Arbor Realty Trust Inc (ABR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Arbor Realty Trust earnings conference call. My name is Lacey and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Paul Elenio, Chief Financial Officer. Please proceed.

Okay, thank you, Lacey, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we will discuss the results for the quarter ended June 30, 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, results of operations, plans and objectives.

These statements are based on our beliefs, assumptions and expectations of our future performance taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of today.

Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I will now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from the press release we issued this morning, we had a very strong second quarter on many fronts. Before Paul takes you through the financial results for the quarter, I would like to update you on the significant progress we continue to make in executing our business strategy and focus on our outlook for the remainder of 2014 and 2015.

As I mentioned on our last call, our focus for 2014 continues to be to achieve a number of key operating objectives in order to produce substantial earnings growth in 2015 and beyond while generating strong operating results for the current year. We also remain heavily focused on improving the right side of our balance sheet to enhance liability structure that will insulate us from market volatility in future periods.

We are very pleased with both our operating results for the second quarter and in the significant progress we have made in achieving several key objectives, which will not only have a positive impact on 2014 but continue to build a strong foundation for substantial future growth and success.

As we discussed on the last call, we continue to improve our liability structures with the closing of our latest CLO vehicle in the second quarter. This transaction marks our third CLO execution in an 18-month period.

As we have mentioned several times, financing a substantial amount of our investments with nonrecourse, non-mark-to-market match funded debt remains a critical component of our business strategy which will allow us to operate efficiently in all environments.

We now have three CLO vehicles (technical difficulty) million of collateral, $546 million of leverage and the ability to substitute collateral for a replenishment feature and all three vehicles which we believe provides us with a very stable funding source for the next few years and result in increased leverage returns [on invested] capital.

We are extremely pleased with our success in this area and in our ability to continue to make substantial improvements with each new securitization including increased leverage in ramp-up capacity for future investments as well as reduced pricing and longer replenishment features.

We continue to cement ourselves as the 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.

The closing of our third CLO in the second quarter also allowed us to empty out a significant portion of our [warehouse] lines resulting in approximately $220 million of financing capacity and we now have approximately 92% 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 issuances as equity.

The $220 million of capacity in our lines combined with our roughly $110 million of cash available for reinvestment in our CLO vehicles, 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.

Another significant accomplishment during the second quarter was our ongoing ability to successfully access the capital markets to fund our growing pipeline of investment opportunities. We raised approximately $56 million of fresh capital through our first senior unsecured debt instrument which had a seven year life and an interest rate of 7 3/8.

We remain very sensitive to dilution and are strategic in our approach to capital issuances given where our stock price is currently trading. We are extremely pleased with our success in this area allowing us to fund our business with the most cost-effective and accretive form of capital.

We also continue to have tremendous success in growing our originations platform, allowing us to effectively replace our runoff with high yielding investments. We originated approximately $170 million of loans in the second quarter with an average yield of approximately 7.75% and generated mid-teens levered returns on these investments as a result of financing a bulk of them in our CLO vehicles.

This volume combined with the $275 million we originated in the first quarter puts our total originations for the first six months of the year at approximately $445 million. We also have a robust pipeline and now expect to be at the high end, or perhaps even slightly above, the range we guided for the last quarter of around $700 to $750 million of total originations for 2014.

We continue to remain extremely disciplined in our lending approach focusing mostly on multi-family whole loans allowing us to invest in the appropriate part of the capital stack and generate strong risk adjusted returns on our invested capital. As we have mentioned in previous calls, we continue to experience accelerated runoff in our portfolio, a fair amount which is in our legacy CDO vehicles.

We experienced approximately $246 million of runoff in the second quarter, $54 million of which was in our legacy CDO vehicles and have totaled approximately $473 million in runoff in the first six months of the year, $220 million related to our legacy CDO vehicles.

It is very difficult to actively predict what our runoff will be for the remainder of 2014, although we do expect some level of continued accelerated runoff in our portfolio. As we have discussed, the runoff in our legacy CDOs have temporarily reduced our margins as these vehicles continue to delever, therefore, our goal remains 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 item that was very significant for us in the second quarter was our ability to monetize and record a gain of approximately $8 million in one of our remaining equity kickers. This resulted from the sale of a 12.5% joint venture interest that's owned and operated a commercial property in Brooklyn New York for approximately $8 million in cash.

