Arbor Realty Trust Inc (ABR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Arbor Realty Trust earnings conference call hosted by Ivan Kaufman, Paul Elenio and Joseph Green. My name is Mahmoud, I'm event coordinator today. During the presentation your lines will remain on listen-only. (Operator Instructions).

I would like to advise all parties that this conference is being recorded. If you wish to ask (Operator Instructions). Now I would like to hand the call over to Mr. Paul Elenio. Please go ahead.

Thank you, Mahmoud. 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 March 31, 2013.

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 any Ford 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'll now turn the call over to arbors President and CEO, Ivan Kaufman.

Thank you, Paul. 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 initiatives and talk about our business strategy and outlook for the remainder of 2013.

We are extremely pleased with our first-quarter accomplishments, especially in our ability to continue to access to debt and equity markets to continue to grow our platform and our core earnings. As we discussed on our last call we completed our first perpetual preferred stock offering, raising $37 million of capital in February and closed our second nonrecourse collateralized loan obligation vehicle in January with $260 million of collateral, including $[15] million of additional capacity to fund future investments in the ramp up future, with pricing that was significantly lower than our first CLO vehicle in September of 2012.

We also raised an additional $90 million of fresh capital in the first quarter through a common stock offering and the completion of a 6 million share at the market offering and we put in place at the end of last year. In addition we increased our short-term funding sources in the first quarter by adding a new $50 million warehouse facility and by increasing the capacity of our existing debt facilities by $30 million while decreasing the cost related to these facilities by approximately 75 basis points.

The new $15 million facility has a one-year term with pricing at $250 million over LIBOR and a leverage of up to 75% depending on the assets financed. These transactions are clearly at the forefront of our recent accomplishments and we are very well-positioned to continue to execute our business strategy of originating attractive investment opportunities and appropriately levering them with the low-cost nonrecourse CLO debt with replenishment rights generating midteen leverage returns on our invested capital.

We are very pleased with the opportunities we continue to see to invest our capital through our external managers' top multifamily originations platform, and the opportunities we continue to see to invest in residential securities. Recently our manager has made a substantial investment in launching a new CMBS and syndication platform that will focus on providing clients with more diverse financing products to meet their needs. As a result we believe we will obtain substantial future benefits from our manager's new expanded platform providing us with a broader customer base, as well as all bridge loans and B note opportunities that are created from this business unit. This will continue to provide quality deal flow for us to invest our capital, allowing us to retain our competitive advantage and continue to grow our platform [in core earnings] over time.

In the first quarter we originated $99 million of loans with an average yield of approximately 8.3% with a levered return of approximately 14%. In addition we originated $107 million of loans in April with a yield of approximately 7.8% and expected leverage returns of around 17%. Our pipeline remains strong and our goal is to continue to put our capital into new investment opportunities with midteens targeted returns.

We also continue to be active in our residential securities platform, purchasing residential mortgage securities in the first quarter totaling $42 million and $24 million in April with midteens expected levered returns. At March 31, 2013, we had $150 million of residential securities outstanding with corresponding leverage of $120 million. These securities generally have an average expected life of 3 to 4 years and are expected to generate an average levered return in high teens.

As I mentioned earlier, our goal continues to be to finance a substantial amount of our investments with nonrecourse debt through CLO vehicles, allowing us to match the term of our assets with the term of our liabilities without being subject to event risk. This is a critical component of our business strategy and the tremendous success we have had in the last several months and accessing the securitization market through two nonrecourse CLO vehicles has put us in a very favorable position to continue to execute the strategy effectively. We believe that success is directly attributable to the depth and experience of our securitization team, our strong reputation in the market of effectively managing our three legacy CDO vehicles through the downturn, and our ability to continue to originate quality collateral from our managers multi-family mortgage origination sales force with a strong national presence and considerable market suitable market reach. This expertise combined with the quality flow of origination volume we continue to generate has allowed us to become a leader in the commercial mortgage REIT securitization market.

As we mentioned on our last call, our second CLO vehicle which closed in January was significantly larger than our first CLO in September, and featured a ramp-up period to provide $50 million of additional capacity. This vehicle contains $260 million of collateral, $177 million of financing, and pricing that is approximately 130 basis points lower than our first CLO. As we now have two CLO assets of $385 million, with $265 million of leverage and the ability to substitute collateral for a period of two years through a replenishment feature in both vehicles.

