Arbor Realty Trust Inc (ABR) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter 4 2012 Arbor Realty Trust earnings conference call. My name is Cathy and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions).

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

Okay, thank you, Cathy. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results of the quarter and year ended December 31, 2012.

With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. I would like to inform you that Ivan is traveling on business today and has dialed in from his business location. So we apologize in advance if we run into any technical audio difficulties, and if we do, we will try to get them corrected as soon as possible.

I do 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, 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 listed. 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.

With the Safe Harbor behind us, I'll now turn it over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul. And thanks to everyone for joining us on today's call. Before Paul takes you through the financial results, I would like to reflect on how we closed out the year, touching on some of our more significant accomplishments and then focus, turn my focus to our business strategy and outlook for 2013.

2012 was a tremendously successful year for us and this momentum has continued into 2013. We closed out the year with approximately 80% of appreciation in our stock price, including dividends, and we are approximately -- we are up approximately another 20% already in 2013.

We are extremely pleased with our progress, especially in our ability to access the equity and securitization markets to continue to grow our platform and our core earnings, and in our ability to grow our dividend over the last three quarters.

We completed two equity offerings in the latter half of 2012, raising approximately $37 million of fresh capital and just recently closed our first perpetual preferred stock offering, raising an additional $37 million of capital in early February.

We have also had great success in accessing the securitization markets in the form of two new nonrecourse collateralized loan obligation vehicles, one in September of 2012 totaling $125 million and a second just last month with $260 million of collateral.

These transactions are already at the forefront of our recent accomplishments and have positioned us very favorably to allow us to continue to execute our business strategy of originating attractive investment opportunities to our deep originations platform and appropriately levering them with low-cost nonrecourse CLO debt with replenishment rights generating midteens [levered] returns on our invested capital.

We continue to remain very active in our core lending business as well as in diversifying our portfolio and revenue sources by investing in residential securities. We are pleased with the opportunities we're seeing in the market to invest our capital and continue to grow our earnings base through our experienced originations team. This has resulted in increased core earnings and as a result we have increased our dividend to $0.12 a share for the fourth quarter, up 9% from the $0.11 a share we paid in the third quarter.

In a moment, Paul will elaborate further on how our growth is also translated to increase our core earnings run rate. Once again were pleased with the investment opportunities we have seen to grow our platform, diversify our revenue sources and produce core earnings and dividends growth going forward.

In the fourth quarter, we originated $91 million of loans with an average yield of 6.7% and a levered return of approximately 14%.

For the full year 2012, we totaled approximately $275 million in originations with an average yield of approximately 7.4% and levered returns of approximately 14%.

In addition in the first month and a half of 2013, we originated $75 million of loans with a yield of approximately 6.7% and expected levered returns of around 14%. As I mentioned earlier, our pipeline remains strong and our goal is to continue to deploy our capital into new investment opportunities with mid-teens targeted returns.

For 2013, we estimate we will originate an average of approximately $30 million of volume a month, which we are confident we can produce between our extensive sales force and the REITs and in our external management.

We also continue to grow our residential investment platform purchasing residential mortgage securities in the fourth quarter, totaling $40 million with a weighted average yield of approximately 5% and expected levered returns of nearly 20%. For the year we purchased $158 million in securities for the average yield of 5% and levered returns of around 20%. Additionally we purchased $25 million of residential securities in 2013 so far with a weighted average yield of 5% and expected levered returns of about 20%.

At December 31, 2012 we had $122 million of residential securities outstanding with corresponding leverage of $98 million. These securities generally have an average expected life of 24 to 36 months and are expected to generate levered returns of approximately 20%.

As I mentioned earlier, our goal is to continue to finance a substantial amount of our investments with nonrecourse debt with replenishment rights, allowing us to match the term of our assets with the term of our liabilities without being subject to event risk if a credit market dislocation should occur. This philosophy is a critical component of our business strategy, and we have had tremendous success in this area over the last several months.

We have a very seasoned experienced securitization team with significant capabilities and this has allowed us to be a leader in the commercial mortgage REIT space in accessing the securitization market through CLO vehicles. As we mentioned on our last call in September, we were the first commercial mortgage REIT to complete a nonrecourse CLO vehicle since the dislocation occurred. We believe this was attributable to our strong reputation in the market of effectively managing our three legacy CDO vehicles through the downturn and our ability to originate high-quality collateral through our deep originations platform.

