Arbor Realty Trust Inc (ABR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Arbor Realty Trust earnings conference call. My name is Derek and I'll be operator for today. (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, Derek, 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 March 31, 2014. 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, result 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 report. 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 significant recent accomplishments and talk about our business strategy and outlook for the remainder of 2014.

As I mentioned on our last call, 2014 will be a transition year for Arbor, one in which we will focus not just on achieving strong operating results for the current year. But more importantly on achieving some of our key operating objectives that will lay the foundation for strong and sustainable growth in our core earnings in 2015 and beyond. Along with setting up our balance sheet to have the appropriate liability structure that will insulate us from market volatility in future periods.

We are pleased with our operating results for the first quarter and, more importantly, in accomplishing some of our key objectives, which will have a positive impact for 2014 and beyond. The first of these accomplishments, and perhaps the most significant, is the closing of our third CLO earlier this week.

This vehicle contains $375 million of collateral with significantly improved features from our two previous deals including $68 million of additional capacity to fund future investments through a ramp up feature for 120 days, increase leverage to 75% and reduced pricing as well as a longer replenishment feature which allows us to substitute collateral for a period of 2.5 years.

A critical component of our business strategy continues to be to finance a substantial amount of our investments with nonrecourse, non-mark-to-market, match funded debt allowing us to effectively operate in all environments.

The closing of this transaction marks our third CLO execution in an 18-month period and now have three CLO vehicles in place with $[760] million of collateral, $546 million of leverage and the ability to substitute collateral through a replenishment feature in all three of these vehicles which we believe provides us with a very stable funding source for the next few years and will result in increased leverage returns on our invested capital.

We are extremely pleased with our success in this area and in our ability to continue to be a leader in the commercial mortgage REIT securitization market, which we believe is directly attributable to the depth and experience of our securitization team and our strong reputation in the market as an originator of quality collateral.

These CLO vehicles have also provided us with greater access to additional short-term credit facilities with lower pricing. As a result, we are able to increase the capacity in our warehouse facilities by approximately $70 million since year-end and continue to reduce our interest rates cost in these facilities.

The closing of our third CLO also allows us to empty out a significant portion of our warehousing lines resulting in approximately 95% of our debt stacked currently in match funded, nonrecourse vehicles which are not subject to mark-to-market provisions, including the trust preferreds and preferred stock issuances as equity.

This also now provides us with approximately $205 million of financing capacity which, combined with a $68 million ramp up feature as well as our cash on hand, expected runoff and access to capital, will allow us to fund our future investment opportunities and continue to pool collateral for additional securitizations when available and continue to deliver mid-teens returns on our capital.

Our second significant accomplishment during the first quarter was our continued ability to successfully access the equity markets, issuing our third perpetual stock offering in the last 12 months, raising $22 million of fresh capital in February. We also raised an additional $6.5 million of capital in the first quarter through the issuance of a portion of the shares available from our at-the-market offering.

Continued access to capital is crucial for us to grow, continue to grow our platform and we are very pleased with our success in this area and in our ability to deploy our capital into accretive investment opportunities and generate mid-teen leverage returns by appropriately leveraging these assets with low-cost, nonrecourse, CLO debt with replenishment rights.

And given where our stock price is currently trading, we remain very sensitive to dilution and strategic in our approach to new capital issuances focusing on both the type of instrument and the opportunistic investment opportunities available from our growing pipeline when determining both timing and size of our future equity raises.

Additionally, we continued to delever our legacy CDO vehicles with approximately $225 million of runoff in the first quarter, $165 million of which was in our legacy CDOs. It is very difficult to accurately predict what our runoff will be for 2014, although we expect it to be in excess of our 2013 runoff. We also expect the majority of this runoff to take place in the first two quarters with a sizable portion of it occurring in our legacy CDO vehicles.

As we have mentioned on our last few calls, these vehicles have been substantially delevered already and any additional runoff will continue to temporarily reduce our margins for 2014 until these vehicles are completely delevered. Therefore our goal is to fully delever a number of our nonrecourse debt vehicles by the end of 2014 or early 2015, which will significantly increase our future earnings.

Another major accomplishment in the first quarter is the tremendous success we had in increasing our origination volume, allowing us to replace our runoff and grow our investment portfolio. We have also remained extremely disciplined in our lending approach focusing on predominantly whole loans in the multi-family space, which is an area we have a tremendous amount of expertise in.

