Arbor Realty Trust Inc (ABR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Arbor Realty Trust earnings conference call. My name is Denise 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 your host for today, Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Okay. Thank you, Denise. Good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust.

This morning we will discuss the results for the quarter and year ended December 31st, 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 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 how we closed out the year, touch on some of our more significant accomplishments, and then turn my focus to our business strategy and outlook going forward.

2013 was a tremendously successful year for us on many fronts and we are excited about the many opportunities we foresee for the future. We finished 2013 with total return to shareholders of approximately 20%, including appreciation on our stock price and dividends and we are very successful in accessing the capital markets and increasing our originations during the year. We raised approximately $200 million of equity capital in 2013 through both common preferred stock offerings and were very successful in deploying this capital into accretive investments, allowing us to replace our runoff and grow our core dividends and earnings.

A major contributor to the success was also our ability to continue to add to our nonrecourse debt vehicles by closing on our second CLO with $260 million of collateral on deals of our first CLO that we closed in late 2012. We also were very pleased with our ability to improve our short-term funding sources in 2013 adding three new facilities totaling $123 million and increasing the capacity of our existing facilities by $30 million as well as reducing our pricing significantly in these vehicles.

These 2013 accomplishments have positioned us very favorably to continue to execute our business strategy of originating attractive investment opportunities through our deep originations platform and appropriately levering them with low-cost nonrecourse CLO debt with replenishment rights and continue to generate low to mid-teens levered returns on our capital.

Additionally, our pipeline continues to grow rapidly and we are very pleased with the investment opportunities we continue to see from our external managers expansive multi-family lending platform. As a result, we had another strong quarter originating approximately $164 million of loans in the fourth quarter with an average yield of approximately 6.7% and a levered return of approximately 13%. We finished 2013 with total originations of $592 million with levered returns of approximately 14%, replacing the nearly $400 million of runoff we experienced, $180 million of which occurred in the fourth quarter, resulting in approximately $200 million of growth in our investment portfolio during 2013.

For 2014, we believe we will be able to continue to increase our origination volume and grow our investment portfolio with estimated total originations of around $700 million to $750 million. It is very difficult to accurately predict what our runoff will be for 2014, although early indications are that we expect our 2014 runoff to be in excess of our 2013 runoff with the majority of the potential runoff occurring in the first two quarters of 2014.

Our origination volume thus far for the first quarter of 2014 is approximately $100 million with estimated leverage of returns of approximately 14% and we have experienced approximately $200 million of runoff in the first quarter to date, the bulk of which is now legacy CDO vehicles.

As we have mentioned in our last few calls, while the accelerated runoff we are experiencing in our legacy CDO vehicles will temporarily reduce our margins and available liquidity, it demonstrates the quality of our investment collateral and will ultimately result in accelerating the deleveraging of these vehicles, which should allow us to replace these financing vehicles sooner than expected and free up the equity capital invested to redeploy into high-yielding opportunities and improve our earnings in future periods.

As we have discussed in the past, a critical component of our business strategy continues to be to finance a substantial amount of our investments with nonrecourse debt through CLO vehicles, allowing us to match the terms of our assets with the terms of our liability without being subject to event risks. We have had a tremendous amount of success in this area and continue to be a leader in the commercial mortgage REIT securitization market. We currently have two CLO vehicles in place with $385 million of collateral, $265 million of leverage and the ability to substitute collateral to a replenishment feature in both vehicles. And we believe that our growing pipeline and current capital structure has positioned us very favorably to originate and continue to pool collateral for another securitization vehicle, which we believe will result in increased leverage returns on our invested capital and a stable funding source for the next few years.

We also believe that continued access to the nonrecourse securitization market has several significant long-term strategic competitive advantages, including allowing us to have permanent nonrecourse debt financing with the liability structure that matches our asset maturities without being subject to mark-to-market provisions as well as having greater access to additional shorter term credit facilities with lower pricing, allowing us to remain competitive on pricing in our investment to adjust when market yields tighten and still maintain similar effective yields.