We believe the success we have experienced in accessing the securitization market for our bridge loan product provides us with a significant long-term strategic competitive advantage, allowing us to have permanent nonrecourse debt with a liability structure that matches our asset maturities without marked to market provisions. This has also resulted in additional warehousing loan capacity and lower pricing and as a direct result has enabled us to tighten our pricing on our loan product to adjust to the market yields and while the market yields become more competitive and still maintain similar effects of yields.

On a long-term basis we will see the greatest benefit if and when the market backs up and liquidity becomes an issue as our debt structure will enable us to not only maintain stable liability terms, but will allow us to continue to operate with the same low-cost debt while assets of price less competitively resulting in future superior leverage returns. As a result, we now have approximately $105 million of capacity in our short-term credit facilities combined with cash today of approximately $65 million for a total of approximately $170 million in cash and capacity to fund future investment opportunities.

As we've discussed in the past, we have also been very successful in repurchasing our data [deep] discounts recording significant gains and increasing our equity value. We successfully repurchased $7.1 million of CDO bonds for a gain of $3.8 million in the first quarter. As of today we own approximately $161 million of our original CDO bonds and 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 discuss the credit status of our portfolio. Overall, the commercial real estate market continued to improve. The significant increase in capital market activity in our space has resulted in increased liquidity which has created a more competitive market reducing yields on certain types of investments. The increased level of liquidity and improving market conditions, however, has also reduced financing costs, and increased available funding sources which I mentioned earlier is offsetting most of the yield compression we are currently seeing in the market. A majority of our investments continue to be in the multifamily asset class, although we are starting to see accretive opportunities in commercial properties as well. We believe that multifamily assets will likely make up around 75% of our future originations with the balance invested in commercial assets.

As I mentioned earlier, we believe we are uniquely positioned and have a strong competitive advantage in the market by levering off of our manager's top Fannie Mae and FHA platform with a significant salesforce, considerable market reach, and a strong national presence in the multifamily lending arena. Furthermore with the addition of our new CMBS and syndication platform, we are very confident in our ability to 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 first quarter we recorded $2.5 million of loan loss reserves related to two assets in our portfolio, and as of March 31 we had six nonperforming loans with a net carrying value of approximately $15 million. We believe that substantially all our legacy issues are 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 minimum. We also feel as the market continues to improve we could continue to have some recoveries from our assets combined with potential gains from debt repurchased to offset any potential additional losses. However, the timing of any potential losses, recoveries and games on a quarterly basis is not something we can predict or control.

In summary, we are very pleased with our accomplishments, especially with the tremendous success we've experienced in accessing the capital markets through multiple equity offerings of perpetual preferred offering and two new nonrecourse CLO vehicles as well as our ability to increase our short-term lending sources and reduce our borrowing costs. We are also very pleased with the investment opportunities we are seeing, and in the increase we have had in our core earnings and dividends over the last several quarters. We are excited about the growth in our pipeline and are very confident that our originations network will continue to produce attractive investment opportunities to grow our platform.

As a result of our growing pipeline and available capital, we are increasing our guidance on loan originations for 2013 from approximately $360 million to a range of $450 million to $500 million. Our primary focus remains on increasing the value to our shareholders by growing our core earnings and dividend over time.

I'll now turn the call over to Paul to take you through the financial results.

Thank you, Ivan. As noted in the press release FFO for the first quarter was approximately $8.3 million or $0.24 per share, and net income was $6.6 million or $0.19 per share. This translates into an annualized FFO return for the quarter on average common equity of approximately 12% and an FFO return on average adjusted common equity of 9%. As Ivan mentioned, we continue to repurchase our debt at deep discounts, recording $3.8 million in gains from the repurchase of some of our CDO debt in the first quarter. We also recorded $2.5 million in loan loss reserves in the first quarter related to two assets in our portfolio, and after these reserves and charge-offs of previously recorded reserves, we now have approximately $146 million of loan loss reserves on 18 loans with a [UPV] of around $235 million as of March 31, 2013.

At March 31 our book value per common share stands at $7.53, and our adjusted book value per common share is $9.68, adding back deferred gains and temporary losses on our swaps. As we've mentioned before 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 $65 million in cash on hand and $105 million at capacity in our short-term credit facility to fund our future investments.

