Arbor Realty Trust, Inc. (ABR) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentleman and welcome to the Q1, 2013 Arbor Realty Trust Earnings Conference Call hosted by Ivan Kaufman, Paul Elenio and (Joseph Green). My name is Mahmood, I am event coordinator today. During the presentation your lines will remain on listen-only. (Operator Instructions). I would like to advise all parties that this conference is being recorded. (Operator Instructions). And now I would like to hand the call over to Mr. Paul Elenio. Please go ahead.

Okay, thank you, Mahmood. Good morning everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter-ended March 31, 2012. 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 to everyone for joining us on todays call. Before Paul takes you through the financial results I would like to reflect on some of our recent accomplishments and initiatives and talk about our business strategy and outlook for the remainder of 2013. We are extremely pleased with our first quarter accomplishments, especially in our ability to continue to access the debt and equity markets, to continue to grow our platform and our core earnings. As we discussed on our last call we completed our first perpetual preferred stock offering raising 37 million of capital in February and closed our second non-recourse collateralized loan obligation vehicle in January with 260 million of collateral including 15 million of additional capacity to fund future investments and a ramp-up feature with pricing that was significantly lower than our first CLO vehicle in September 2012. We also raised an additional 90 million of fresh capital in the first quarter through a common stock offering and the completion of a 6 million share after market offering that we put in place at the end of last year. In addition we increased our short-term funding sources in the first quarter by adding a new $50 million warehouse facility and by increasing the capacity of our existing debt facilities by $30 million while decreasing the cost related to these facilities by approximately 75 basis points. The new $50 million facility has a one year term with pricing at 250 over LIBOR and a leverage of upto 75% depending on the asset financing. These transactions are clearly at the forefront of our recent accomplishments and we are very well positioned to continue to execute our business strategy of originating attractive investment opportunities and appropriately levering them with the low cost non-recourse CLO debt with…

Okay, thank you, Ivan. As noted in the press release, FFO for the first quarter was approximately $8.3 million or $0.24 per share and net income was $6.6 million or $0.19 per share. This translates into an annualized FFO return for the quarter on average common equity of approximately 12% and an FFO return on average adjusted common equity of 9%. As Ivan mentioned we continue to repurchase our debt at deep discount recording 3.8 million in gains from the repurchase of some of our CDO debt in the first quarter. We also recorded 2.5 million in loan loss reserves in the first quarter related to two assets in our portfolio and after these reserves and charge-offs of previously recorded reserve now have approximately a 146 million of loan loss reserves on 18 loans with a UPV of around 235 million as of March 31, 2013. At March 31, our book value for common shares stands at $7.53 and our adjusted book value per common share is $9.68. Adding back deferred gains and temporary losses on our swap. As we've mentioned before we believe that our adjusted book value better reflects our true franchise value as these deferred items will be recognized over time, while the significant economic benefit related to these items has already been realized. Additionally, as Ivan mentioned we currently have approximately 65 million in cash on hand and a 105 million capacity in our short term credit facility to fund our future investments. Looking at the rest of our results for the quarter the average balance and core investments increased to approximately 1.7 billion for the first quarter compared to approximately 1.6 billion for the fourth quarter due to our first quarter and fourth quarter originations. The yield for the first quarter on these core investments…

Thank you. (Operator Instructions). We already have two questions in the queue. The first one is in the line of Steve Delaney of JMP Securities. Over to you please.

Thank you, good morning, Ivan and Paul, how are you?

Good morning, Steve.

So I am glad you commented on the CMBS platform. I had noticed that April 12 article in the CMA, and they commented on some recent hires but also referred back to some people you hired in February. So Ivan, would you just kind of briefly summarize the scope of that team, how many people, are they all based in New York, are any of them regional lenders?

Sure, most of the team is more of a corporate team that's based in the New York area. We are building out a full and complete CMBS capability of originating and distributing loans and the real emphasis is that it's an expanded product line for our sales staff. And will create better relations for our borrowers, the direct results for the read is to see greater bridge opportunities in different asset classes and reach a broader customer base and also create potential mezzanine and preferred equity investments. So we've already starting to see the benefit of that additional production and that's one of the reasons why we actually upped our estimates is because it's just starting to have a dynamic impact on our pipeline and products flow.

I thought that might be it because you've been running about a 100 million and -- 90 to a 100 and now it's (cash) you went in kicking in but it sounds like you're starting to see some flow or some potential for it.

Yeah, I guess basically we had given guidance to about 30 million a month in originations so I am stepping it up now going forward to approximately 50 million a month and that's still just perceived -- treading lightly and watching our growth in a very steady way which we've been very deliberate about.

The other reason we upped our estimates for the year and clearly on our run rate going forward as Ivan mentioned we're going to get it hopefully to 50 million a month. We did a 100 million of products in March, we've done a 107 in April. So we're already at 207 here and we are seeing it step-up. So it's a by-product of the fact that we've had a strong April with the capital we've raised. And so we think that the 450 to 500 is a much better target for us. On a run rate hopefully it will be more than that going forward but for this year that sounds right though.

Okay, so from the product standpoint since they are going to broaden out a little bit, the bridge loan opportunities, I clearly get that because there are going to be a lot more floating loans, you can put those in your CLO structures. Now if they are doing like fixed rate 10 year loans for CMBS sale, isn't that going to -- the B note of that wouldn't that generally be also be a fixed rate loan in which you have to figure out a financing method where you apply swaps to those?

