Arbor Realty Trust Inc (ABR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arbor Realty Trust first-quarter 2016 earnings conference call.

(Operator instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Paul Elenio, Chief Financial Officer. Please go ahead, sir.

Thank you, Ashley. 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, 2016. 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 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 and 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. Thanks to everyone for joining us on today's call. As you can see from our press release, we had a very productive first 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 provide an update on the acquisition of our manager's Agency Platform and then reflect on our first-quarter accomplishments and our business strategy and outlook for the remainder of 2016.

As we spoke about in great detail on our last call, we are extremely excited about the many benefits we will achieve from the acquisition of our manager's Agency Platform. Some of these significant benefits will include the immediate accretion to our earnings and dividends, significant diversification, and greater predictability to our earnings [streams] through a long-dated prepayment protected servicing portfolio., transitioning the REIT from a mono line dependent entity into a fully integrated franchise with a significant agency originations business with high barriers to entry providing a natural limitation on competition, increasing our equity base and market cap, creating a larger more efficient vehicle for us to raise capital in the future and providing full alignment with our shareholders to a significant stock ownership.

We have worked extremely hard in the last few months to put ourselves in the best position to close this transaction as soon as possible which would allow us to realize these benefits earlier than anticipated. We mailed our definitive proxy on April 25 and have scheduled a special meeting with shareholders to approve the transaction for June 1.

We've also made significant progress on working towards retaining obtaining the necessarily approvals from the [GSEs] government agencies, our banks, and third parties. We're optimistic that this progress will allow us to close a transaction as early as the end of the second quarter. Again, allowing us to realize many significant benefits of this transaction earlier than expected including the potential to increase our dividends in the third quarter.

Now I would like to talk about some of our first-quarter accomplishments and our outlook for the remainder of 2016. We continue to focus heavily on growing our originations platform while remaining extremely disciplined in our leading approach by investing in senior debt. This has allowed us to generate levered returns in excess of what we would achieved by lending in the subordinate areas of the capital stack.

As we have mentioned in our last few calls, we've experienced a significant amount of runoff in the last few years which has made it difficult at times for us to continue to grow our loan portfolio. This has also resulted in a significant increase in liquidity, to deploy into new investment opportunities and grow our future earnings. The recent disruption in the CMBS market has resulted in reduced runoff which has allowed us to grow our loan portfolio approximately $134 million in the first quarter.

We originated approximately $218 million of loans and experienced runoff of approximately $85 million in the first quarter and our pipeline remains strong. Our first-quarter originations had an average yield of approximately 6.17% and we generated levered returns of approximately 14.6% on these investments. To reduce runoff we experienced in the first quarter, there is a trend we believe could continue in the near term, which would allow us to continue to grow our portfolio and increase our core earnings.

Additionally, with a heavy focus on senior multifamily loans, our portfolio is now comprised of 88% senior debt which 75% of the debt being multifamily assets which clearly have proven to be the most resilient asset class and product type in all cycles. And with the significant improvement we have made in our financing facilities, we are generating strong returns on our capital and a very secure part of the capital stack.

As I mentioned earlier, we are also very pleased in our ability to maintain our strong liquidity position. We currently have approximately $165 million of cash on hand which given the current uncertainty and instability in the capital markets, puts us in the unique and favorable position of being able to acquire our manager's significant Agency Platform and grow our business and future earnings without the immediate need to issue a traditional capital.

We have also continue to enhance our debt structures which is one of the keys to our success, and remain a critical component of our business strategy. The successful execution of this strategy has allowed us to generate superior levered returns in a very safe and stable part of the capital stack through the continued use of nonrecourse securitization vehicles.

We continue to be a market leader in the CLO securitization arena and currently have nearly $800 million of nonrecourse debt through three vehicles representing nearly 75% of our total financing, allowing us to appropriately match fund our assets with nonrecourse liabilities and generate strong leverage returns on our capital. Additionally, we had been extremely successful in leveraging off of our unique platform and consistently creating significant additional income streams.

We produced impressive results from the investor we made in the residential mortgage banking business recording $6.6 million of income with $0.13 a share in earnings for the investment in 2015 and $1.6 million or $0.03 a share for the first quarter. This translates into a return of greater than 50% on our investment in this joint venture to date.

