Arbor Realty Trust Inc (ABR) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arbor Realty Trust Third Quarter Earnings Conference Call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Paul Elenio, Chief Financial Officer. You may begin.

Okay, thank you, Vicky, 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 September 30, 2015. 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'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks for everyone, for joining us on today's call. As you can see from this morning's press release, we had another very successful quarter. We produced strong operating results and continue to effectively execute our business strategy. Before Paul takes you through the financial results, I would like to reflect on our significant accomplishments and focus on our outlook for the remainder of 2015, and for 2016.

As we discussed on our last call, we completed our primary goal for 2015 of de-levering all of our remaining legacy securitization vehicles earlier than expected, which has again allowed us to substantially reduce our debt costs, gain access to the capital that was trapped in these vehicles to deploy into new investment opportunities, and grow our core earnings run rate. We also continue to focus heavily on issuing new and enhanced, non-recourse financing structures. We have experienced tremendous success in this area, and continue to be a market leader in the CLO securitization arena.

In the third quarter, we issued a new CLO with $350 million of collateral, including a $47 million ramp-up feature to fund future loans and investments. The CLO contains significant improvements from our last securitization, including increased leverage to 77%, a longer-replenishment period as well as a continued ability to finance non-multi-family assets. This is our fifth securitization vehicle since the financial crisis, and each one of these securitizations we've cultivated a loyal and growing base of investors that highly value our strong transaction performers and our diverse platform.

We now have three CLOs in place with nearly $800 million of non-recourse debt, which represents almost 80% of our total financing. The success we have had in managing and improving our liability structure is a critical component of our business strategy, which has allowed us to appropriately match-fund our assets with non-recourse liabilities, and generate strong leverage returns on our capital. We also continue to focus heavily on growing our originations platform while remaining extremely disciplined in our lending approach, by investing in senior, multi-family loans. This has allowed us to successfully transition our portfolio to one which is comprised of 87% senior debt, with [73%] of that debt being multi-family assets, which clearly have proven to be the most resilient asset class and product type in all cycles.

And, with the significant approval we have made in our financing facilities, we are generating mid-teens returns on our capital in a very secure part of the capital stack. In fact, the levered returns we are producing in our senior debt are in excess of the returns that are being achieved by lenders in the subordinate areas of the capital structure.

In the third quarter, we originated $190 million of loans with an average yield of approximately 6%, and generated a level of returns of approximately 14% on these investments. We experienced approximately $146 million of runoff in the third quarter, resulting in approximately $44 million of net growth in our loan portfolio during the quarter. Additionally, the pipeline continues to grow at a rapid pace, and although it remains difficult to accurately predict our runoff due to continuing improving market conditions, now that we have successfully de-levered all of our legacy securitization vehicles, this runoff has substantially increased our cash available to re-invest into our new investment opportunities, which will allow us to continue to increase our earnings going forward.

As a result, we now have approximately $175 million of cash on hand, including $50 million of cash [in] immediately-deployable in our replenishable CLO vehicles, combined with approximately $325 million of capacity in our short-term credit facilities, to fund our investment opportunities. This will allow us to continue to grow our business without an immediate need for additional capital. We remain sensitive to dilution, given our stock price, and are very pleased with our strong liquidity position, allowing us to fund our future investments and increase our earnings without dilution.

Another significant accomplishment is our continued ability to leverage our unique platform and grow our franchise by consistently creating significant additional income streams, which has allowed us to generate earnings well in excess of our dividends. We continue to produce extremely-impressive results from the investment we made in the beginning of the year in the residential mortgage banking business. In the third quarter, we recorded $1.4 million of income, and for the nine months of the year generated $5.9 million of income, or $0.12 a share, in earnings from this investment, which is well in excess of our original projections. This translates into a return greater than 50% on our investment in this joint venture to date.