And of course, if the market were to back up again and liquidity become scarce, we would greatly benefit from these debt structures by enabling us to maintain stable liability terms with low-cost debt while accessing -- while assets are priced less competitively, resulting in superior leverage returns.

Now what I would like is to update you on the view of the commercial real estate market and discuss their credit status of our portfolio. Overall, 2013 was a year of continued improvements in the commercial real estate market as significant amounts of capital entered the space and asset values increased. 2014 has started out similarly, and we continue to see signs of increased stabilization and more rapid growth, especially in the commercial multifamily lending arena. This is an asset class we have tremendous experience in and continues to be our primary focus.

As a result, deal flow was up significantly, which has grown our pipeline and increased our originations substantially. We also believe we are well-positioned and have a strong competitive advantage in the market by levering off of our manager who provides us with a strong consistent pipeline with multifamily [regional] opportunities to its top Fannie Mae, FHA platform with a strong national presence in the commercial lending area.

And I've mentioned earlier, we are very confident in our ability to continue to [improve] significant investment opportunities for us to grow our platform and increase our core earnings over time.

Looking at the credit status of our portfolio, in the fourth quarter we recorded $2 million of loan loss reserves and impairment charges related to two assets in our portfolio and recorded $785,000 in recoveries of our previously recorded reserves. Additionally 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 and our legacy assets, we remain optimistic that any potential remaining issues will be minimal and that we will continue to have future recoveries on our assets combined with potential gains from debt repurchase to offset any potential, additional losses.

However, the timing of any potential losses, recovery and gain on a quarterly basis is not something we can predict or control.

In summary, we are pleased with our 2013 accomplishments, especially in our ability to significantly grow our originations platform, and to pool our capital into accretive investment opportunities, replacing our runoff and continuing to grow our earnings and dividends through the continued success we have experienced in utilizing nonrecourse CLO vehicles and warehouse facilities to finance these investments.

We are also excited about the growth in our pipeline and in the investment opportunities we have seen to continue to grow our platform and earnings power going forward. And while 2014 will not be without its challenges, as the market has become more competitive and we are starting to see more runoff in our legacy CDO vehicles, we are confident that we will be able to utilize our deep originations network and nonrecourse securitization expertise to delever our legacy CDO vehicles, while maintaining our earnings and dividends for 2014 and, more importantly, position us favorably to increase our earnings in 2015.

We remain patient and disciplined in our approach and are very confident in our ability to achieve our goals and continue to increase the value for our shareholders over the long term.

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

Okay. Thank you, Ivan. As noted in the press release, FFO for the fourth quarter was approximately $6.3 million or $0.13 a share and FFO for 2013 was $25 million or $0.58 per share. AFFO was $28 million or $0.65 per share for 2013, adding back non-cash stock compensation and one-time expenses related to potential transaction [with our] external manager.

We also reported GAAP net income of $3.4 million or $0.07 per share for the fourth quarter and GAAP net income of $16.7 million, or $0.39 per share for 2013. And we ended 2013 with an AFFO return on average common equity of approximately 8.5%.

As Ivan mentioned, we recorded $2 million in loan-loss reserves and impairment charges related to two assets in our portfolio and had $785,000 in recoveries of previously recorded reserves during the fourth quarter. We finished 2013 with $7.5 million of loan loss reserves and impairment charges which was almost entirely offset by $7.2 million of gains and repurchases of some of our CDO debt and recoveries of previously recorded reserves during the year.

And at December 31, 2013, we had approximately $122 million of loan-loss reserves on 15 loans in our portfolio with a UPV of around $208 million. At December 31, our book value for common share was $7.53 and our adjusted book value for common share was $9.22, adding back deferred gains and temporary losses on our swaps.

Looking at the rest of the results for the quarter, the average balance in our core investments decreased to approximately $1.76 billion for the fourth quarter from approximately $1.81 billion for the third quarter due to our fourth-quarter runoffs, slightly outpacing our fourth-quarter originations. The yield for the fourth quarter on these core investments was around 5.86% compared to 5.62% for the third quarter.