We also generated $200,000 of additional income in the first quarter from one of our equity interests and we expect these two investments to generate a consistent annuity going forward, of around $1.5 million to $2 million of income per quarter. These strong results continue to demonstrate our unique ability to create significant additional earnings through new business ventures and from structured transactions, which we view as important part of our franchise and an additional means of diversifying our income streams, and adding to our earnings capabilities.

As we have highlighted earlier, the acquisition of our manager's Agency Platform will also add significant additional income streams and extend the duration of our earnings sources to a long dated prepayment protected servicing income, from a significant agency servicing portfolio. Overall, we are very pleased with our first-quarter accomplishments and our ability to continue the successfully our execute our business strategy by growing our loan portfolio and core earnings run rate, while maintaining our strong liquidity positions.

We are also very excited about the acquisition of our manager's significant Agency Platform which we believe will be immediately accretive to our earnings and dividends and add significant diversity, duration, and stability to our earnings streams. We feel strongly that the many benefits we will realize from the acquisition we will have transformational affect on our future growth and success.

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

Okay. Thank you, Ivan. We generated AFFO for the first quarter of $6.9 million or $0.13 per share, excluding depreciation expense, non-cash stock compensation expense, and $3.1 million of expenses incurred during the quarter, related to the potential acquisition of our manager's Agency Platform. As Ivan mentioned, we were able to grow long portfolio significantly during the quarter which will increase our earnings run rate going forward and we continue to generate significant additional income streams, recording $1.9 million of income from our equity investments in the first quarter as well.

Looking at the rest of the results for the quarter, the average balance in our core investments was up to $1.64 billion for the first quarter, from $1.57 billion for the fourth quarter due to the originations outpacing our runoff during the quarter. The yield on these core investments decreased to 6.25% for the first quarter, from 6.82% for the fourth quarter, largely due to significantly more accelerated fees from early runoff in the fourth quarter combined with higher yields on our first-quarter runoff. And the weighted average all-in yield on our portfolio was down slightly to around 6.27% at March 31, 2016, compared to 6.32% at December 31, 2015 due to higher yields on our runoff in the first quarter.

The average balance in our debt facilities was also up to approximately $1.22 billion for the first quarter, from approximately $1.18 billion for the fourth quarter again due to the growth in our loan portfolio during the quarter. The average cost of funds in our debt facilities increased slightly to approximately 4.19% for the first quarter, compared to 4.16% for the fourth quarter and our estimate all-in debt decreased to approximately 4.09% at March 31, 2016, compared to around 4.12% at December 31, 2015. If you were to include the dividends associated with our perpetual preferred offerings as interest expense, our average cost of funds would be approximately 4.48% for the first quarter and approximately 4.45% for the fourth quarter and our estimated all-in debt costs would be 4.38% at March 31, 2016, compared to 4.43% at December 31, 2015.

Overall, net interest spreads in our core assets on a GAAP basis decreased to 2.06% this quarter, compared to 2.66% last quarter, including the preferred stock dividends as debt cost, our average net interest spreads also decreased to approximately 1.77% this quarter, from approximately 2.37% last quarter, largely due to significantly more accelerated fees in the fourth quarter from early runoff. However, our overall [spot] net interest spread, including the preferred stock dividends as debt cost was flat at 1.89% at both March 31, 2016 and December 31, 2015 which, combined with the growth in our long portfolio during the first quarter, has increased our core earnings run rate going forward. Our average leverage ratios on our [co-lending] assets were also flat at approximately 64%, including the trust preferreds and perpetual preferred stock as equity for both the first and fourth quarters and our overall leverage ratios on a spot basis, including the trust preferreds and preferred stock as equity was 1.5 to 1 at March 31 of 2016, compared to 1.4 to 1 at December 31 at 2015.

NOI related to our REO assets increased approximately $1.1 million, compared to last quarter due to the seasonal nature of income related to a hotel property that we own and we project that we will produced NOI in 2016 to approximately $1.1 million to $1.4 million on our remaining REO assets, the majority of which, was already realized in the first quarter, again, mostly due to the seasonal nature of a hotel property we own.

Additionally as Ivan mentioned earlier, we recorded $1.9 million of income in the first quarter from our equity investments and we expect these investments to continue to produce approximately $1.5 million to $2 million of income a quarter going forward. This success continues to add to our core earnings capabilities and diversifies our income streams. And with the addition of our manager's Agency Platform, we will add significant additional long dated income streams through a predictable annuity of servicing income from a prepayment protected significant agency servicing portfolio. Operating expenses, excluding acquisition costs, were up compared to last quarter, primarily due to the vested portion of annual restricted stock grants issued to our employees, directors, and the employees of our manager in the first quarter.