The vehicle has $125 million of collateral and $88 million of leveraged and the ability to substitute collateral for a period of two years through a replenishment feature. And just last month we announced the closing of our second nonrecourse CLO. The details of the CLO were described in our press release but I would like to highlight some of the significant components and unique features of this transaction.

The vehicle is comprised of approximately $260 million of collateral including $50 million of additional capacity to fund future investments known as a ramp up. It contains approximately $177 million of financing, has a weighted average spread excluding fees of 235 over LIBOR and also provides us with the ability to substitute collateral for a period of two years through a replenishment feature. This vehicle is significantly large enough (technical difficulty) CLO in September and has a ramp-up feature to provide additional capacity going forward. It is also estimated that the all-in costs of this vehicle will be approximately 130 basis points lower than our first CLO, demonstrating the depth of our securitization team as well as the improving market conditions.

Additionally, we believe the success we have had in accessing the securitization market will have several other long-term benefits to offer, including greater access to financing lines and equity capital as well as the ability to pool products for potential future securitizations. In fact, in the first month and a half of 2013 we have already increased our short-term funding sources by adding a new $50 million warehouse facility as well as by increasing the capacity of our existing debt facilities by $30 million. The new $50 million facility has a one-year term with pricing 250 over LIBOR and a leverage of up to 75% depending on the assets that are being financed.

As a result, we now have approximately $125 million of capacity in our short-term credit facilities in addition to the $50 million of capacity we created in our second CLO through the ramp-up feature. And this capacity, combined with cash today, of approximately $40 million gives us a total of approximately $215 million in cash and capacity to fund future investment opportunities.

As we've discussed in the past we've also have been very successful in repurchasing our debt at deep discounts, recording significant gains and increasing our equity value. While we did not purchase any of our CDO bonds in the fourth quarter we did repurchase a total of 66 million of CDO bonds for a gain of $30 million in our 2012, and in the first quarter of 2013 we purchased $7.1 million of our CDO bonds for $3.4 million resulting in a gain of approximately $3.7 million that will be recorded in the first quarter of 2013.

As of today, we own approximately $161 million of our original CDO bonds at an $89 million discount to PAR, which represents significant embedded cash flows that we may realize in future periods. We will continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity.

Now I would like to update you on our view of the commercial real estate market and then discuss the credit status of our portfolio.

Overall, the commercial real estate market continues to recover and asset values are continually improving. There is clearly more liquidity entering this space each day which has also made the market more competitive, putting some pressure on yields. The availability of liquidity and improving market conditions, however, has also reduced financing costs and increased available funding sources.

The market we are most active in is a multifamily asset class with investment opportunities typically ranging from $5 million to $30 million. We believe we have a significant competitive advantage by levering off of our manager who provides us with a strong pipeline of flow of multifamily abridge loan opportunities. Our manager is one of the top Fannie Mae, FHA platforms in the country with a significant sales force, considerable market reach and a strong national presence in the commercial lending arena.

Additionally we benefit from significant operating efficiencies as a result of our manager's deep infrastructure. As a result, we continue to produce significant investment opportunities for us to grow our platform and increase our core earnings.

Looking at the credit status of our portfolio, in the fourth quarter, we recorded $2.4 million of net loan-loss reserves related to three assets in our portfolio. We also had a $500,000 recovery of a previously recorded reserve during the fourth quarter from the gain on the sale of a real estate owned asset which was previously written down below the sales price.

As of December 31, we had nine nonperforming loans with a UPV of approximately $60 million and a net carrying value of approximately $15 million which is up from a net carrying value of $10 million at September 30, due to one additional nonperforming loan in the fourth quarter. Additionally, we believe we have put substantially all of our legacy issues behind us, and while it is possible we could have some additional write-downs in our portfolio on our legacy assets based on market conditions, we remain optimistic that any potential remaining issues will be minimal.