In the past garnering and enhancing the value of equity kickers was an important component of our business strategy and, although in the current lending environment these equity kickers are less frequent, this transaction demonstrates our ability to great significant off-balance-sheet value and substantial earnings from our legacy investments.

Additionally, as previously disclosed, we recognized a $58 million gain related to our interest in the 450 W. 33rd St. property in July. As we've discussed on several calls, we have had the gain deferred on our books for many years and was a significant component of our reported adjusted book value per share.

We are extremely pleased to have resolved this outstanding item, recording a significant gain in the third quarter and increasing our book value per share by $1.15 to $8.82. Currently we are trading at a significant discount to our book value, which is not in line with our peers and we feel that the resolution of the significant item should result in a trading price relative to our book value that is more in line with our peers.

In July we were also able to successfully negotiate a buyout of the outstanding warrants that were issued through Wachovia Bank as part of the 2009 debt restructuring. There were 1 million warrants outstanding with an average strike price of $4 per share. We agreed to purchase the outstanding warrants for a one-time cash payment of approximately $2.6 million, which reflects a stock price equivalent to $6.60 per share.

We are very pleased to have extinguished these warrants at a discount to our current stock price and at a substantial discount to both our book value and what we believe is true value of our franchise.

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 continues to show signs of steady improvement especially in the multi-family sector. Significant amounts of capital continue to enter the space resulting in increased competition in the market.

As I mentioned before, we do expect this trend to continue which would result in further yield compression. Again, we remain disciplined in our approach focusing mainly on multi-family lending which is an asset class in which we have a tremendous amount of experience.

We believe we are well-positioned and have a competitive advantage in the market by levering off of our manager who provides us with a consistent pipeline of multi-family bridge loan opportunities from its significant agency platform.

Therefore, despite the increased competitive landscape we feel confident that our pipeline of investment opportunities will continue to grow and are 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 second quarter we recorded a $4 million of loan-loss reserves related to three assets in our portfolio and recorded $4.8 million in recoveries of previously recorded reserves. This translates into net recoveries of previous reserves of approximately $900,000 for the quarter.

And while it is always possible we could have some additional write-downs in our portfolio going forward, we remain optimistic that any potential remaining issues will be minimal and that we could continue to have future recoveries on the assets on other gains 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 second-quarter operating results and the significant progress we've made over the last several months in achieving our overall objectives.

We will remain focused on continuing to achieve these goals which include: further enhancing our liability structures through continued access to nonrecourse securitization market; delevering and replacing a significant amount of our legacy nonrecourse debt vehicles; continuing to grow our origination platform and replace our runoff from further access to capital markets in the most efficient and accretive way to continue to grow our pipeline.

We are confident we will be able to achieve these objectives while maintaining our core earnings and dividends in 2014. And more importantly, achieve the ultimate long-term goal of positioning us favorably to grow our earnings in 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 second quarter was approximately $13.7 million or $0.27 per share and net income was $11.5 million or $0.23 per share. Adjusted FFO was approximately $14.9 million or $0.29 per share for the quarter adding back approximately $1.25 million of non-cash stock compensation expense.

As Ivan mentioned, we had a very successful quarter including significant profitability. During the quarter we recorded a gain and received $7.9 million in cash from the sale of one of our equity investments. And as we disclosed recently, we also successfully unwound a large [deferred] gain we had related to the 450 W. 33rd St. property in July resulting in the recognition of a $58.1 million GAAP gain that was recorded in our third-quarter financial statements.

As we have mentioned on many calls, this deferred gain was a significant component of our adjusted book value and the resolution of this item has increased our pro forma June 30 book value $1.15 to $8.82 per common share. And our adjusted book value is now $9.21 per common share adding back the temporary losses on our swaps.

As Ivan mentioned, we recorded $4 million in loan loss reserves related to three assets in our portfolio and had $4.8 million in recoveries of previously recorded reserves during the quarter, resulting in net recoveries of approximately $900,000 in the second quarter. And at June 30, 2014 we had approximately $115 million of loan loss reserves on 14 loans in our portfolio with a UPB of around $238 million.

Looking at the rest of the results for the quarter, the average balance in our core investments increased slightly to approximately $1.64 billion for the second quarter from approximately $1.62 billion for the first quarter, despite runoff exceeding originations for the second quarter primarily due to the timing of originations in runoff in the first quarter.