We also generated approximately $4 million of additional income, or $0.08 a share, during the third quarter, from an equity interest that was part of a preferred equity investment that was repaid earlier in the year. These earnings were a result of our portion of refinance proceeds above the prior existing debt, on various assets in the portfolio. Additionally, we do believe that we will continue to receive proceeds in a range of $250,000 to $500,000 quarterly from the operating performance of these assets on a go-forward basis.

These tremendous results continue to demonstrate our unique ability to create significant additional earnings through new business ventures and from structured transactions which we view as an important part of our franchise, and an additional means of diversifying our income streams and adding to our earnings capabilities.

In summary, we are extremely pleased to have successfully completed all of our 2015 goals and objectives ahead of schedule, and with great results, which took a tremendous amount of discipline, patience and skill. These significant accomplishments included de-leveraging our legacy securitization vehicles, substantially reducing our debt cost, and un-trapping the cash in these vehicles to redeploy into higher-yielding investments; issuing new and improved non-recourse financing structures, growing our originations platform while continuing to focus on multi-family senior loans generating superior levered returns; significantly increasing our liquidity position; and reducing our low interest legacy portfolio, which was decreasing and dragging our earnings; the substantial contribution to our core earnings from our residential investments and from our structured transactions; and the 15% increase in our dividend over last year; and our ability to produce significant earnings above our dividend.

We believe that successful execution of the business strategy in 2015 has positioned us extremely well in the market to produce continued growth and success in the future, while allowing us to increase our earnings and dividends over time. Now with our stock trading at 70% of book value, combined with our strong dividend, we believe we are a very attractive value for potential investors.

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

Okay, thank you, Ivan. As noted in the press release, net income for the third quarter was $15.3 million, or $0.30 per share, and AFFO was $17.1 million, or $0.34 per share, adding back depreciation expense and non-cash stock compensation expense. We successfully de-levered our last legacy CDO vehicle during the quarter, resulting in recording net non-cash income of approximately $7.7 million. AFFO without this item, as well as roughly $1.1 million in professional fees incurred during the third quarter, related to the potential acquisition of our manager's agency platform, was $10.5 million, or $0.21 per share, which resulted in an annualized return on average common equity of approximately 9% for the quarter.

As Ivan mentioned, during the third quarter, we continued to generate significant additional income streams, recording $1.4 million of income from our residential mortgage business joint venture, and $4 million of net income from one of our equity interests, $5 million of which was recorded as income from equity affiliates, which was partially reduced by $1 million of expenses related to this transaction that we're recording in operating expenses.

This has resulted in AFFO of approximately $37 million, or $0.72 per share for the nine months ended September 30, excluding the non-cash income we recorded from the de-levering of our legacy securitization vehicles during the year, as well as the professional fees related to the potential acquisition, which the $0.72 is well-ahead of our dividend of $0.45 per share for the first three quarters and translates into a 10.6% annualized return on average common equity to date.

Looking at the rest of the results for the quarter, the average balance in our core investments was down to $1.53 billion for the third quarter, from $1.62 billion for the second quarter, mainly due to the full effect of runoff outpacing our originations in the second quarter. The yield on these core investments increased to 6.68% for the third quarter, from 6.46% for the second quarter, largely due to the collection of unaccrued interest in the third quarter exceeding accelerated fees from early runoff in the second quarter. And the weighted average all-in yield on our portfolio was up slightly, to around 6.31% at September 30, compared to around 6.28% at June 30.

The average balance on our debt facilities was also down to approximately $1.14 billion for the third quarter, from approximately $1.17 billion for the second quarter. The average cost of funds in our debt facilities increased to approximately 4.13% for the third quarter, compared to 4% for the second quarter, and our estimated all-in debt cost was up to approximately 3.94% at September 30, compared to around 3.86% at June 30, largely due to the de-levering of CDO III in the third quarter, which carried a lower cost of debt.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense, our average cost of funds would be approximately 4.39% for the third quarter, and approximately 4.31% for the second quarter, and our estimated all-in debt cost would be 4.27% at September 30 compared to 4.19% at June 30, again, mainly due to the de-levering of CDO III in the third quarter, which had a lower cost of funds.

