19. If you are an investor and you just want to look at this as what is the economic value from cash and liquid assets above debt, you still get to that number. And that is what we are trying to demonstrate.

Got it. The TRuPS is the piece that I was missing. And that helps me understand how you're using that concept of building up from the asset side to get up to your adjusted book value.

Right.

The last thing I will ask, guys, you did -- congratulations on tapping the equity market. Obviously, where the share price is it is something you needed to do, and you have got -- where the share price is relative to your adjusted book it can be costly.

So I guess the question is we have seen I think about 15 preferred stock offerings, and other than the TRuPS you, don't have any straight prefers. Is that an instrument that you would consider to use to -- as you need incremental capital just to minimize dilution to the common?

I think we will look at all available options that are out there. And based on our needs, our lines and our volume, I think at that particular time, which is not today, we will evaluate what is the best execution for us.

Well, thanks for the comments and the time this morning.

(Operator Instructions). At this time I am not seeing any questions. I would like to turn the call back over to management.

Okay, well, thanks for your participation today. And we look forward to continuing to grow our Company and your participation in our stock. Thank you.

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