The yield for the first and second quarter on these core investments was flat at around 6.22% and the weighted average all in deal on our portfolio increased to around 5.93% at June 30 compared to around 5.79% at March 31 due to the second-quarter originations having a higher yield than the second-quarter runoff.

The average balance on our debt facilities also increased to approximately $1.21 billion for the second quarter from approximately $1.17 billion for the first quarter primarily due to the closing of our third CLO and senior unsecured notes in the second quarter, partially offset by runoff in our legacy CDO vehicle the proceeds of which are used to pay down CDO debt and the pay down of a significant amount of our warehouse be debt with the proceeds from our third CLO.

The average cost of funds in our debt facilities increased to approximately 3.73% for the second quarter compared to 3.68% for the first quarter largely due to runoff in our CDO vehicle combined with the issuance of our senior unsecured notes in the second quarter.

Additionally, our estimated all-in debt cost increased to approximately 3.75% at June 30 compared to around 3.52% at March 31, again primarily due to paying down our lower-cost CDO debt with the proceeds from runoff in these vehicles and the issuance of our senior unsecured notes.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense our average cost of funds for the second quarter would be approximately 4.06% compared to 3.97% for the first quarter. And our estimated debt cost would be 4.08% at June 30 compared to 3.86% at March 31, again primarily due to runoff in our CDO vehicles and the issuance of our senior unsecured notes.

So overall net interest spreads in our core assets on a GAAP basis decreased slightly from 2.55% last quarter to 2.49% this quarter, including the preferred stock dividends as debt cost, our net interest spreads decreased to approximately 2.16% for the second quarter compared to approximately 2.26% for the first quarter largely due to a temporary reduction in our margin from the impact of our legacy CDO runoff.

Other income decreased approximately $700,000 compared to last quarter due to the sale of all of the remaining RMBS securities in the first and second quarter and this will result in other income being immaterial going forward.

NOI related to our REO assets decreased approximately $700,000 compared to last quarter due to the seasonal nature of income related to a portfolio of hotels that we owned. We believe these REO assets should produce NOI before depreciation and other cash adjustments of approximately $3.5 million to $4 million for 2014 the bulk of which was recognized in the first two quarters.

This projected NOI, combined with the net interest spread on our loan and investment portfolio, gives us approximately $48 million of annual estimated core FFO before potential loss reserves and operating expenses based on our run rate at June 30 compared to approximately $53 million at March 31.

This decrease is due to a significant amount of the capital we raised in the second quarter from our senior unsecured notes and the ramp-up feature associated with our third CLO not being fully deployed as of June 30 as well as a temporary reduction our net interest margin from the accelerated runoff be we experienced in our legacy CDO vehicle.

As we have discussed before, although this accelerated runoff has temporarily reduced our earnings run rate, it continues to delever these vehicles which should allow us to execute our strategy of creating efficiencies from replacing our legacy CDO's resulting in increase in our earnings run rate in 2015.

Additionally, we do expect our portfolio to experience overall net growth in 2014 and this combined with the gain we recognized in the second quarter from the sale of one of our equity investments will allow us to achieve our goal of maintaining our earnings and dividends for 2014 and again grow our core earnings run rate in 2015 and beyond.

Operating expenses were relatively flat compared to last quarter other than a non-cash charge of $1.25 million in the second quarter related to the vested portion of restricted stock that was granted to our directors, employees and employees of our manager. This item was added back to our AFFO for the quarter which I discussed earlier.

Next our average leverage ratios and our core lending assets remained relatively flat at approximately 63% including the trust preferred and perpetual preferred stock as equity for the second quarter versus 62% for the first quarter. And our overall leverage ratio on a spot basis including the trust preferreds and preferred stock as equity was also flat at approximately 1.8 to 1 at both June 30 and March 31.

And after the closing of our third CLO in the second quarter we now have approximately 92% 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 a result of moving a substantial amount of the collateral from our short-term warehouse line 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 $60 million primarily due to the ramp-up feature associated with our most recent CLO combined with CDO runoff in the second quarter that was used to repay CDO debt in the third quarter.