Overall, net interest spreads in our poor assets on a GAAP basis increased to 2.55% this quarter, compared to 2.47% last quarter. Including the preferred stock dividends as debt costs, our average net interest spreads also increased to approximately 2.25% this quarter, from approximately 2.15% last quarter, largely due to other fees and interest in the third quarter exceeding fees from accelerated runoff in the second quarter. And, our overall spot net interest spread, including the preferred stock dividends as debt costs, decreased slightly from 2.09% at June 30 to 2.04% at September 30.

Our average leverage ratios in our core lending assets increased slightly, to approximately 63%, including the trust-preferreds and professional-preferred stock as equity for the third quarter, compared to 62% for the second quarter. And, our overall leverage ratio on a spot basis, including the trust-preferred and preferred stock as equity, was 1.4-to-1 at both September 30 and June 30.

NOI related to our REO assets was flat quarter-over-quarter, and we've generated approximately $4.5 million of NOI from these assets for the nine months ended September 30. We do expect a loss of approximately $100,000 to $200,000 from our REO assets in the fourth quarter, due to the seasonal nature of income related to a portfolio of hotels that we own, which produce substantially more income in the first half of the year. However, the projected NOI of approximately $4.3 million to $4.4 million for 2015 is above our initial expectations of $3.5 million to $4 million due to improved property performance form several of our REO assets.

We did have some changes to the right side of the balance sheet this quarter, including the issuance of a new CLO, increasing our CLO debt by $268 million, and a reduction in our short-term debt by approximately $200 million, largely due to moving certain assets into our new CLO vehicle. Additionally, CDO debt was reduced to zero, due to successfully de-levering our last legacy CDO vehicle in the third quarter. As Ivan mentioned earlier, we now have three non-recourse replenishable CLOs with $768 million of debt, representing 78% of our total debt stack at September 30.

Lastly, as Ivan mentioned, we continue to focus heavily on multi-family senior loans, and as a result, we have transitioned our portfolio to one that contains 87% bridge loans and 70% multi-family assets at September 30, as compared to 73% bridge and 67% multi-family at the same time last year. This is a significant accomplishment, and again, with the improvements we have made in our financing facilities, we were able to generate mid-teens returns on our capital in a very secure part of the capital stack. Additionally, our loan-to-value was around 76%, and geographically we have around 29% 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. Vicky?

(Operator instructions) Our first question comes from the line of Steve Delaney with Steve Delaney with JMP Securities. Your line is now open.

Good morning, and thanks for taking the question. It seems like it's getting routine, but I've got to congratulate you on another earnings beat, this quarter as well. So, great job. Ivan, the preferred equity gain, looking at the Q we see that's in the Lexford portfolio. Could you tell us what type of properties are in that portfolio?

Yes, those are multi-family properties, a very large portfolio that we had a preferred equity investment in, pre-crisis. We successfully took all of that portfolio, raised additional capital, retired the additional capital we raised, as well as the preferred equity investment. And the properties are operating in a very healthy way.

Great, so you did a -- you were able to refinance it and pull some equity out? It sounds like?

Well, for part of it, that's correct.

Part of it. Now, would you describe those properties as fully-stabilized, or is there still some work to do to improve NOI there?

I think they're fairly stable.

Okay.

There's still a little [bit room left] through good management and structuring and financing, but we're pretty content with the job that we've done, and is -- perhaps a little bit more through restructuring to get some more out of it.

Okay. And I know the -- you know, we've talked before about equity kickers, and how the market has changed. Are there any remaining preferred equity interests that you would consider to be material, in some of the pre-crisis loan portfolio?

Paul, you want to comment on that?