Looking at the rest of our results for the quarter, the average balance in core investments increased to approximately $1.7 billion for the first quarter compared to approximately $1.6 billion for the fourth quarter, due to our first-quarter and fourth-quarter originations. The yield for the first quarter on these core investments was around 5.63% compared to 5.1% for the fourth quarter. This increase in yield was primarily due to the collection of back interest on certain loans in our portfolio not previously accrued, higher yields in our first-quarter originations combined with the full effect of higher yields in our fourth-quarter originations.

Additionally the weighted-average all-in yield on our portfolio increased to around 5.22% at March 31, 2013 compared to around 5.05% at December 31, 2012, again primarily due to higher yields on our new investments. The average balance in our debt facilities also increased to approximately $1.3 billion for the first quarter compared to approximately $1.2 billion for the fourth quarter. The average cost of funds in our debt facilities was approximately 3.38% for the first quarter compared to 3.18% for the fourth quarter.

Excluding the unusual non-cash impact of certain interest rate hedges which are deemed to be ineffective for accounting purposes [and our] interest expense, our average cost of funds increased to approximately 3.35% for the first quarter compared to around 3.09% for the fourth quarter. This increase was primarily due to higher costs associated with one of our warehouse facilities due to the transfer of assets out of this facility to our second CLO that closed in January combined with first-quarter runoff in our legacy CDO vehicles which carry a lower cost of funds.

Additionally our estimated all-in debt cost was approximately 3.17% at March 31, 2013 compared to around 3.12% at December 31, 2012. As we mentioned earlier we successfully closed our first perpetual preferred stock offering in the first quarter, raising approximately $37 million of capital. This instrument is treated for accounting purposes as equity and the dividend yield of 8.25% associated with this offering is reflected below net income on the income statement as a preferred stock dividend and is therefore not reflected in our GAAP cost of funds.

If you were to include this expense, our average cost of funds for the first quarter would be approximately 3.46% and our estimated all-in debt cost would be 3.32% at March 31, 2013. So, overall, normalized net interest spreads in our core assets on a GAAP basis was approximately 2.28% this quarter compared to approximately 2.01% last quarter. Including the preferred stock dividend as debt, our net interest spreads were approximately 2.17% for the first quarter and our net interest spread run rate is approximately $44 million annually at March 31, 2013 compared to approximately $43 million at December 31, 2012.

Other income which primarily consists of net interest spread on certain RMBS securities which are deemed to be linked transactions for accounting purposes, as well as asset management and miscellaneous fees, increased $800,000 during the first quarter. The increase was mainly due to the reimbursement of certain fees on a loan in our portfolio as well as the first-quarter RMBS securities purchased that are linked. The net interest spread earned on the linked RMBS securities is not reflected in the net interest spreads just discussed.

NOI related to our REO assets increased $2.9 million compared to last quarter due to the seasonal nature of income related to a portfolio of a hotel that we owned, combined with some one-time expenses from a change in the property management of these assets in the fourth quarter. As of March 31 we have two REO assets we are holding for investment totaling approximately $125 million, subject to approximately $54 million of assumed debt for a net value of approximately $71 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, the majority of which was recorded in the first quarter, again due to the seasonality of our hotel portfolio. This projected $3 million NOI income combined with approximately $3 million in other income related our RMBS link transactions and approximately $44 million of net interest spread in our loan and investment portfolio gives us approximately $50 million of annual estimated core FFO before potential loss reserves and operating expenses looking out 12 months, based on our run rate at March 31, 2013.

And as Ivan mentioned earlier, we originated $107 million in loans and purchased $24 million of RMBS securities in April with levered returns in the mid- to high teens which will increase our core earnings going forward. Clearly our goal is to continue to deploy long-term growth capital we raised during the first quarter into accretive investment opportunities and continue to grow our core earnings and dividends over time.

Operating expenses were relatively flat compared to the fourth quarter, although the first quarter included approximately $600,000 of non-cash expenses from the issuance of 192,500 restricted stock awards to certain of our employees and the employees of our manager has previously disclosed in our 10-K. Additionally just this week we issued 70,000 fully vested shares to our independent directors as part of their annual compensation which will result in a non-cash charge in the second quarter of approximately $500,000.

Next, our average leverage ratios on our core lending assets remained relatively flat compared to last quarter at around 67% and 65%, respectively, including the trust preferreds and perpetual preferred stock as equity. Our overall leverage ratio on a spot basis, including the trust preferreds and preferred stock as equity was down from 2.9 to 1 at December 31, 2012 to 2.2 to 1 at March 31, 2013, mainly due to our equity offerings in the first quarter.

