Arbor Realty Trust, Inc. (ABR) Q3 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Third Quarter 2013 of Arbor Realty Trust Earnings Conference Call. My name is Shaquena. And I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I’d now like to turn the presentation over to your host for today’s call Mr. Paul Elenio, Chief Financial Officer. Please proceed sir.

Okay, thank you, Shaquena. 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 September 30, 2013. 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 today’s call. Before Paul takes you through the financial results, I would like to touch on some of our recent accomplishments and then focus on our business strategy and outlook for the remainder of 2013 and for 2014. We are very pleased with another successful quarter especially in our ability to deploy our long-term growth capital into high yielding investment opportunities, allowing us to continue to execute our strategy of growing our core earnings and dividends over time. As we announced recently, we raised an additional $41 million in equity capital at the end of the third quarter and as of today, we have approximately $73 million in cash and $72 million of capacity in our short-term credit facilities. We believe this cash and capacity combined with expected run-off in our CLO and warehouse facilities provides us with adequate capital and liquidity to fund our pipeline and achieve our goals of continuing to grow our portfolio and further access the securitization market generating mid-teens leverage returns. Our growing pipeline combined with our success in accessing the debt and equity markets has allowed us to continue to grow our originations rapidly replacing our run-off and continuing to increase our core earnings. We are very pleased with the investment opportunities we continue to see through our external managers expansive multifamily originations platform, which has allowed us to deploy our capital quickly and has increased our pipeline significantly over the last several months. As a result, we had another strong quarter originating $148 million of loans in the third quarter with an average yield of approximately 7.3% and a leverage return of approximately 14%, which combined with our originations for the first six months of $280 million totaled approximately $428 million of…

Thank you, Ivan. As noted in the press release, FFO for the third quarter was approximately $5.6 million or $0.13 per share and net income was $3.7 million or $0.08 per share. FFO was approximately $6.8 million or $0.155 per share for the quarter excluding approximately $1.2 million in one-time expenses for legal and professional fees related to a potential transaction involving the REIT and this external manager as previously disclosed in our latest offering filing. Additionally, we continue to repurchase our debt at deep discounts recording $1.2 million in gains from the repurchase of some of our CDO debt in the third quarter and $4.9 million in gains from CDO debt buybacks for the nine months ended September 30, 2013. We also recorded $1.5 million of loan loss reserves related to one asset in our portfolio and had $750,000 recoveries of previously recorded reserves during the third quarter. And after these reserves, we now have approximately $143 million of loan loss reserves on 18 loans with a UPV of around $239 million as of September 30, 2013. At September 30, our book value per common shares stands at $7.51 and our adjusted book value per common share is $9.26, adding back deferred gains and temporary losses on our swaps. 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. Looking at the rest of the results for the quarter, the average balance in our core investments increased marginally to approximately $1.81 billion for the third quarter from approximately $1.78 billion for the second quarter due to our third quarter originations slightly outpacing our third quarter run-off. The yield for the…

Thank you. (Operator Instructions) And your first question comes from the line of Steve Delaney presenting JMP Securities. Please proceed.

Thank you. Good morning, Ivan. Good morning, Paul.

Hey, Steve, good morning.

One of the things we noted you had a fairly large increase in the number and dollar amount of loan payoffs in the third quarter relative to second quarter like 15 loans for $100 million. I’m just curious if you see that as a trend or if there was any kind of unique or one-off development in the third quarter as far as why did the payoffs spike?

I think that clearly was a little bit of a drop in interest rates. There were people who perhaps were considering it in the prior quarter when rates spiked up, some of the decisions got delayed and when rates came down, you probably had a combination of what would happen in the second quarter will occur in the third quarter. I think that you’ll see more of a consistent trend going forward and that quarter probably will represented two quarters worth of payoffs.

Steve, it’s Paul. Certainly as Ivan mentioned rates and value increases I’m sure had played a role in the runoff. We are expecting probably similar or maybe even a little higher runoff in the fourth quarter. However, the difference as we’re trying to lay out in our commentary is the third quarter runoff of roughly $130 million, about $85 million of that were from our legacy CDOs --

Right.