Yes, Steve, it's a good question. I don't see anything in the portfolio right now that stands out that could produce significant results, but I think I would say that we manage to -- however we do it, we manage to lever off this unique platform, and our franchise ability, and we always manage to find opportunities on these structured transactions to create additional earnings. And on this particular issue, this particular situation is, as Ivan laid out, we did say in our commentary that although the gain this quarter was largely due from refinance proceeds on several of the assets, and we did a great job on that, we are expecting this to be somewhat of an annuity going forward, of anywhere from $250,000 to $500,000 a quarter. And that's because the performance of the assets has improved, and where our equity interest lies in the waterfall, we are expecting to get some additional proceeds going forward each quarter, which in our mind is like another annuity, another form of income.

Having said that, looking at the portfolio I don't see anything that stands out in addition to the items we've mentioned, but again, we continue to find ways to generate additional value from our legacy assets.

All right, well, thank you. Thank you for that color. Now, on CLO V, we did note the three-year replenishment, Ivan did highlight that. To your knowledge, is this the first CLO that's been done with a three-year, rather than a two-year, replenishment period?

Well, first off, most of the securitization is being done under market, or not revolving, and (inaudible - multiple speakers) --

Static. Static pools, right, yes.

It's static. So, we're one of the few lenders who are able to have a replenishment feature. To my knowledge, this is the longest one that we've done, and I'm not sure there are others in the market that have this feature.

Ivan, do you think, was this unique to the particular collateral set, or do you think three years will become your standard structure going forward?

I think a lot depends on the market, and clearly, our investors have become really comfortable with us, our collateral, and the way we operate. So, each time that we do issue one, our investors get more and more comfortable with our performance, and our reporting, and how we manage things. So, the more they get comfortable, the better our performance, and I think the greater flexibility we should have given the market remains stable.

Okay, thank you, and one final thing from me, if I may. We had been told in the second quarter call, I think we talked about, you have the four Daytona hotels, and I think you announced that you had a PSA on one of the hotels, and I think we were looking for a fourth quarter, a possible sale and gain of maybe $1.5 million. Looks like from the Q, [Ben] found some information that suggested maybe there's been more activity. So, could you -- Paul, one of you, just give us an update on kind of the status of all of the Daytona hotels as it sits now?

Yes, Steve, no problem. So, yes we did, on our last quarter call, talk about that we had one of our Daytona assets in real estate held for sale because we had a PSA on it. We did expect that transaction to close early in the fourth quarter, and it has, and we had originally talked about, about a $1.5 million gain. I think we're expecting that gain, even though we're still finalizing the work, to be about $1.6 million.

In addition to that one asset, we managed to get a quick deal done on a second asset, and that was not listed as held for sale on the second quarter, was listed as held for sale in the third quarter, as we signed up the agreement early in the third quarter, and then we just closed on that deal literally I think yesterday or the day before, and we're expecting almost a $2 million, or $2.1 million, gain on that asset as well. So, we managed to liquidate two of the four remaining at the time we spoke last, Daytona properties at a nice gain, and we now have two left on our books that are still in real estate owned.

Great. Well, thank you, thank you, gentlemen, for the update there, and again, congratulations. Another great quarter. Thanks.

Thanks, Steve.

Our next question comes from the line of Jade Rahmani with KBW, your line is now open.

Good morning, and thanks for taking the questions. Just wanted to ask if you could give your perspective on recent market volatility, and what you think if anything, the market is signaling about perhaps the CRE cycle trajectory of underwriting standards, or anything else?

Sure. Clearly, there's been a lot of turmoil in the CMBS market, and that's a factor of the risk retention rules and some of the other rules, and Reg A, that's taking place, which I believe is going to have an impact on that market and the pricing of that market, and the credit standards on that market. Overall, in general, I think there is some concern that the market's a little frothy, and you're seeing a little bit of a tightening take place right now. And I?m not sure whether that's a factor of that, you know, a lot of the institutions have filled up their tank for the year and are gliding into the year-end, and being more choosy just because they're full, or whether there's a little bit of a change in terms of the credit culture. But, we're definitely seeing a little bit of a shift, and the box being a little tightened.