This approach allows us to invest in the appropriate part of the capital structure, generating strong risk-adjusted returns and demonstrates the strength of our origination platform and franchise value. We originated approximately $275 million alone from the first quarter with an average yield of approximately 6.9% and generated mid-teens leveraged returns on these investments as a result of financing a bulk of them in our new CLO vehicle.

For the month of April, we originated approximately $60 million of loans with an average yield of 7.7% and incurred approximately $100 million of runoff. As we discussed on our last call, based on the continued growth in our pipeline we estimate total originations to be around $700 million to $750 million for 2014.

We do expect 2014 origination volume to be more heavily weighted in the first two quarters as a result of higher expected runoff in these quarters, as well as our overall view that the market will become more competitive throughout the year resulting in potential further yield compression on new originations.

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 we continue to see improvements in the commercial real estate market and increases in asset values, especially in the multi-family sector.

Over the last year and a half, significant amounts of capital have entered this space which continues to make the market more competitive. As I mentioned earlier, we do expect this trend to continue which could result in further yield compression. Again, multi-family lending remains our primary focus and is an asset class we have a tremendous amount of experience in.

We do 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 consistent pipeline of multi-family bridge loan opportunities through its top Fannie Mae and FHA platform. As a result, deal flow is up significantly, which has grown our pipeline substantially.

As I mentioned earlier, we are very confident in our ability to continue to generate strong, levered returns on our investments by financing them with our nonrecourse CLO vehicles, allowing us to increase our core earnings over time.

Looking at the credit status of our portfolio in the first quarter, we recorded $1.3 million of loan loss reserves impairment charges related to two assets in our portfolio and recorded $900,000 in recoveries of previously recorded reserves.

And while it is possible we can have some additional write-downs in our portfolio on our legacy assets, we believe that substantially all our legacy issues are behind us and remain optimistic that any potential remaining issues will be minimal.

We also feel that we can continue to have future recoveries on our assets in gains from debt repurchase to offset any potential additional losses. Although the timing of any potential losses, recovering gains on a quarterly basis is not something we can predict or control.

In summary, we are extremely pleased with our first-quarter results and recent accomplishments and will remain very focused on achieving our key objectives going forward.

These objectives include: continued access to the nonrecourse securitization market; delevering and replacing a significant amount of our legacy, nonrecourse debt vehicles; continuing to grow our originations platforms while preserving the strong credit quality of our investments; and further accessing the equity markets, remaining very sensitive to dilution and strategic in our approach to new capital issuances.

We are confident that we be able to achieve these objectives while maintaining our earnings and dividends for 2014. More importantly, this will position us favorably to achieve our long-term goal of increasing our earnings for 2015 and beyond, resulting in increased value to our shareholders.

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 first quarter was approximately $8 million or $0.16 per share and GAAP net income was $5.9 million or $0.12 per share for the first quarter. This translates into an annualized FFO return for the quarter on average common equity of approximately 8.5% and an FFO return on average adjusted common equity of approximately 7%.

As Ivan mentioned, we recorded $1.3 million in loan loss reserves and impairment charges related to two assets in our portfolio and had $900,000 in recovery of previously recorded reserves during the first quarter. And on March 31, 2014 we had approximately $117 million of loan loss reserves on 14 loans in our portfolio with a UPB of around $201 million.

On March 31, our book value per common share was $7.55 and our adjusted book value per common share was $9.15 adding back deferred gains and temporary losses on our swaps.

Looking at the rest the results for the quarter, the average balance in our core investments decreased to approximately $1.62 billion for the first quarter from approximately $1.76 billion for the fourth quarter despite originations exceeding runoff in the first quarter due to the timing of the runoff occurring early versus the originations occurring later in the quarter.

The yields for the first quarter on these core investments was around 6.23% compared to 5.86% for the fourth quarter. This increase in yield was primarily due to acceleration of fees on some of our first-quarter runoff which exceeded the acceleration of fees in the fourth quarter.

And the weighted average all-in yield on our portfolio also increased to around 5.79% at March 31, 2014 Compared to around 5.69% at December 31, 2013 due to first-quarter originations having a slightly higher yield than the first-quarter runoff.