We may, but the yields maybe so significantly higher that we wouldn't have to do that. We're thinking that the yields could be in the 12% to 15% range in general on an unlevered basis and the spread in that is sufficient enough, and the yield in that is sufficient enough and with some of the perpetuals right now we've accessed in the market it's pretty much to match duration to what we are borrowing at and what we will be lending at.

Okay, that's helpful, that makes sense. Then it was pricing more along the lines, it's just the mez loan probably.

Yeah, pretty much so and the markets is still in recession so being on the origination side, and having the opportunity to price your B note or mezzanine note really puts us in a strategic advantage in originating loan also getting attractive deals.

Thank you. And Paul, one final thing for you, the 50 million annual run rate core FFO at March, I heard you say, I know that's below loan loss provisions. What else? Is there anything else that is not coming out of that 50 million like management incentive fees, how should we look at the 50 million?

Yeah that's right Steve. The 50 million is core FFO run rate as of March going forward without loan loss reserves because that's not something we can easily predict…

I understand

Although we think they are legacy and it doesn't include your operating expenses. You'd have to look at the operating expenses from the prior year maybe grow it a little bit, so if that was 27-28 last year, if it's 29 or 30 this year wherever you think it's going you net those two out and you say well that's the net core FFO, on all the shares we have outstanding. And I think when you do that you'll still see a pretty strong number. Keep in mind we did raise a decent amount of capital in the first quarter so there was a little bit of a drag for the quarter on that capital but we went to work immediately and in April we did 107 million of loans and we think we are going to deploy our capital very quickly and effectively to grow it going forward.

Yes so I mean if you weren't fully deployed, the 50 million run rate obviously at June we would expect that to be slightly higher with the 100 million additional loans.

Yeah there is a little bit of a lag between the time we raised the capital and put it out. It wasn't that big of a lag it probably affected us for about a month maybe but we have been pretty effective in terms of not raising the capital until we have the pipeline and there is a little delay in getting that pipeline across.

I understood. Well thank you guys for the comments and congrats on a great start for the year.

Thanks Steve.

Thanks for your question. Stephen Laws of Deutsche Bank is next. Over to you please.

Hi, good morning. Thanks for taking my questions. I appreciate the detailed prepared remarks and I know Steve set out a number of things in his questions. So maybe two quick things, can you talk about what do you intend to do with the CDOs there are in situation where the past replenishment periods, any chance you would call those or you expect those to run down, maybe comment on what the current CLO markets are, I know you hit on it a little bit but any additional color there about how the CLO markets are today for new vehicles? Thoughts on that would be helpful please.

Sure. I mean as you know we have three CDOs up and there is a cross-over point where they get de-levered to run off and at that point in time we would call in when it was appropriate to do it economically. The benefit of those CDO vehicles is that their liability costs are unbelievably low and even though they have reduced in leveraged it's still very beneficial to have it in place. The first one that will go away would be the first vehicle. We are not at that point today to call it and it's something we evaluate on a continuous basis to see if calling it and a re-leveraging of the assets could produce a better return. So depending on how the assets run off we'll dictate when that occurs and that will be the cross over point to call those, re-lever those assets and free up some of the equity as those vehicles got de-levered. With respect to the CLO market now clearly from CLO one in September to the one we did in January there was enormous improvement, not just in terms of our cost of funds but also in terms of the flexibility in that vehicle. We are seeing significant improvement now in that market for an issue like ours so if we had the collateral we would love to be able to create another one. Creating another one really gives us critical mass in our liability structure and allows us to more effectively manage our business on a longer term basis so we are very keen and looking at that. What's very interesting to know is that although there have been a lot of different security issues in the market nobody really has issued a CLO like us which is really deemed as a financing vehicle which is flexible. For whatever reason we are one of the few issuers who have been able to figure out that market, A, without collateral and our expertise and we actually get them done and C, just as importantly investors are still clamoring for that kind of debt instrument. So we are very eager to return to that market and we think that, that market like the rest of the debt market has shown considerable tightening and it would be real strategic and advantageous for us to get another one as we soon as could

Great thanks for the color there and then could you maybe talk about you have utilized a number of different ways to raise additional capital equity offering, some others and ATM. Can you talk about as you go forward maybe what type of mix you would like to see in the capital stack as you look to raise additional capital to deploy into new investments?

Yeah, Steve it's Paul. I think that's a good question and a lot of that would depend on what type of product and what type of pipeline we see in front of us. As we mentioned in our prepared remarks we still think 75% of our product flow will be multi-family bridge. We are seeing some opportunities in the commercial side. We could start to see a few more mez opportunities that have higher yields but are less leveragable. So a lot of that will depend on our mix of products and what the market is doing. We would like to have a mix of common and preferred and other end securitization and other types of debt that make sense to our product right now where the common stock is, we have taken a little bit of a hit over the last week or so, so we look to maximize the equity offering based on where we are trading, where our multiples are and what the opportunities are on the debt side as well as the preferred stock side. So I think we will just monitor this going forward and when we feel we need capital and the common stock is not a good currency for us we will look to the perpetual preferred or other types of markets that make sense that maybe not as dilutive. And when we feel the common stock is a good currency for us we will look to access it there, again depending on our deal flow and our pipeline.

Thanks for taking my questions appreciate the comments.

Thank you for your questions we have no further questions. (Operator Instructions).

Okay if there are no further questions thanks for your participation today and we look forward to our next call. Thank you.

Thank you, Mr. Kaufman, Mr. Elenio and Mr. (Green) and gentlemen your conference call now comes to an end. You may disconnect. Thank you very much for joining.