So, the first quarter should be quite interesting to see how the revised regulations on risk retention, you know, and the Reg A affects the CMBS market, and whether or not commercial loans will suffer some level of backup as the CMBS market becomes wider in terms of price. We'll see how that develops, and we'll see how the commercial banks and the other lenders adjust their credit when they have a new allocation of capital. So, we're watching and seeing, ourselves, we're fairly cautious. We're focused primarily, as we say, on the call and our portfolio reflects on the multi-family segment of the market, which is fairly stable. But even there, we've seen a good run-up in rents, and some cap rate compression. So, we are proceeding with caution, as well.

And just in terms of the opportunities that you know, on the bridge lending side, has this started to have any material impact on the pricing? Are you seeing also potential deals take longer to close, especially as they go into year-end, borrowers a little more nervous, and more interested in locking up financing, maybe even at a slightly higher spread than say a few months ago?

I think in the third quarter, in the early third quarter, things were a little slower. There's always a little bit of a rush. People doing some year-end transactions, and we actually had a little bit of a surge in our portfolio, our pipeline. But, I think there is a little bit more caution out there. You do have a lot of people doing a lot of tax-free exchanges from sales, and [doing it to] new sales, that's driving the market as well. And that has put -- you know, pushed volume up. So, you know, without a question, there has been cap rate compression. I think that the new regs don't affect the multi-family sector as it does the commercial sector, as the -- you know, Fannie Mae and Freddie Mac provide a lot of liquidity and consistency in the space.

Just touching to a disclosure in the 10-Q, can you give some color on the office building that I think was acquired through foreclosure?

Sure, Jade. It's Paul. So, we had a senior loan for a while that's been non-performing on an office property in the Pittsburgh area, that we've been watching that asset for a while. It's been non-performing, although we've been trapping cash in a lock box because we're the senior lender, and two things happened during the quarter. We've extended out that loan a few times, we came up on a maturity default, we liked the asset, we like where we are and our value, and we ended up taking that property back during the third quarter. Our basis in that asset is just under $6 million. It's an office property in Pittsburgh. We like where we are in the value a lot, and we've written down that loan, obviously, by $2.5 million, and now our basis is [$5.9 million]. We did manage to, in the -- in my prepared remarks, I mentioned we did manage to end up with some of the interest that was back-owed to us in the third quarter from the cash, so we recorded that in interest income. And we took back the asset, and we have it on the books at $5.9 million, and we like that property at that value.

In terms of the outlook, you know, do you have to put in dollars to stabilize the property, or is it performing in terms of occupancy level?

It is performing. Its occupancy is pretty strong. We may have to put a couple of dollars in to improve the property, from an appearance perspective and a performance, but we're not looking at the significant dollars, and we certainly -- any dollars we put in, we feel we're well undervalued where we own it right now. So, we're totally comfortable with that approach, and holding it, putting in some dollars, and getting it more stable, and getting its value up.

And then just on the prospect of potentially internalizing the manager or doing some kind of transaction, is this an active topic? Is it taken off the table? Why hasn't there been more movement on the topic, and perhaps it's to do with ABR's valuation? And then just the follow-on to that would be, if there was some kind of merger, would ABR be able to maintain lead status?

Okay, I'm going to answer that question. What we've disclosed is all we really can say, which is that we are in discussions, we continue to be in discussions. As I mentioned in my prepared remarks, we did have some professional fees incurred during the third quarter as a result of those discussions. So, this is, this is an active deal, to your question, but all we can tell you at this point is, we are in discussions, we continue to be in discussions. If and when we ever get to the point where there is a deal, we will announce that. We're not at that point. And at this point, I can't guarantee there will be a deal, and if there is a deal, what that deal will look like from a structuring perspective, or what it'll mean to the REIT. We're just not at that point yet.

Okay. Thanks for answering that. Appreciate it.

(Operator instructions) Our next question comes from the line of Richard Eckert with Lahde Capital Management. Your line is now open.