The average balance in our debt facilities also decreased to approximately $1.17 billion for the first quarter from approximately $1.26 billion for the fourth quarter, primarily due to our first- and fourth-quarter runoff in our legacy CDO vehicles, the proceeds of which are used to pay down CDO debt. Partially offset by temporary increases in our short-term financing facilities as we pooled collateral for our third CLO which closed earlier this week.

The average cost of funds in our debt facilities increased to approximately 3.68% for the first quarter compared to 3.28% for the fourth quarter, largely due to runoff in our CDO vehicles which is used to pay down lower cost CDO debt.

Additionally, our estimated all-in debt cost increased to approximately 3.52% at March 31, 2014 compared to around 3.34% at December 31, 2013, again primarily due to paying down our lower cost CDO debt with the proceeds from runoff in these vehicles.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense, our average cost of funds for the first quarter would be approximately 3.97% compared to 3.53% for the fourth quarter. And our estimated debt cost would be 3.86% at March 31, 2014 compared to 3.60% at December 31, 2013 primarily due to the issuance of our third perpetual stock offering in the first quarter.

So overall, net interest spreads in our core assets on a GAAP basis was relatively flat at approximately 2.55% this quarter compared to approximately 2.57% last quarter. Including the preferred stock dividends as debt cost, our net interest spreads decreased slightly to approximately 2.26% for the first quarter compared to approximately 2.32% for the fourth quarter. And our net interest spread run rate is now approximately $49.5 million annually at March 31, 2014.

Other income increased $300,000 compared to last quarter. The increase was mainly due to gains from the sale of certain of our RMBS securities. As we mentioned in our press release, we have sold substantially all of our remaining RMBS securities in the first quarter which will result in other income related to securities being immaterial going forward.

The NOI related to our REO assets increased $2.7 million compared to last quarter due to the seasonal nature of income related to our portfolio of hotels that we own. We believe these REO assets should produce NOI before depreciation and other non-cash adjustments of approximately $3.5 million for 2014, the bulk of which will be recognized in the first two quarters.

This projected income combined with approximately $49.5 million of net interest spread in our loan and investment portfolio gives us approximately $53 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, 2014.

And as Ivan mentioned, we are experiencing accelerated runoff in our legacy CDO vehicle, the bulk of which appears to be occurring in the 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 efficiency from replacing these legacy vehicles which should allow us to maintain our earnings base in 2014 and increase our earnings run rate going into 2015.

Operating expenses were relatively flat compared to last quarter. As I mentioned in our proxy, we are expecting to grant approximately 300,000 shares of restricted stock to our directors, employees and employees of our manager in the second quarter, divested portion of which will be reflected as a non-cash expense in the second quarter.

Next, our average leverage ratios on our core lending assets remain relatively flat compared to last quarter at approximately 62% including the trust preferred and professional preferred stock as equity. And our overall leverage ratio on a [spot] basis, including the trust preferreds and preferred stock as equity, was down slightly from approximately 1.9 to 1 at December 31 to 1.8 to 1 at March 31.

And after the closing of our third CLO this week, we now have approximately 95% of our debt stack in match funded, nonrecourse vehicles which are not subject to mark-to-market provisions, including the trust preferreds and preferred stock issuance as equity as result of moving a substantial amount of our collateral from our short-term warehouse lines into this vehicle.

There are some changes in the balance sheet compared to last quarter that I would like to highlight. Restricted cash increased by approximately $42 million primarily due to CDO runoff in the first quarter that was used to repay CDO debt in the second quarter. CDO debt also decreased by approximately $120 million compared to last quarter due to our fourth- and first-quarter CDO runoff that was used to repay CDO debt in the first quarter.

Additionally, available for sale securities decreased $35 million from the sale of substantially all RMBS securities during the quarter, as I mentioned earlier. Repurchase agreements increased approximately $89 million compared to last quarter due to leveraging our first-quarter originations that were pooled for our third CLO that closed earlier this week.

This transaction resulted in increased capacity in our warehouse lines upon the closing of the CLO. And equity increased approximately $30 million in the first quarter primarily due to the issuance of our third perpetual stock offering and the issuance of a portion of our common shares from our asset market program.

Lastly, our loan portfolio statistics as of March 31 show that about 70% of our portfolio is variable rate loans and 30% were fixed. Our product type: about 73% are bridge loans; 15% junior participation; and 12% mezzanine and preferred equity. By asset class: 66% are multi-family loans; 19% are office; 7% land; and 6% hospitality. Our loan to value is around 73% and geographically we have around 30% of our portfolio concentrated in New York City.