This increase in yield was primarily due to higher yields in our third and fourth quarter originations, combined with the acceleration of fees on some of our early runoff in the fourth quarter. And the weighted average all-in yields on our portfolio also increased to around 5.69% at December 31, 2013, compared to around 5.59% at September 30, 2013.

The average balance on our debt facilities also decreased to approximate $1.26 billion for the fourth quarter from approximately $1.36 billion for the third quarter, primarily due to third- and fourth-quarter runoff in our legacy CDO vehicle, the proceeds of which are used to pay down CDO debt. The average cost of funds in our debt facilities increased to approximately 3.28% for the fourth quarter compared to 3.10% for the third quarter, largely due to run off in our CDO vehicle which is used to pay down lower cost CDO debt.

Additionally, our estimated all-in debt cost increased to approximately 3.34% in December 31, 2013, compared to around 3.14% at September 30, 2013, again primarily due to paying down our low-cost CDO debt with the proceeds from runoff in these vehicles.

If you were to include the dividends associated with our two perpetual preferred offerings of interest expense, our average cost of funds for the fourth quarter would be approximately 3.53% compared to 3.34% for the third quarter and our estimated debt cost would be 3.60% at December 31, 2013, compared to 3.39% at September 30, 2013.

So overall, net interest spreads on our core assets on a GAAP basis increased to approximately 2.57% this quarter compared to approximately 2.52% last quarter including the perpetual stock dividends of debt cost. Our net interest spread also increased to approximately 2.32% for the fourth quarter compared to approximately 2.28% for the third quarter and our net interest spread run rate is now approximately $51 million annually at December 31, 2013.

Other income, which primarily consists of net interest spreads on certain RMBS securities which are gains to the link transactions for accounting purposes as well as asset management in miscellaneous fees, increased $800,000 compared to last quarter. This increase was mainly due to a $750,000 reduction in the fair value of these securities during the third quarter due to change in interest rates and spread.

Additionally, as we mentioned in our press release, we have sold a majority of our remaining RMBS securities in the first quarter of 2013, for slightly more than the carrying value at December 31, 2013.

NOI related to our REO assets decreased $1.4 million compared to last quarter due to the seasonal nature of income related to a portfolio of hotels that we own. NOI for the full year of 2013 was $3.3 million and we believe these REO assets should produce NOI before depreciation and other non-cash adjustments of approximately $3.5 million annually going forward. This projected income combined with approximately $51 million of net interest spread on our loan investment portfolio gives us approximately $54 million to $55 million of annual estimated core FFO before potential loss reserve and operating expenses looking out 12 months based on our run rate at December 31st, 2013.

And as Ivan mentioned, we are experiencing accelerated runoff in our record legacy CDO vehicles lately, the bulk of which appears to be occurring in first half of 2014. This could result in temporary reductions in our earnings run rate, although we do expect our portfolio to experience overall net growth in 2014 and we are optimistic that we will be able to create efficiencies from replacing these legacy CDO vehicles, which should allow us to maintain our earnings base in 2014 and increase our earnings run rate going into 2015.

Operating expenses were down compared to last quarter, largely due to approximately $1.3 million in one-time expenses incurred during the third quarter related to a potential transaction with our external manager.

Next, our average leverage ratios in our core lending assets decreased to 62% this quarter compared to 66% last quarter, including the trust preferred and perpetual preferred stock as equity which mainly was due to our third- and fourth-quarter CDO runoff, which is used to pay down CDO debt. And our overall leverage ratio on a spot basis including the trust preferred and preferred stock as equity was relatively flat at approximately 2 to 1 at December 31 and September 30.

There are some changes in the balance sheet compared to last quarter that I would like to highlight. Restricted cash decreased by approximately $58 million, primarily due to CDO runoff in the third quarter that was used to repay CDO debt in the fourth quarter which, combined with some fourth-quarter CDO runoff used to repay CDO debt, also accounts for the $97 million decrease in CDO debt compared to the third quarter.