There are some changes in the balance sheet compared to last quarter that I would like to highlight. Repurchase agreements and credit facilities decreased by approximately $81 million due to the transfer of certain assets into our second CLO vehicle in January, which also accounts for the increase in CLO debt of $177 million and CDO debt decreased approximately $62 million from last quarter due to our fourth- and first-quarter CDO runoff which was used to pay down CDO debt in the first quarter. Additionally, total equity increased approximately $132 million this quarter, primarily due to our common and preferred stock offerings during the quarter.

Lastly our loan portfolio statistics as of March 31 show that about 69% of our portfolio was variable rate loans and 31% are fixed. By product type about 69% of bridge product, 18% junior participation, and 13% are mezzanine and preferred equity investments. By asset class 54% was multifamily, 27% was office, 7% hotel and hospitality, and 9% land. Our loan to value is around 78%, our weighted average median dollars outstanding was 48% and geographically we have around 32% of our portfolio concentrated in the New York City area.

That completes our prepared remarks for this morning. I'll now turn it back to the operator to take any questions you have at this time. Operator?

(Operator Instructions). Steve DeLaney, JMP Securities.

Thank you. Good morning, Ivan and Paul. So I'm glad you commented on the CMBS platform. I had noticed that April 12 article in the CMA. And it commented on some recent hires, but also referred back to some people you'd hired in February.

So, Ivan, would you briefly summarize the scope of that team, how many people? Are they all based in New York, or any of them regional lenders?

Sure. Most of the team is more of a corporate team that's based in the New York area, and we are building out a full and complete CMBS capability of originating and distributing loans. The real emphasis is that it's an expanded product line for our sales staff, and will create better relationships for our borrowers, the direct result for the REIT is to see greater bridge loan opportunities and different asset classes and reach a broader customer base and also create potential mezzanine and preferred equity investments.

So we are already starting to see the benefit of that additional production. And that's one of the reasons why we actually upped our estimates is because it's just starting to have a dynamic impact on our pipeline and product flow.

I thought that might be it, because you've been running about $100 million, and $90 million to $100 million, and then, I was going to ask you when they were going to start kicking in. But it sounds like you're starting to see some flow, or some potential flow.

I guess basically we'd given guidance to about $30 million a month in originations, so we've been stepping it up now going forward to approximately $50 million a month. And that's still just treading lightly, and watching our growth in a very steady way which we've been very deliberate about.

The other reason we upped our estimates for the year, and clearly on a run rate going forward as Ivan mentioned, we're going to get it hopefully to $50 million a month is, we did $100 million of product in March, we'd done $107 million in April, we are already at $207 million. And we are seeing it step up, so it is a byproduct of the fact that we've had a strong April with the capital we raised, and so we think that the $450 million to $500 million is a much better target for us. On a run rate hopefully it will be more than that going forward, but for this year that sounds right to us.

From a product standpoint, since they're going to broaden out a little bit, the bridge loan opportunities I clearly get that because they're going to be LIBOR floating loans, you're going to put those in your CLO structures. Now, if they're doing like fixed rate 10-year loans for CMBS sale, isn't that -- the B note off that wouldn't that generally also be a fixed rate loan and would you have to figure out a financing method where you applied swaps to those?

We may, but the yields may be so significantly higher that we wouldn't have to do that. We are thinking that the yields could be in the 12% to 15% range on an unlevered basis, and the spread in that is sufficient enough and the yield in that is sufficient enough and with some of the perpetuals that we have accessed in the market is pretty much a matched duration to what we are borrowing at, and what we will be lending it.

That's helpful, that makes sense. Then it's pricing more along the lines of just a mezz loan probably.

Pretty much so and the markets are still inefficient. So, being on the originations side and having the opportunity to price your B note or mezzanine note really puts you in a strategic advantage in an originating loan, also getting attractive yields.

Paul, one final thing for you. The $50 million annual run rate core FFO at March, I heard you say I know that's below loan loss provisions. What else --? Is there anything else that is not coming out of that $50 million like management incentive fees? How should we look at the $50 million?

That's right, Steve. The $50 million is core FFO run rate as of March going forward without loan loss reserves because that's not something we can easily predict, although we think they are legacy. And it doesn't include your operating expenses. (multiple speakers) you would have to look at the operating expenses from the prior year, maybe grow it a little bit, so if that was 27, 28 last year, if it's 29 or 30 this year whatever you think it's going, you net those two out and you say well, that's the net core FFO (multiple speakers) shares we have outstanding.