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

(Operator Instructions). Steve DeLaney, JMP Securities.

Thank you. Good morning, Ivan and Paul, and congrats on your recent 10th year anniversary as a public company.

Good morning Steve, thank you.

Yes. So obviously a huge sequential increase in loans. We usually think of the fourth quarter as being the busiest quarter of the year and the first quarter maybe a little light on originations. But you certainly bucked that trend. And then we also noticed the average loan size was way up. It was about $15 million in the first quarter compared to $8 million to $9 million.

So, my first question would be are there a couple of large, lumpy loans in there that we should make note of? Or is there simply -- is there any change in focus on larger loans? So, any color you could give us around both the increase in volume and the average size would be helpful.

I think Steve, it is Ivan, just in general as we return to the lending market quarter by quarter we keep increasing our loan sizes. And as we expand our credit facilities and we increase our capability in our securitization, that allows us to go after bigger loans. And that just was on a quarter-by-quarter basis until we got comfortable that the securitization market would be there. So that has a lot to do with it.

Okay.

We were focusing more on smaller loans, getting our systems processes and then getting ourselves into position for securitization. When we securitized the first two deals they were smaller deals and you can't have outsized loans. So the larger the deal, the larger loans that we can do. And the more vehicles that we have out, the more capable we have to do larger loans.

So it has to do with the growth of the platform and our business strategy and sustained discipline. And we have just gotten to the point where we can now do loans of a significant amount and utilize our vehicles which is part and parcel to our core strategy.

Okay, that is very helpful. And we did notice that the third deal, $375 million, was significant larger than the first two that were $260 million and $125 million respectively. One thought -- on your CLOs, you continue to be able to obtain replenishment periods and ramps.

It appears to me that Arbor is the only issuer, at least among the public commercial mortgage REITs, that is being able to obtain the kind of flexibility in the structures. Everyone else is using sort of a static pool approach. Is there something unique about the loans you're putting in that the AAA buyers are comparable with giving you that reinvestment period?

I think it speaks to the manager and the fact that we have successively managed our legacy deals very effectively. We maintain relationships with our investors. And we have a very, very good name in the market. And we have maintained those relationships with our investors.

So I think we are very unique in the ability to have these type of financing vehicles. And unlike other people, or other of our competitors who originate and securitize and have static facilities, we view these vehicles as financing vehicles, which gives us a tremendous competitive advantage in the market if there is a liquidity issue.

In addition, it allows us to also lower our warehousing cost with our line lenders because they know there is a takeout for these loans. So it has to do with the experience of the manager. And secondarily, the collateral which we traffic in the mostly multi-family, the Company has such a deep history of and the investors are comfortable with it.

So we are staying very disciplined, sticking to our knitting. But I also want you to note that in this last CLO we did have a small percentage of being able to put another asset class in there. So we continue to expand the terms to make it a better financing vehicle for the Company. But we are unique in this space to be able to have a vehicle like this.

It would definitely appear so. And lastly, Ivan, you mentioned in your prepared remarks that you expect in the second half of this year to see some increased competition. I am curious whether you are thinking that that will be new players coming into the space, new sources of capital. Or is it just pricing pressures as people are trying to just get bigger -- bigger in the space? Just sort of comment on where you see the biggest competition coming from for Arbor.

Right. I Think as you can see in the REIT space, there is a lot of capital being raised and there is pressure to put that money out. So there is definitely more liquidity within the existing players. There are some new players coming into the market. So, just based on the additional liquidity and some new players, we are seeing a lot of pressure.

We are very sensitized also to the fact that asset values continue to increase and that people are being a little bit -- they are going two ways, they are being a little bit more aggressive on loan terms and a little bit more aggressive on the credit quality.

So that is one of the reasons why we were a little bit more aggressive in the first quarter to build our portfolio, thinking that it would get a little bit too competitive in the third and fourth quarter. And we have been able to back off a little bit.

It makes a lot of sense. Well, thank you both for the comments and good quarter.

(Operator Instructions). Lee Cooperman, Omega Advisors.

Thank you and good morning. I'll leave the tough questions to Steve. He does a good job at asking good questions. And maybe I could ask you some easy ones.