Lastly, our loan portfolio statistics as of December 31 showed that about 70% of our portfolio was variable-rate loans and 30% of fixed, our product type, about 71% for bridge, 15% junior participations, and 14% mezzanine and preferred equity. By asset class, 64% of our portfolio was multifamily; 22% was office; 7% land; and 4% hotel. Our loan-to-value was around 77% and, geographically, we have around 35% of our portfolio concentrated in New York City.

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

(Operator Instructions). Steve Delaney, JMP Securities.

Good morning. I apologize, I missed a good part of your prepared remarks, phone reception problems at Penn Station (inaudible) at the end. A couple of things. Paul, [FIN] noted that the average loan yield had a really nice bounce 4Q over 3Q, 5.86 to 5.62. Have you addressed that in your prepared remarks, the increase?

Sure, Steve, I did and I will repeat it. We did have a nice bounce in the average yield during the quarter as you mentioned and some of that was due to the third and fourth quarter originations obviously having higher yields in our overall portfolio yield because we still have some legacy assets that are obviously earning far less than what the current market is. But a good part of that bounce during the quarter had to do with when you do have unexpected runoff from time to time, you are able to accelerate the fees so you can get origination fees and exit fees on these loans and for accounting purposes you are spreading them over an effective yield over the life of the loan, when the loan pays off early, you clean that up and run back through your interest income. So that had a lot to do with the big bounce.

And as I pointed out you will see that because the spot rate going forward went up 10 basis points from 5.59 to 5.69 while the average went up 24 basis points so that 14 basis point differential is really the acceleration of fees. And that happens, and it will continue to happen when you have accelerated runoff.

Sounds like over the next couple of quarters we could see some boost to the yield from that one-time fee income?

Yes. I mean it certainly acts as a mitigant to some of the loans that are paying off in the legacy CDOs. So it allows us to have the additional income if we have a little bit of a loss in earnings during that period on some of the runoff. And if it comes from new CLOs, then it is really a nice pop to our earnings.

Yes, so, Steve, to your point, you are correct. It really depends both if the runoff is running off at maturity or running off early. So all your runoff going forward to maturity don't get that pop to yield, but if it is early, you do get that pop.

Understood. And, Paul, did you talk at all about the CLO market? And your last deal over a year ago, it would seem that with the volume of your originations running over $150 million a quarter that you certainly probably have enough collateral now to look at another deal.

Yes, well as we -- as I mentioned in my remarks, the CLO strategy is really fundamental to our business and there's very few weeks have been successful in the CLO market with the kind of securitizations we have been creating which have replenishment rights and substitutions and things of that nature. So we believe that this year will be a good year for us. We (technical difficulty) heavily with our investors. We have created a deep base and that's certainly within our purview to get a transaction done.

And those flexible structures obviously make a lot of sense for your rich lending strategies. Ivan, if you were to do something here. I think the last deal was LIBOR plus [235]. Would you expect -- has your funding costs of CLOs improved more than the loan pricing has suppressed or is it about the same? I am trying to get a sense of where we are today incrementally with the improvement in CLO [CVS] pricing if you are actually able to get the same levered ROE or maybe even slightly better than might have done on the first two transactions.

Yes, well, we think there would be an improvement clearly for us and there would be a benefit. The market on the CLO side and based on the depth of our investors we believe it would tighten considerably. While the market remains competitive on the origination side, I think that we have been able to maintain our spread somewhat so there would be somewhat of a pickup there.

Okay, thanks. One last quick thing. Can you give us any update on the timing of when you might be able to recognize the deferred revenue on 450 W. 33rd? Thanks for the time this morning.

Sure. It is a tough answer. We are obviously monitoring it. The loan we believe comes due in June. We don't know what the answer will be whether the loan will be refinanced, whether the loan will be paid off or cashed out. Obviously, we are very vested in that. If the loan was to be refinanced and we were -- if the loan were to be refinanced or paid off, we would lift our guarantee and be able to record that deferred gain which we think, obviously, would be significant for us. It would certainly bridge that gap very nicely between book value and adjusted book value.

But we don't control it. We are monitoring it. But we do believe that loan comes due in June. We will just have to see where that goes in June, whether it gets refinanced, pushed out or paid off.