CDO debt also decreased by approximately $86 million compared to last quarter due to our first-quarter CDO runoff that was used to repay CDO debt in the second quarter. Additionally, CLO debt and unsecured debt increased $281 million and $59 million respectively due to the issuance of our third CLO and first senior unsecured notes in the second quarter. And repurchase agreements decreased approximately $226 million compared to last quarter from us emptying out a significant portion of our warehouse line as a result of us closing our newest CLO vehicle.

Lastly our portfolio statistics as of June 30 showed that about 70% of the portfolio was variable rate loans and 30% are fixed. By product type about 73% of the portfolio are bridge loans, 15% junior participation and 12% mezzanine and preferred equity.

By asset class 67% was multi-family, 19% was office, 7% land and 4% hospitality. The loan-to-value is around 73% and geographically we have around 34% of our portfolio concentrated in New York City.

That's 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. Lacey.

(Operator Instructions). Steve DeLaney, JMP Securities.

Congrats on a very active -- another very active quarter towards your goals. I would like I guess -- one housekeeping thing, Paul, with respect to the pro forma book value that you gave us, I believe it was $8.82.

Correct.

And I understand that included the impact of West 33rd. Did you also factor in any accretion from the repurchase of the Wachovia warrants or was that not --?

No, we did not.

Okay.

We did not at that time, Steve. We just basically took the equity at June 30 and pro forma'd it just for that transaction and then divided all of the shares that were outstanding as of June 30.

Okay, got it. And I guess most importantly I totally get what you're talking about the runoff and the deleveraging and therefore the lower ROE on the capital that is trapped in the legacy CDOs. You guys did a great job I think on the fourth quarter call letting us know that was going to be part of the story in 2014.

I was just looking at your like total capitalization, if we take your equity and the new seven-year notes and we take the TruPS you have got about $700 million what I would call total investment capital. Give us just very roughly, Paul, like some sense of how much of the capital is currently trapped in these three legacy CDOs currently and sort of that timeframe of when might that number go from whatever it is today what is the timeframe to get that down to zero?

Yes, so, it is Ivan. How are you, John. So -- hi, Steve. So the concept of the trapped equity, and Paul will give you the numbers, is that when a loan currently pays off in the CDO -- in the legacy CDOs the impact of that is a direct loss of income, right, because you're losing the interest earning asset but you are keeping the debt.

So we are at the point now where the return on the equity in that vehicle is diminishing every day. So we are working now to delever those vehicles, we're going to try to get them done in the fourth quarter. And what will happen is we will continue to see further acceleration of runoff in those vehicles and refinancing of those assets. And then we will be able to put that equity back to work and get significantly higher returns.

So each and every day the equity in that vehicle is getting lower returns and we are at that crossover point. Paul, do you want to lay out how much is in there?

Sure. As Ivan mentioned, Steve, it does temporarily reduce the margins in the ROE, but it achieves the longer-term goal which is to continue to delever these vehicles and hopefully get them to a point at the end of 2014 or hopefully the latest, early 2015 where it makes sense to unwind them and replace them and we will get efficiencies from that.

Right now in the three CDO vehicles we have roughly $275 million to $300 million of equity tied up in those vehicles. And as far as when we'll be able to deploy that, that will certainly be determined greatly by how much additional accelerated runoff we see here and when we get to that point where it makes all the sense to replace these and terminate them.

Right now we continue to see accelerated runoff and we will see where it goes for the remainder of the year. As Ivan mentioned, when we do get runoff not only do you lose the interest on the asset because the cash is used to pay down debt, it also goes to pay down the senior bondholders, which is the lowest cost debt in the vehicle.

So that is why the ROE continues to decline in those vehicles, because not only are you not having access to that trapped cash, but it is going to pay down the lowest cost debt tranche in the vehicle until those tranches are repaid.

Yes. So our leverage is significantly below 50% at this point in the first two legacy vehicles and I think approximately at 50% in the third one and that is what we are wrestling with. And at the same time we are also dealing with adding new securitization vehicles which has a little bit of a cost too, because when you have a ramp up in those vehicles you are paying a cost on those without having the asset.

So we are really building the foundation to replace those vehicles at the same time having a duplicate cost of putting new vehicles in place and absorbing that. So that is kind of the foundational elements that we are putting in place.