Okay, thank you for taking my call. Paul, forgive me if you've answered this, but I've been jumping in, on and off. You cited $5 million in income from equity affiliates, that looks like a substantial portion of your income on that line item for the year. Can you tell me what that related to?

Yes, hi Rich, you jumped in late. We did have some commentary, and answered some Q&A on it already, but what that was, is we had a preferred equity interest, preferred equity investment, and with that preferred equity investment, we had an equity interest as well. We managed to work that portfolio of assets in a way to get all of our preferred equity investment and any additional capital we raised, paid off, and we also managed to take some of those properties within that portfolio -- it's a multi-family portfolio -- and refinance the debt on several of those assets. And the refinance proceeds were in excess of the initial debt stack, and those proceeds flowed down, those excess proceeds flowed down in a waterfall. And, we were the recipient of some of that waterfall, and that was $5 million, net of $1 million in expenses we had, would be $4 million.

Additionally, and that was an event that happened in the third quarter. Additionally, what we talked about is now that the debt has been refinanced, the properties are performing quite well. We've seen some improvements in several of the properties, and we are expecting going forward to have somewhat of an annuity on our equity interest of about $250,000 to $500,000 a quarter, proceeds that would flow down to us in the waterfall from the performance of those assets.

Okay. Thank you very much, and I'm sorry for making you go through it again.

Not a problem.

And our next question comes from the line of Lee Cooperman with Omega Advisors, your line is now open.

Thank you. Ivan, you don't sound like you're up to 100%. I hope you feel better soon. Anyway, is that a good read? You're not feeling too well?

No, I was just traveling, so it was just from being on the airplane, that's all.

Feel better, you're too valuable. Let me just try to put a few things together, I want to make sure I understood correctly. You guys thought being in the right place in the capital stack, where you're comfortable, you could generate a mid-teens ROE. Is that what I heard?

Yes.

Okay. Second, you had unused lending capacity, around $175 million at the current time?

Right now, we have -- we have -- Lee, it's Paul. We have $325 million in capacity in our short-term lines, and that's artificially a little high because we just closed our fifth CLO, and emptied out our warehouse lines, and put those into the last securitization. So now, as we do new originations going forward, that capacity will start to get used. But currently, we have about $325 million of capacity in our line, and about -- I think in our commentary, $175 million, what we'll call liquidity, between cash on hand and cash that's immediately deployable in our CLOs.

Got you. The reason I'm asking these questions, you know, when times were not as good for us as they are today, in 2012 we sold 3.5 million shares at [$5.80], 2013 in March we sold 5.6 million at [$8.00], and then in September we sold 6 million at [$7.08]. Our stock is now lower than it was when you sold stock. The Company is in materially stronger condition. You guys are large owners. If I could buy a $9.35 book value -- which is the real book value -- you can earn mid-teens ROE, we deserve to sell at book value. Okay? And so, if I could buy something at under $7.00 that's worth $9.35, and you have the liquidity, the only reason we shouldn't be doing it is if this transaction this other gentleman asked about, is alive and you're restricted. But I would say if you're unrestricted, or can get unrestricted, we should consider taking the par val liquidity and buying back something selling in the marketplace for I don't know, $0.70 on the dollar, something like that. Just a thought.

I think your thought has a lot of merit, if the circumstances are correct. And as you know, it took us quite a bit of time to really de-lever the facilities that we had in the legacy facilities, to generate this kind of cash. We're quite pleased with having this capability. I think it opens up a lot of options for us, depending on which way the Company moves.

Good, well, you've done a very good job. Feel better, and thank you very much for taking the questions.

Thanks, Lee.

Thanks, Lee.

(Operator instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Ivan Kaufman, Chief Executive Officer. Please go ahead, sir.

Well, thank you, everybody, for participating. I'm really pleased with our third quarter results and the first three quarters have been outstanding. And, look forward to a successful completion of 2015.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.