It may be a difficult question actually to answer. But if you kind of look at the legacy CLO runoffs, coupled with the opportunity in a new CLO that you just priced, would you think the combination would allow us, A, to maintain the present dividend and sometime in 2015 raise the present dividend as the new CLO was employed? That would be question one.

And second, my favorite question is -- which book value do you guys believe in as large shareholders of the Company, the $9.15, the $7.55, or something in between?

Hey Paul, why don't you take a shot at that and I will comment afterwards.

Sure. Lee, I handle the first part of the question and then we will go to your favorite question. But certainly yes, we do feel that the combination of the runoff and the delevering we are seeing in these legacy CDO vehicles combined with the more favorable terms we are seeing now in our new CLO issuances, will allow us to definitely be able to delever these vehicles towards the end of year, maybe into early 2015, and hopefully replace them with more efficient vehicles. Which we think, as we said in our prepared remarks, will certainly set the stage for us to grow our earnings in 2015 and beyond on a more substantial pace.

As far as being able to maintain our dividend and our earnings, yes. We are very focused on that. We do believe that we are going to, despite the runoff in the legacy CDO vehicles, we still, as we said in our commentary, are expecting to grow the portfolio net during the year.

I think we have done a really good job of being good stewards of capital. Very sensitive to dilution and being able to raise the capital in order to continue to grow the portfolio despite the runoffs being trapped in the legacy CDO vehicles and continue to maintain that earning base and that dividend.

So we have every intention to maintain that earnings base for 2014 and that dividend. But really more importantly, really get these key objectives behind us and be able to set up 2015 and beyond to be very strong earnings years. And there is a couple of reasons for that.

One, not only being able to have more efficient vehicles in the new financing structures we are seeing. Two, when we are able to replace the legacy CDO vehicles, any future runoffs out of those legacy assets will hopefully be able to be redeployed through replenishment features we should be able to garner in the new vehicles.

And lastly, and I think very significantly, is we will have the burn off of those swaps that we have associated with those loans which is really hampering our net spreads with a higher interest cost. And that burn off of those swaps would be earlier than they normally would be if we are able to delever those vehicles and replace them.

As far as the second question, whether we think -- which is the right book value, certainly we think the $9.15 is the right value. As you are aware, there are two components that are driving the difference between book and adjusted book. And the one that has to deal with the value of the swaps keeps getting smaller and smaller each quarter as the swaps get closer to maturity. That number is down to $20 million. It was as high as $50 million or $60 million a couple of years back.

So we have a $20 million item that just naturally over the next two to three years will accrete back into equity as the swaps get closer to maturity and it has been doing that each quarter. This quarter was a $2 million pickup from equity from the change in value of the swaps that was positive.

The second is the 450 West transaction which we've talked extensively about. And the transaction, we believe that financing comes due in June. Obviously we don't completely control it, but we are going to work very hard to see if we can figure out a way that we can end up releasing our guarantee on that and booking that.

As you know, it doesn't have an economic benefit because we received the cash before, but that is a $1.16 per share. So if we can get that done that would really bridge the gap between book and adjusted book. And that is why we feel the adjusted book is the right number because we feel those items are -- have been monetized already for the most part and it is just a matter of booking an accounting adjustment here to get it back.

Got you. It sounds to me as though the question not only is the dividend safe, but if your business plan is effectuated that we're probably looking at dividend lump sometime during 2015?

Yes, we think by delevering these vehicles and putting new vehicles in place, and not having to deal with the runoff on the delevered older vehicles and some of the lower rates on the legacy that you will see a true increase in core earnings in 2015 as well as getting rid of the swaps.

It should be very significant and what would be really nice is that could go along very nicely with the issue that you mentioned on the adjusted book versus the real book. And the growth in the dividends could help us achieve growing our stock price trough our real book.

Good. I guess one last question I did not ask before. Is your special committee making any progress on the possibility of the private entity and the public entity being put together?

I don't believe the special committee has gotten back together yet. We just had a Board meeting this week. So I don't believe that discussion has begun on a special committee basis. But we will inform you as to when the appropriate time is.

Good. Thank you. You guys are doing a good job and I appreciate it. Thank you.

Thanks Lee.

At this time I am showing no further questions in queue. I would like to turn the call back over to Mr. Ivan Kaufman for any closing remarks.

Thanks to everybody for their participation. I am very, very pleased with our first quarter and the significant accomplishments we have made in order to meet our business plan for this year. Thank you, everybody. Have a nice day.

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