Yes, and just to continue that point that Ivan just made. We put it in our prepared remarks, it's not a small point. Some of the reduction in margin during the quarter was a little artificially lower than it should have been because, as you know, we did close our third CLO in the second quarter, we did have our senior unsecured notes in the second quarter and we did have a ramp up in that third CLO.

Also the runoff during the quarter, so a lot of that cash wasn't fully deployed as of June 30, Steve. And also the runoff during the quarter, unlike the runoff in the first quarter, which was largely from our CDOs, in the second quarter we did have around $130 million of a runoff in our CLOs.

So that is why we mentioned in our prepared remarks there's about $110 million of cash that we're able to deploy that is sitting in our CLOs that is uninvested and we expect to deploy that cash rather quickly. We also mentioned that our pipeline is very strong and we do expect to see net growth in the portfolio and for the year.

So we realize that this issue is an issue that reduces our ROE. The strategies we put in place are to continue to grow our pipeline in originations to show net growth to be able to offset some of that, we did have that large equity kicker which helps. And then put us in a position to delever these vehicles later in the year that really grow 2015.

And to accelerate the deleveraging, do your structures have some kind of a cleanup [call] provision, that lets you kind of break the trust if it gets below 10% of the original principal balance? Or do you just have to wait for them to -- for all the senior notes to be fully paid off?

Yes, no. I will let Gene comment on that. Gene Kilgore, who heads our securitization area. So he is a little more technical than we are in terms of the ability to break them.

Yes, hi, Steve. Yes, we do have the ability to do that, Steve, basically at any point. I mean there is notice required of course for the note holders. But basically we have the ability to call all those legacy vehicles at any time.

Great, good to know. Okay, guys, well, thanks so much for the comments. I have taken up too much of your time. But like I say, congrats on -- you have made it clear what the objective was and the plan and I think with 40% of your total capital somewhat in a sub optimal situation I think the results are pretty remarkable. So congrats on that.

Thank you very much, Steve.

Jade Rahmani, KBW.

Just a follow up to the CDO question. I mean do you think that the level of pay downs you experienced in the first half is a sustainable run rate or should decline? Because to get some portfolio growth I think it would assume a moderation.

Yes, that is a good question, Jade, and it is very tough to predict, as we put in our prepared remarks, what runoff would be going forward with the amount of capital we are seeing enter the space, the amount of refi capability some of these borrowers and investors have.

But we do believe that the runoff will taper down a little bit here in the third and fourth quarter combined with the fact that we do think we are going to have a pretty strong originations third quarter, which we tried to guide to with the robust pipeline.

So you are right, we do expect our originations to be at the high end if not exceed the range we guided to last quarter. And we do expect the runoff to taper a little bit here in the third and fourth quarter, which will result, we believe, in net portfolio growth.

However, we don't have a crystal ball on what the runoff will be, that is our best guess at this point. And of course origination volume could be higher or lower depending on what we see as market opportunities as well.

Yes, I think that due to the liquidity in the market and the return of the CMBS market we were quite surprised at some of the payoffs, that they were done that early. At this point in time accelerated runoffs as we delever these facilities is at a point in time beneficial to us.

So we are at that crossover point and I believe in the fourth quarter, if there is accelerated runoff, that actually works to our benefit once these facilities are delevered, so it won't impact us negatively at that point going forward.

Okay. Regarding the CLO runoff, what was that attributable to and what kind of prepayment rate does that imply?

So I guess the nature of our assets and our CLO vehicles are short-term in duration, they are generally 24 to 36 months. I think once again due to the performance on a lot of these assets being far greater than even the owners expected or we expected and liquidity in the markets, these assets, which were transitional, just got ready for permanent financing that much quicker.

So I think that is good news for us because it really reflects on the quality of our assets. And what is also good news is our facilities are set up with replenishment features so when loans pay off we just replenish them with new ones. On the other side of it, we continue to effectively generate new multi-family loans that we put into these vehicles and our pipeline is very strong.

So that is just part of our business operations, we are pretty comfortable with that. And it is a typical story with a lender, they're always nervous when the loan is put on because the initial part is at risk. But when they get paid off they are sorry to see it go. On the other hand, our business model is set up for that and our vehicles are set up for that.

Okay. Can you discuss the competitive environment and also if you believe yields are likely to compress and volumes pull back? Maybe -- I mean, the third quarter sounds like you are expecting it to be strong, but maybe have your views on the competitive outlook changed?