We also believe as the market continues to improve, we could have some recoveries from our assets combined with potential gains from 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 through two equity offerings, a perpetual preferred offering and two nonrecourse CLO vehicles as well as in our ability to increase our short-term lending sources. We are also pleased with the increase in our core earnings and dividend over the last several quarters as well as the appreciation in our stock price. We are excited about the growth in our pipeline and are confident our originations network will continue to produce attractive investment opportunities to grow our platform.

We will continue to focus on increasing the value to our shareholders by growing our core earnings and dividend over time and further narrowing the GAAP between where our stock is trading and our adjusted book value which is approximately $10.41 on December 31 which we believe is more representative of our true franchise value.

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 produced FFO for the fourth quarter of approximately $900,000 or $0.03 per share and FFO of $23.5 million or $0.87 per share for 2012. We successfully generated $0.5 million in the fourth quarter and $3.9 million for the full year 2012 of recoveries of previously recovered loan loss reserves in the form of gains from the sale of two of our real estate owned assets.

These gains are not included in FFO under its current definition. So adding them back adjusted FFO was $1.4 million or $0.04 per share for the fourth quarter and $27.5 million or $1.01 per share for the 2012 year. We also reported a net loss of approximately $300,000 or $0.01 per share for the fourth quarter and net income of $21.5 million or $0.79 per share for the year ended December 31, 2012.

We ended 2012 with an adjusted FFO return on average equity of approximately 13.7% and an adjusted FFO return on average adjusted equity of 9.2%. As Ivan mentioned, we recorded $2.4 million in net loan-loss reserves in the fourth quarter related to three assets in our portfolio, and after these reserves and charge-offs of previously recorded reserves, we now have approximately $162 million of loan loss reserves on 20 loans with a UPV of around $240 million as of December 31, 2012.

At December 31 our book value per share stands at $7.34 and our adjusted book value per share is $10.41 adding back deferred gains and temporary losses on our swaps. As Ivan mentioned, we believe that our adjusted book value better reflects our true franchise value as these deferred items will be recognized over time while the significant economic benefit related to these items has already been realized.

Additionally, as Ivan mentioned, we currently have approximately $40 million in cash on hand and $175 million of capacity in our short-term credit facilities, including the ramp-up feature in our second CLO to fund our future investments.

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 third and fourth quarters. The yield for the fourth quarter on these core investments was around 5.10% compared to 5.03% for the third quarter. This increase in yield was primarily due to higher yields on our fourth-quarter originations combined with the full effect of our third-quarter originations as well as from the acceleration of income from an early payoff which was partially offset by one new nonperforming loan during the quarter. Additionally the weighted average all-in yield on our portfolio increased to around 5.04% at December 31 compared to around 4.91% at September 30 primarily due to higher yields in our new investments partially offset by a nonperforming loan in the fourth quarter.

The average balance on our debt facilities were also relatively flat at around $1.2 billion for the third and fourth quarters. The average cost to funds on our debt facilities was approximately 3.18% for the fourth quarter compared to 3.11% for the third 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 increased to approximately 3.09% for the fourth quarter compared to around 2.97% for the third quarter, primarily due to the full effect of our first CLO which closed in late September.

Additionally, our estimated all-in debt cost was relatively flat at around 3.12% at December 31 compared to around 3.15% September 30. So, overall normalized net interest spreads in our core assets was approximately 2.01% this quarter compared to approximately 2.06% last quarter and our net interest spread run rate is now approximately $44 million annually or 1.91% at December 31 compared to approximately $40 million annually or 1.76% at September 30. This significant increase is primarily due to the growth in our portfolio and increases in yields from our fourth-quarter originations.

NOI related to our REO assets decreased $1.6 million compared to last quarter due to the seasonal nature of income related to our portfolio of hotels that we own, combined with some one-time expenses from a change in the property management of these assets. As of December 31, we have two REO assets we are holding for investment totaling approximately $124 million subject to approximately $54 million of assumed debt for a net value of approximately $70 million.

As of today, we believe these two assets should produce NOI before depreciation and other non-cash adjustments of approximately $3 million for 2013. This projected income combined with our net interest spread run rate at December 31, 2012 of approximately $44 million in our loan and investment portfolio gives us approximately approximately $47 million of annual estimated core FFO before potential loss reserves and operating expenses looking out 12 months based on our run rate at December 31, 2012.