And I think when you do that, you'll still see a pretty strong number. Keep in mind we did raise a decent amount of capital in the first quarter so there was a little bit of drag for the quarter on that capital, but we went right to work immediately, and in April we did $107 million alone and we think we're going to deploy that capital very quickly and effectively to grow it going forward.

If you weren't fully deployed at the $50 million run rate, obviously in June we would expect that to be slightly higher with the $100 million additional loans.

Yes. (multiple speakers)

There is a little bit of a lag, between the time we raised the capital and put it out, there's -- it wasn't that big of a lag, it probably impacted us for about a month maybe. But we've been pretty effectively -- effective in terms of not raising the capital until we have a pipeline, and there is a little delay in getting that pipeline closed.

Understood. Thank you both for the comments and congrats on a great start to the year.

Stephen Laws, Deutsche Bank.

Good morning. Thanks for taking my questions. Appreciate the detailed prepared remarks, and I know Steve hit on a number of things in his questions. So, maybe two quick things. Can you talk about what you intend to do with the CDOs? They are in a situation where they are past their replenishment periods. Any chance you would call those, would you expect those to run down? Maybe on what the current CLO markets are, I know you hit on it a little bit, but any additional color there about how the CLO markets are today for new vehicles. The thoughts on that would be helpful.

As you know, we have three CDOs up, and there is a crossover point where they get delevered through runoff. And at that point in time we would call them when it was appropriate to do it economically. The benefit of those CLO -- CDO vehicles is that the liability costs are unbelievably low. And even though they have reduced and leveraged it is still very beneficial to have them in place.

The first one that would go away would be the first vehicle. We are not at that point today to call it. And it's something we evaluate on a continuous basis to see if calling it and re-leveraging those assets would produce a better return. So depending on how the assets run off will dictate when that occurs. And that will be the crossover point to call those, relever those assets and free up some of the equity as those vehicles got delevered.

With respect to the CLO market now, clearly from CLO I in September to the one we did in January, there was an enormous improvement, not just in terms of our cost of funds, but also in terms of the flexibility in that vehicle. We are seeing significant improvement now in that market for an issue like ours, so if we had the collateral we would love to be able to create another one. Creating another one really gives us a critical mass in our liability structure and allows us to more effectively manage our business on a longer term basis, so we are very keen in looking at that.

What is very interesting to note is that although there have been a lot of different securities issues in the market, nobody really has issued a CLO like us, which is really deemed as a financing vehicle which is flexible. For whatever reason, we are one of the few issuers who have been able to figure out that market, A without collateral in our expertise. And B, actually get them done, and C, just as importantly, our investors are still clamoring for that kind of debt instrument. So we are very eager to return to that market, and we think that market, like the rest of the debt markets, has shown considerable tightening, and it would be real strategic and advantageous for us to get another one of those up as soon as we could.

Great, thanks for the color there. Could you maybe talk about -- you've utilized a number of different ways to raise additional capital equity offering, some others, and ATM. Can you talk about as you go forward, maybe what type of mix you would like to see in the capital stack as you look to raise additional capital to deploy into new investments?

I think that's a good question, and a lot of that will depend on what type of product and what type of pipeline we see in front of us. As we mentioned in our prepared remarks, we still think 75% of our product flow will be multifamily bridge. We are seeing some opportunities in the commercial side. We could start to see a few more mezz opportunities to have higher yields but are less leverageable. So a lot of that will depend on our mix of product and what the market is doing. We'd like to have a mix of common and preferred and other -- and securitization and other types of debt. That makes sense to our product flow.

Right now where the common stock is, it's taken a little bit of a hit over the last week or so. So, we look to maximize the equity offerings based on where we are trading, where our multiples are and what the opportunities are on the debt side as well as the preferred stock side. I think we'll just monitor this going forward, and when we feel we need capital and the common stock is not a good currency for us, we will look to the perpetual preferred or other types of markets that make sense that may be not as dilutive. And when we feel the common stock is a good currency for us we will look to access it there. Again, depending on our deal flow and our pipeline.

Great, thanks for taking my questions, appreciate the comments.

We have no further questions. (Operator Instructions).

Okay. If there are no further questions, thank you for your participation today and we look forward to our next call. Thank you.

Thank you, Mr. Kaufman, Mr. Elenio and Mr. Green. Your conference call now comes to an end. You may now disconnect, thank you very much for joining.