Well, our third quarter in the loans in our pipeline that are closing, we are pretty comfortable with the yields that are set and it is pretty remarkable considering that there is yield compression that we've been able to maintain the yields on our assets.

We expect there to be further yield compression, more competition and given our level of volume, given our manageability to originate these loans, we are a little bit insulated on it, we are still able to win deals and on the margin not have to compete to the same level.

One of the benefits that we have in the space that we are in, in the smaller loans borrowers are not as sensitive to yield as they are in a larger loan. So we have carved out a nice niche to have a little bit of insulation from that yield compression.

On the flip side of that we're expecting our liability costs to go down, press our warehousing lenders and hopefully get off another securitization that will be even tighter. So we will try and offset some of that.

But the volume that we have in our pipeline and on our expected closings are somewhat consistent with the prior quarter, not that much different. But we are expected to see further yield compression within the market.

Okay. Regarding the types of loans you are originating, I think the average loan balance declined to below $10 million. And I think last quarter it was around $13 million. Was there anything notable there?

Yes, Jade, it is Paul. We did have a few larger loans in the first quarter, as Ivan guided to on the last quarter call in response to a similar question. We are starting to be able to, with the securitization vehicles we have and the expertise, play in some of the larger loans.

And I think it is just coincidence, in the first quarter we did originate a few larger loans, in the second quarter our loan size was averaged about $8 million, so it was a little bit less. But we do have some larger loans in the pipeline as well.

So I think it is just timing. Our niche is small loans, but we do -- we have been able to effectively compete in some of the larger loans lately because of the size of the securitization vehicles we have and the expertise. But I just think the second quarter was it little bit of timing.

Okay. And just lastly on the REO portfolio, it sounds like you are expecting essentially breakeven earnings in the second half. I mean what is it about the portfolio that drives such steep seasonality?

It is a -- the main portfolio that deals with seasonality is a portfolio of resort hotels in Southern Florida. And so, those hotels are obviously a lot more active in the first quarter and a little bit into the second quarter. And as you get into the summer months they're not as active. Basically you have not as much activity and you are spending that time maintaining the hotel. And it is just the nature of having resort hotels in Southern Florida.

Unfortunately the accounting does not allow us to spread those earnings evenly over the year. So we deal with seasonality and the first two quarters are profitable and the second two quarters run a loss in that portfolio.

Great, thanks for taking the questions.

Richard Eckert, MLV & Company.

I just had a question about the timing of the originations. In the first quarter you indicated that you expected them to decelerate in the second half of the year. But it looks like now, just given the pattern from the first two quarters, that you're actually, at least in the third quarter, expecting an increase in originations. Can you just give us some kind of guidance as to what the pattern is that you expect at this time? And we won't necessarily hold you to it.

Sure. Well, we don't always have control over when our pipeline closes. And we actually expected the second quarter to be a little higher, but one of our larger multi-family loan packages, I think about an $80 million deal, is actually slated to close probably today or Monday.

So that is a little bit of the shift that would've occurred in the second quarter and would've been more true to form with our comments. So that one loan probably will -- has impacted that comment only because it was a little slow to get closed.

But it was our objective to accelerate our originations because we thought it would become more competitive in the second half. So we effectively did it, we just got dragged down by one loan to not actually be true to that statement but pretty much true to the business strategy.

Within the second half I think that, depending on our runoff and depending on the opportunities that we see, we may have the opportunity to have greater net growth in our portfolio if we are seeing the right opportunities. So that will just depend on the opportunities that come in the door. And that is why in my prepared remarks I commented that we will probably exceed the prior range that we set up.

We are a little surprised with our ability to win certain deals without having to dip into the same competitive arena as everybody else just based on a network of relationships that we have. So hopefully we can show a little bit more, but we don't want to guide to it because the market can get that much more competitive. And we are just cautious on how we proceed.

Fair enough. Thank you very much.

(Operator Instructions). And at this time I show that we have no further questions. I would like to turn the call back to Paul Elenio, Chief Financial Officer, for closing remarks.

Okay, everybody, thank you for listening in on the call. We are very pleased with our progress for the second quarter in achieving lots of the key objectives we have laid out and also keeping an eye on being able to sustain our earnings and dividends for 2014. And we look forward to speaking to you again next quarter. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.