Thanks for the time this morning and all the best in 2014.

Thank you.

Thank you.

(Operator Instructions). Lee Cooperman, Omega Advisors.

Like Steve, I missed the first part of the call, so I apologize if I ask a question that you addressed. But I have asked this question numerous times on past calls and I think the response has been that you think the adjusted book value which is now [$9.22] will ultimately be more indicative value and the GAAP book value of [$7.53]. So my question is would be consistent equity offerings and the one that was I guess announced this morning of about 7 million shares and if the shelf were an actual offering, what does each additional share sold at net to you of under $7.00 a share give you in the way of earning power? And I guess what I am really looking at is a question of return on capital versus cost of capital.

Seems it is very expensive capital given the belief that the business is worth closer to $9.00 and selling stock at less than $7.00 net of expenses. So I would like to know -- what do you do with that money?

And then the second question I mean what return you will earn on that money and will it accrete to the current distribution of $0.52 or detract from it? And secondly if you could discuss the status of the discussions of emerging the manager into the public entity?

Sure. 2013, we mentioned we raised about $200 million and we did access the perpetual market and given the yields that we are creating about 14% that was a very attractive way for us to be not dilutive to our book. And clearly going forward, we will be very sensitive to any book value dilution and look to access the perpetual markets where it is appropriate.

But also note that even with the equity raise that we did last year, we continue to grow our core earnings in our core dividend. So we were very successful at taking those funds and having a positive impact on the Company.

As you and I have previously discussed, having an active origination platform and access in the securitization market is fundamental to positioning us for future periods. In my comments I mentioned the discipline in our growth and our strategy is really core to building our franchise. So I think we are trying to juggle growing our core earnings, growing our platform and having the least impact on the dilution and we are very sensitized to that.

Paul, do you have any comments on that?

No. I think that is exactly our strategy. As you are aware when we do get accelerated legacy CDO runoff, there's a need for more liquidity than if it is not in the CDOs. It's in this CLOs, the warehouse. We can use that liquidity right away. So a lot will depend here, Lee, on where the runoff comes from, but we are certainly very sensitive to dilution.

We will look to see instruments like the perpetual deferred to continue to grow and certainly we will definitely monitor where our runoff is and where we think we can put that capital into accretive investment opportunities. As far as the 7 or 7.5 million shares that you mentioned today that you may have seen in our 10-K filing, that is not an offering. That is an aftermarket offering that we just put up.

We had one in place last year. We utilized it very effectively. It expired. We decided to put one up again. We will be very sensitive to dilution of common where our stock is trading, but it is a nice tool to have up, a nice tool in your toolbox, a nice instrument. You can raise capital when you need it effectively. You don't have to do it all at once. It is much cheaper. It is not an indication that we are using it right now, we just want to have it up and have it as an option for us.

Right now we will certainly look to stay away from common dilution and see if we can get something done in a different level of instrument like Ivan said, a perpetual preferred, but it is nice to have that up as an option.

And one of our core objectives is to figure out how to delever our CDOs which has a lot of trapped equity in it with kind of a low return and if we are successful in doing that (technical difficulty) lot of equity. And redeploy that into higher growth core earnings which will have a very positive impact on our dividend going forward.

So, that is what makes 2014 a little bit of a challenge. It is something that we feel we can accomplish, but that is also contemplated in part of our utilization of potential equity raises.

And second question, thank you for that. Second question regarding the status of the discussions reputting the manager into a public entity.

Those discussions have not been restarted yet. I believe that we may enter into some discussions with the Board. We do believe that the synergies between the two entities could have a very good result. So we will go back to the drawing board and examine whether or not there is a potential transaction that could be had that would be accretive to the Company.

All right, thank you. Good luck.

We have no further questions. I would now like to call back over to management for closing remarks. Please proceed.

Well, thank you, everybody, for your time this morning and, more importantly, your support in 2013 to help us achieve our goals. Look forward to our next call.

This concludes today's conference. You may now disconnect. Have a great day.