And lastly, as Ivan mentioned, we have made significant progress on the acquisition of our manager's Agency Platform and are optimistic that we will close this transaction by the end of the second quarter, or early in the third quarter. This will allow us to potentially realize the many benefits of this transaction earlier than originally anticipated.

In addition to the filing of our definitive proxy, which is available on both our and the SEC's website, we have also filed and put up on our website in our investor relations section, an investor presentation, which contains a certain detailed information on Arbor our manager's Agency Platform, and some of the significant benefits of the proposed acquisition. We hope this additional information will be helpful to our shareholders.

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

Thank you.

(Operator Instructions)

Jade Rahmani of KBW.

Hello, this is actually [Ryan Thomas] for Jade. Thanks for taking my questions. Just starting off with overall marketing conditions. How would you characterize the current level of activity deal volume? And the stability of pricing going forward? For example, are you seeing a pullback from banks and in conjunction with lower CMBS volumes and the upcoming maturities, is there any worry about a potential liquidity crunch in the coming months?

It's Ivan.

I'm going to try to keep my response brief. Because I could probably talk about that for a couple of hours. But clearly the dislocation in the CMBS market, and in the uncertainty in the CMBS market has created from like ours, certain opportunities to do a greater amount of bridge lending. As people cannot get CMBS loans, in a consistent manner both from price and proceeds, we can use our balance sheet and provide capital. Where, in the past, it was more difficult to do so. So we will probably going to do some senior lending on a commercial side for some real good core New York City assets that we couldn't have done before. And really attract the spreads and probably be able to get mid teens adjusted returns if not better.

So we've seen some greater opportunity come out of that dislocation. And in fact, if it would adjusted to Dodd-Frank rules and keep the risk retention rules, we think, on a longer-term basis we will be able to play more significantly in that space. And specifically in the $10 million to $15 million mark, which is an area which that is -- most of the larger institutions don't like to play in. So that's good for us.

You see a little bit of a tick up in volume this year. Especially in the first two quarters, with good spreads, so we're pretty happy about that. In terms of overall, clearly, our agency business, the one that the REIT is acquiring, we are seeing very strong volumes and a little less competition. Not only because the CMBS market has gone away, but also some of the banks are a little full, or are readjusting their underwriting parameters.

And the agencies have maintained a very consistent underwriting parameter. And I think some of the local banks were more aggressive we are going to see some greater opportunities in the agency business. And we're pretty thrilled with the level of volume, how first two quarters look. And certainly our outlook for the balance of the year, given what's happening in the marketplace. But we are also seeing, which we are happy about, is while the banks were extremely aggressive. Specifically in New York City metropolitan area. I think they've really overstepped their bounds and they're pulling back to little bit. So it's really giving us an opportunity to put on real quality assets and have a bigger market share.

Great. That's really helpful color.

My second question relates to something you alluded to in your prepared remarks regarding the loan repayments in the quarter. Any more color you can provide on how volatility impacted those repayments? And what you expect in terms of runoff for the balance of the year?

I think what Paul alluded to was the fact that we pre-payments slowed a little bit. And that it could be a result of the CMBS market really backing up. The CMBS market is very aggressive. And they are able to take assets out of our portfolio once they stabilized a little quicker than sometimes we anticipate. So with that market being dislocated, and with the spreads being higher, I think people have to stabilize their assets a bit longer to get to the kind of execution that they want and the cost benefit of exiting earlier has gone away. So I think we will see a little more division in our portfolio.

Which is good for us. Clearly when assets get stabilized it's the best part of that asset. You really want to keep it as long as you can. The riskiest part is always in the early stages.

So I think the longer day that we can have on some of our bridge assets, the actual quality of our risk adjusted returns really goes up. And we are able to maintain a higher balance. As Paul mentioned, we're sitting on $165 million of un-deployed cash. That's a lot of cash for a firm like ours. And whether we deploy it from this acquisition or to new lending opportunities, it is going to be extremely accretive for our core dividend.

Great. And just regarding the CLO market, how is pricing in that market and execution in that marketing looking currently? And do you expect to be able to access it in the near future.