Which as you know the cash sits in the CDO delevers the vehicle and then obviously if we return our equity over time. The fourth quarter run-off we’re expecting is largely looks like it’s largely going to be in our CLO vehicles and warehouse facilities which is quite helpful for us as we kept our loan short-term as we talked about in the past. That gives us additional capital and additional capacity to fund new originations and as Ivan mentioned our pipeline is very strong. We’re expecting a very strong fourth quarter. So the run-off in the CLO and warehouse facilities will actually facilitate the ability for us to continue to fund this growing pipeline.

Yes. A comment on that Steve is that a lot of our loans we originate we deem to be two to three year assets.

Right.

And a lot of the assets performance is probably better than we’ve expected, so that we’re able to access long-term financing a little bit quicker. So it’s kind of a good sign relative to the credit quality in our portfolio the people can exit -- work more quickly than we anticipated but something that we were well-positioned to manage by increasing our originations to replace that run-off.

Yes. I get the point about 4Q, about obviously a payoff in the new CLO is a lot better for you than a payoff in the legacy CDO as you have that replenishment period and the CDO uses you have in your cash trapped and de-levering the structure. So that’s an important thing first to think about and as we model, payoffs, we’re going have to think about where they might be occurring? And then a kind of related question, you had quite a few loan extension I think 10 for about $140 million and just a simple question there, I mean that’s a routine thing, I think when a loan is written for a period of time, you will usually have one or two on your extensions kind of built in. But should we think of their being a good when you do an extension, is there a good to Arbor in terms of a fee or rate escalation or is it normally just sort of a neutral event to you, when you –

I think there is a combination number one, a lot of our extension gives us an opportunity to rebalance a loan and that’s an important credit asset management feature. And from time-to-time, there are extension fees that are paid. So it’s a combination of two things.

And Steve, the spike in extensions during the quarter is a little bit deceiving because although its listed as 8 or 10 loans it’s really a bunch of loans related to one project we have and the extension was due and it was extended. So it was expected to be extended, it was extended, it’s not an indication that there was a problem with that asset, it just happens to be a larger asset.

Okay, great. That’s helpful. So just basically a single borrower with multiple pieces of collateral?

Correct.

Okay. And the last thing, Paul, we had been advised to the one-time charges, $1.25 million in your prospectus supplement on September 23. I’m looking at the income statement and darn if I can see where it lives, where that item is run through on the income statement, can you help me there?

Sure. It’s run through in the selling and administrative portion of the income statement. And if you look, I think the selling and admin expense line item went up about $800,000 and change from quarter-to-quarter, so that $1.2 million is sitting there as well as some reductions in some of our legal and restructuring cost during the quarter.

Yes, must be the reduction in some of the other -- the legal because it - on a net basis it didn’t look like that big a change.

Yes. The other items is, you have this stock-based comp which runs through there and as I mentioned in my prepared remarks. We’d like to break it out, but the SEC had us put it in that line item now and we did have a large number of stock-based comp hit the second quarter from the issuance of shares to our directors which immediately vest so its sheltering a little bit of that increase.

Okay. And how much was that stock-based comp, do you have that figure handy?

Yes. The stock-based comp from last quarter was 6.80, in this quarter it was 1.82. So that difference – that $500,000 difference is eating up some of that $1.2 million and the rest is being – now, we had a little bit of a decrease in expenses related to some restructuring in this third quarter as compared to the second quarter.

Okay. And lastly, Ivan, I know there – you’re probably limited in what you can say in response to this question. But, the disclosure about the Board’s special committee, is there anything you should be saying to clients about that or is there any update on that - those deliberations, I guess, is the way, anything you can say to us about that at this time?

Yes, I have no color on it at the moment. It’s in the 10-Q and I think that’s pretty much explains our status. Paul, you have any comment?

Yes. Steve, unfortunately our 10-Q is up to-date that is the latest disclosure and that’s all we can really say at this point.

Thanks. I will take a look at that. Thanks for your comments and congratulations on another quarter of good solid progress. Thank you.

Thank you.

Thanks Steve.

(Operator Instructions) There are no further audio questions. I’d now like to turn the call back over to Mr. Elenio for closing remarks.

Okay. Well, thanks for your participation. And it was a very good quarter and look forward to next quarter’s call in the close of the very, very solid year.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And have a great day.