Clearly, this growth in our core earnings over the last several quarters has contributed greatly to the increases in our dividends and we are optimistic that we will continue to increase our core earnings and dividends over time.

Operating expenses increased compared to the third quarter, largely due to increased employee and operating costs associated with our 2012 accomplishments and our active origination platform and loan restructurings in the fourth quarter. Additionally, as we disclosed in our 10-K this morning, the Board has approved the issuance of approximately 200,000 shares of restricted stock to certain of our employees and employees of our manager. These shares will be granted on February 28, 2013, and have a three-year vesting period.

Next, our average leverage ratios on our core lending assets decreased slightly compared to last quarter to around 65% and 76%, including the trust preferreds as debt compared to 66% and 77%, respectively. And our overall leverage ratios on a spot basis including the trust preferred as equity was down slightly from 3.01 to 1 at September 30 to 2.9 to 1 at December 31. This was due to decrease in total CDO debt outstanding from runoff, partially offset by the financing of our fourth-quarter origination.

There are some changes in the balance sheet compared to last quarter that I would like to highlight. Our purchase agreements and credit facilities increased by approximately $50 million due to the financing of our fourth-quarter originations combined with a lower debt balance in these facilities in the third quarter from the transfer of certain assets into our first CLO vehicle in September and CDO debt increased approximately $29 million from last quarter due to our third-quarter CDO runoff which was used to pay down CDO debt in the fourth quarter.

Additionally, total equity increased approximately $19 million this quarter, primarily due to our common stock offering in October.

Lastly, our loan portfolio statistics as of December 31 shows that about 68% of the portfolio was variable rate loans and 32% are fixed. By product type about 67% were bridged, 19% junior participations and 14% mezzanine and preferred equity investments. By asset class, 51% of our portfolio was multifamily, 20% is office, 7% hotel and 10% land. Our loan-to-value is around 80% and our weighted average median dollars outstanding was 50% and, geographically, we have around 34% of our portfolio concentrated in the New York City area.

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. Cathy?

(Operator Instructions). Steve DeLaney, JMP Securities.

Thank you, good morning. And congratulations on the continued steady progress here in the fourth quarter.

Thanks, Steve.

Thanks, Steve.

So I've been, I've been -- thanks, I wanted to thank you for the outlook on production that was one of my questions that increase we might see over and above the 275. I guess I have two questions on the 360 or $30 million a month. When you make that projection should we assume you're going to maintain sort of primarily this same focus on multifamily bridge loans or are you looking to broaden your lending product menu?

I think that the a majority of our production will continue to be multifamily. While it was almost exclusively multifamily in 2012, I would expect that they'll probably represent around 75%. We are looking at some retail deals and some hospitality deals very, very selectively and it is our ambition to do probably 25% diversification. And if and when we do another securitization we would like to be able to include that asset class and that securitization to diversify our asset classes that we traffic in.

And your loan pricing, it looks like what you've done so far in the first quarter this year held up pretty well to the fourth quarter. Do you have a sense on what type of pricing pressure you might see in 2013?

I mean, we've clearly seen in the last 90 days pricing tighten up by 50 basis points to as much as 100. I think that some of the benefits of the way we originate, we do get some unique transactions and since we are not looking to do billions of dollars, we can still garner fairly aside attractive yields. But I would say there will be a continual heightening as is more liquidity in the markets and we've been able to decrease our borrowing costs to potentially offset that and still deliver consistent midteens returns. I would say 2013 is going to be a year of continued spread tightening for the borrower.

But hopefully with the financing maybe being a little more accommodating in lower rate you're still thinking you can sort of get this midteen type ROE when you lever this?

Yes I do and, also, given the fact that we have put another CLO in place it is much more efficient. The transaction costs are much less and we have a ramp up. And we can fund directly into our CLO, avoiding duplicate transaction costs for financing.

So we believe that the efficiencies that we are achieving in the financing side should offset the tightening of the spreads on the lending side.