So, for most firms the CLO markets closed. For us, we believe we have an opportunity to go into the market. We don't have an immediate need right now. We have a good balance of funding on our currency of our book which is about 75% of our funding versus our bank lines.

If our volumes kick up, we will entertain, and our prepayments flow will entertain going back to the market. We think that it will probably be about 15 to 20 basis points more expensive than it was, perhaps nine months ago. But that can change. But we feel we could get off an effective transaction because of our reputation and our brand in the market.

And one last question if I could. Regarding the agency platform. Can you provide how many originators are currently at that platform? And if you are anticipating head count growth given the tailwinds that the GSEs are seeing in terms of volume? I believe there was a recent industry trade publication that alluded to recent hires.

So we have about 20 originators, somewhere in that level. And we try to grow origination base by 5% to 10% a year. For us, most of our originators are organically grown. We train them, we start them out at early stages. We have training programs. It takes a long time to grow that. And generally we have a training group of around anywhere between six to 12 people. It takes two years to turn those people into originators.

We're not that active in terms of recruiting people from other firms. We don't use that as a mainstay. There are times that people to come to us. So we like to see the origination staff grow from 5% to 10% a year. And we've been pretty effective at doing that. And of course, allowing our originators themselves to grow incapacity by providing them greater administrative support.

It's not just growth in the number of sales people. It's growth in the effectiveness of our own salespeople. And we have multiple strategies to do that. We're pretty pleased with how we have been handling that. In terms of quality of personnel and staff, it is a competitive industry. And that's always an issue in building a franchise, being able to retain your people. As well as be able to attract quality people. And that's an ongoing challenge. And we believe we've handled that fairly well to continue to grow our franchise.

Great. Thanks for taking my questions.

(Operator Instructions)

Ben Zucker of JMP Securities.

Thanks. Good morning and thanks for taking my question.

I actually wanted to focus on the owned real estate portfolio right now. I noticed that the carrying value of that owned real estate was down maybe 28% year-over-year. But at the same time, the NOI declined by 51%. So for my first question, I was just wondering how you would characterize the quality of the remaining real estate portfolio? Not including what's been sold subsequent to 1Q and understanding it's a seasonal business. Just because it's seemingly isn't maybe as high quality as what was in the portfolio at this point last year.

Ben, it is Paul.

As you pointed out, subsequent to the quarter we did sell off pretty much the majority of our REO remaining book. We are sitting with two assets left. One of them is the hotel property down in Florida. The other is an office building that we recently took over. So we're left with two assets. And we are evaluating now the strategy on those assets. But as I put in my prepared remarks, the lion share of the portfolio has been sold. Either prior to the quarter, or subsequent. Therefore the NOI associated with those assets has obviously disappeared. But it's turned into cash, that we are able to deploy into what we think are quality bridge loans with strong levered returns.

So we don't see a lot of NOI left in those two assets. And we will evaluate those assets over the next coming quarters to see what our strategy is. But like you indicated, the lion share of that portfolio has been monetized. We've done a great job at creating the value, holding onto those assets, improving them, creating value, and now we're deploying that value back into our core business, which is our bridge lending program.

So basically when there is a drop in NOI, if we sell an asset, we feel we've achieved the right value in that asset. And we can redeploy that cash back into our core business of bridge lending and replace the drop in NOI. With perhaps even in accretive effect of having a better return on cash that we received from the sale of that asset.

No, that makes perfect sense. And it sounds like we're on the same page, because now as we are sitting here with your full year guidance $1.1 million to $1.4 million, we already saw $1 million. It almost implies the remaining the $31 million plus of real estate that's not held for sale and hasn't been sold is more or less dead money. And if that could be turned around and conservatively levered up and generate another $100 million of investable dry powder that might be something you would be looking to do down the road, if I'm hearing you correctly?

Yes. Piece by piece. Patiently. And the other thing too is sometimes managing these assets takes a lot of effort. And if we have to also measure the cost and expenses of managing that as well as the accounting treatment and we take all of that into consideration.

No that's great. I hear you. And my other question is about the repayments were already asked and answered. So thanks for taking my questions.

Sure.

I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Okay well thanks for everybody participating on today's call. We are extremely excited about where we are today. Between our core business, as well as the transaction at hand. And hopefully on our next quarter we will have very favorable news about the completion of that transaction. Have a nice day everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a wonderful day. [ End of transcript ]