Okay, that's helpful. And I guess as you look at the market opportunity out there and obviously you've got your [indirect] origination channels so you're not looking to just buy loans in the secondary market. But when you look at the $275 million in 2012 or the 300 plus next year, are you in some way setting those kind of targets based on the capital that you have available or is it a function of that those are the volumes alone that sort of meet your quality standards.

What I'm getting at is the stock has done very well. If you were to continue to have access to more capital would it be possible to attract a larger volume of loans to put that capital to work without having to cut your credit standards?

Sure, we can definitely ramp up our originations significantly above where we're at but we monitor a number of things. We monitor our runoff, our capacity, our liquidity and our cost of capital because we don't want to just raise capital for the sake of raising capital. We are very sensitive to our stock price has been and it is more strategic in terms of what we want to accomplish. But there is more capacity in terms of our origination than what we are originating but we're monitoring it based on those factors. And if there were certain unique opportunities that incrementally in yield we would have -- we would evaluate that accordingly.

But it is something that management is active on a day-to-day basis in terms of monitoring and measuring the opportunities versus our cost of capital and as well as access to the securitization markets on the debt side.

Okay, well listen, thanks for the time and the comments and congratulations on a great turnaround year for Arbor.

Thank you very much, Steve.

Thanks Steve.

Stephen Laws, Deutsche Bank.

Hi, good morning. Thanks for taking my questions. Always tough to follow Steve, he asks a lot of great questions as well. Can you maybe talk a little bit about the modified and extended loans during the quarter? You know what you're seeing there, what type of terms you're able to get on those and how much more of that do you expect to see kind of going forward as more of the, I guess, legacy loans hit kind of an extension or maturity date?

Paul, I'm going to turn that to you (multiple speakers)

Sure, absolutely. Yes, Steve, I mean, some of the modifications and extensions have definitely slowed. The legacy portfolio is on tremendously solid footing. But we do still have some of the same loans that are coming out for extension and we do have some new modifications. I think the trend lately, though, has been more in favor of us. In the past when the dislocation occurred and we were modifying loans we would normally giving rate concessions to get a better credit quality loan and more predictable earnings and loan performance.

Lately what we've seen is a trend the other way. And when people are coming up from modified and extension unless it's a specific loan that we know are extending based on a contractual term we are able to extract a little bit more in yield. So this quarter we did extend and modified some loans. The ones we did extend we extracted a little more yield out of them.

So we will have some of this going forward as some loans we have still had extension options on them but it has been slowing over the last couple of quarters.

Great, thanks for the color on that especially. It sounds like things are moving back in your favor there as well.

You know, looking at the overcollateralization test, CDO III is fairly close to the limit although it did improve sequentially from last quarter when it was [105 spot 64]. Can you maybe touch on that a little bit? You think that will continue to improve there or is there any risk you have or any concerns you guys have with that CDO III.

I guess we always have concerns when the cushion is thin. And we've effectively managed it, Jean Kilgore, who manages our securitization of CDOs, has been a very very good job. I guess we are sensitive to maintaining and making sure that vehicle still cash flows and you know we will work very hard to do so.

In terms of concern, given the cushion, we do have a level of concern but we will pay a lot of attention to it and try and operate that as efficiently as we can.

Stephen, it's Paul, as Ivan said we do have a level of concern with the cushion being tight. However, I do want to point out that the third CDO was the more highly leveraged CDO that we did in the legacy books so the cushion was never really very large to begin with.

So it is a tight cushion but it is the CDO that has the highest leverage and while we do have some concerns as loans pay off we were hopeful that the cushion could improve with loans paying off. Other things could go the other way and we do have a concern but as the vehicle continued to delever, some of these tests do get better over time.

And that CDO was more of a whole loan CDO with higher quality collateral and that's part of the reason why it always operated on a low equation.

Great, well, thanks for that and I think might my other question couple on pipeline and cash flow were dressed either in your prepared remarks or your previous answers and, again, congrats on a nice year but also important a nice start to this year with the CLO and some new financing facilities.

Thanks.

Thank you, Steve.

I would now like to turn the call over to Ivan Kaufman for closing remarks.

Well, thanks for everybody's support in 2012 and we're looking forward to an outstanding 2013. As Steve mentioned we are off to a great start in terms of our stock performance and participation and look forward to our next earnings call. Thank you very much.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect.