Arbor's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Arbor Realty (ABR)

Arbor Realty Trust Inc. (NYSE:ABR)

Q4 2013 Results Earnings Conference Call

February 14, 2014 10:00 AM ET


Paul Elenio - Chief Financial Officer

Ivan Kaufman - President and CEO


Steve Delaney -JMP Securities

Lee Cooperman - Omega Advisors


Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Arbor Realty Trust Earnings Conference Call. My name is Denise, and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Paul Elenio

Okay. Thank you, Denise. Good morning everyone. And welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter and year ended December 31, 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 maybe 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.

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 reflect how we closed out the year touch on some of our more significant accomplishments and then turn my focus to our business strategy and outlook going forward.

2013 was a tremendously successful year for us on many fronts and we are excited about the many opportunities we foresee for the future. We finished 2013 with total return to shareholder of approximately 20%, including appreciation of our stock prices dividend and we are very successful our access to capital markets and increasing our originations during the year.

We raised approximately $200 million of equity capital 2013 through both common preferred stock offerings and we are very successful in deploying this capital into accretive investments allowing us to replace our run-off and grow our core dividends and earnings.

A major contributor to the success was also our ability to continue to add to our non-recourse debt vehicles by closing on our second CLO with $260 million of collateral on deals of our first CLO that we closed in late 2012.

We also were very pleased with our ability to improve our short-term funding sources in 2013, adding three new facilities totaling $123 million and increased in the capacity of our existing facilities by $30 million, as well as reducing our pricing significantly in these vehicles.

These 2013 accomplishments have positioned us very favorably to continue to execute our business strategy originating attractive investment opportunities to our deep originations platform and appropriately levering them with low cost non-recourse CLO debt with replenishment rights and continue to generate low-to-mid-teens leverage returns on our capital.

Additionally, our pipeline continues to grow rapidly and we are very pleased with the investment opportunities we continue to see from our external managers expensive multifamily lending platform.

As a result, we had another strong quarter, originating approximately $164 million of loans in the fourth quarter with average yields of approximately 6.7% and leverage return of approximately 13%.

We finished 2013 with total originations of $592 million with leverage returns of approximately 14%, replacing a nearly $400 million of run-off we experienced, $180 million of which occurred in the fourth quarter resulting in approximately $200 million of growth in our investment portfolio during 2013.

For 2014 we believe we will be able to continue to increase our originations volume and grow our investment portfolio with estimated total originations of around $700 million to $750 million.

It is very difficult to accurately predict what our run-off will be for 2014. Although, early indications are that we expect that 2014 run-off could be in excess of our 2013 run-off with the majority of the potential run-off occurring in the first two quarters of 2014.

Our origination volume thus far for the first quarter of 2014 is approximately $100 million, where estimate leverage returns of approximately 14% and we have experienced approximately $200 million of run-off in the first quarter to-date, the bulk of which is in our legacy CDO vehicles.

As we have mentioned in our last few calls, while we accelerated run-off, we are experiencing in our legacy CDO vehicles will temporarily reduced our margins and available liquidity. It demonstrates the quality of our investment collateral and will ultimately result in accelerating the de-leveraging of these vehicles, which should allow us to replace these financing vehicles sooner than expected and free up the equity capital invested to redeploy into high-yielding opportunities and improve our earnings in future periods.

As we have discussed in the past, a critical component of our business strategy continues to be to finance a substantial amount of our investments with non-recourse debt through CLO vehicles, allowing us to match the terms of our assets with the terms of our liabilities without being subject to leverage.

We’ve had a tremendous amount of success in this area and continued to be a leader in the commercial mortgage REIT securitization market. We currently have two CLO vehicles in place with $385 million of collateral, $265 million of leverage and the ability to substitute collateral to replenishment feature in both vehicles.

And we believe that our growing pipeline and current capital structure has positioned us very favorably to originate pool collateral for another securitization vehicle, which we believe will result in increased leverage of returns on our invested capital and a stable funding source for the next few years.

We also believe that continued access to the non-recourse securitization market has several significant long-term strategic competitive advantages including allowing us to have permanent non-recourse debt financing with a liability structure that matches our asset maturities without being subject to mark-to-market provisions as well as having greater access with additional shorter term credit facilities with lower pricing, allowing us to remain competitive on pricing on our investment and to adjust when market yield tightens and still maintains similar effective yields.

And of course, if the market were to back up again and liquidity becomes cash, we would greatly benefit from these debt structures by enabling us to maintain stable liability terms with low course debt, while accessing -- while acts us to price less competitively resulting in superior leverage returns.

Now, I would like to update you on the view of the commercial real estate market and discuss the credit status of our portfolio. Overall, 2013 was the year of continued improvement in the commercial real estate market as significant amounts of capital entered this space and asset values increased.

2014 has started out similarly and we continue to see signs of increased stabilization and more rapid growth, especially in the commercial multi-family lending arena. This is an asset class we have tremendous experience in and continues to be our primary focus. As a result, deal flow is up significantly which is growing our pipeline, increased our originations substantially.

We also believe we are well positioned and have a strong competitive advantage in the market by levering off of our manager who provides us with a strong consistent pipeline of multi-family additional opportunities to its top Fannie Mae, FHA platform with a strong national presence in the commercial lending area.

And I have mentioned earlier, we are very confident in our ability to continue to produce significant investment opportunities for us to grow our platform and increase our core earnings over time. Looking at the credit status of our portfolio, in the fourth quarter, we recorded $2 million of loan losses reserves and impairment charges related to two assets in our portfolio and recorded $785,000 of recoveries of previous recorded reserves.

Additionally, we believe that substantially all our legacy issues are behind us and while it is possible we could have some additional write-downs in our portfolio and our legacy assets, we remain optimistic that any potential remaining issues will be minimal, and they will continue to have future recoveries on our assets combined with potentially gains from debt repurchase to offset any potential additional losses. However, this timing of any potential losses, recovery and gains in our quarterly basis is not something we can predict nor control.

In summary, we are pleased with our 2013 accomplishment, especially in our ability to significantly grow our originations platform and deploy our capital into accretive investment opportunities replacing the runoff and continuing to grow our earnings and dividends through the continued success we are experiencing and utilizing non-recourse CLO vehicles and warehouse facilities to finance these investments.

We are also excited about the growth in our pipeline and in the investment opportunities we are seeing to continue to grow our platform and earnings power of going forward. And while 2014 will not be without its challenges as the market has become more competitive and we are starting to see more runoff in our legacy CDO vehicles, we are confident that we will be able to utilize our deep originations network and non-recourse securitization expertise to delever our legacy CDO vehicles while maintaining our earnings and dividends for 2014 and more importantly position us favorably to increase our earnings in 2015.

We remain patient and disciplined in our approach and are very confident in our ability to achieve our goals and continue to increase the values for our shareholders over the long term.

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

Paul Elenio

Okay. Thank you, Ivan. As noted in the press release, FFO for the fourth quarter was approximately $6.3 million or $0.13 per share and FFO for 2013 was $25 million or $0.58 per share. AFFO was $28 million or $0.65 per share for 2013, adding back non-cash stock compensation and one-time expenses related to potential transaction with our external manager.

We also reported GAAP net income of $3.4 million or $0.07 per share for the fourth quarter and GAAP net income of $16.7 million or $0.39 per share for 2013. And we ended 2013 with AFFO return on average common equity of approximately 8.5%.

As Ivan mentioned, we recorded $2 million in loan loss reserve and impairment charges related to two assets in our portfolio and had $785,000 in recoveries of previously recorded reserves during the fourth quarter. We finished 2013 with $7.5 million of loan loss reserves and impairment charges, which was almost entirely offset by $7.2 million of gains and the repurchase of some of our CDO debt and recoveries of previously recorded reserves during the year.

And at December 31, 2013, we had approximately $122 million of loan loss reserves on 15 loans in our portfolio with UPB of around $208 million. At December 31st, our book value per common share was $7.52 and our adjusted book value per common share was $9.22 adding back deferred gains and temporary losses on our swaps.

Looking at the rest of the results for the quarter, the average balance in our core investments decreased to approximately $1.76 billion for the fourth quarters from approximately $1.81 million for the third quarter due to our fourth quarter run-offs slightly outpacing our fourth quarter originations.

The yield for the fourth quarter on these core investments was around 5.86% compared to 5.62% for the third quarter. This increase in yield was primarily due to higher yields in our third and fourth quarter originations, combined with the acceleration of fees on some of our early run-off in the fourth quarter and the weighted average all-in yield on our portfolio also increased to around 5.69% at December 31, 2013 compared to around 5.59% at September 30, 2013.

The average balance on our debt facilities also decreased to approximately $1.26 billion for the fourth quarter from approximately $1.36 billion for the third quarter, primarily due to third and fourth quarter run-off in our legacy CDO vehicles, the proceeds of which are used to pay down CDO debt. The average cost of funds on our debt facilities increased to approximately 3.28% for the fourth quarter compared to 3.10% for the third quarter largely due to run-off in our CDO vehicles which is used to pay down lower cost CDO debt.

Additionally, our estimated all-in-debt cost increased to approximately 3.34% at December 31, 2013 compared to around 3.14% at September 30, 2013, again primarily due to paying down our low-cost CDO debt with the proceeds from run-off in these vehicles. If you were to include the dividends associated with our two perpetual preferred offerings as interest expense, our average cost of funds for the fourth quarter would be approximately 3.53% compared to 3.34% for the third quarter and our estimated debt cost would be 3.60% at December 31, 2013 compared to 3.39% at September 30, 2013.

So overall, net interest spreads on our core asset on a GAAP basis increased to approximately 2.57% this quarter compared to approximately 2.52% last quarter including the perpetual stock dividends’ debt cost, our net interest spreads also increased to approximately 2.32% for the fourth quarter compared to approximately 2.28% for the third quarter. And our net interest spread run rate is now approximately $51 million annually at December 31, 2013.

Other income which primarily consists of net interest spread on certain RMBS securities which are deemed to be linked transactions for accounting purposes as well as asset management and miscellaneous fees increased $800,000 compared to last quarter. This increase was mainly due to a $750,000 reduction in the fair value of these securities during the third quarter due to the change in interest rates and spread.

Additionally, as we mentioned in our press release, we have sold the majority of our remaining RMBS securities in the first quarter of 2014 for slightly more than the carrying value at December 31, 2013.

NOI related to our REO assets decreased $1.4 million compared to last quarter due to the seasonal nature of income related to our portfolio of hotels that we own. NOI for the full year 2013 was $3.3 million and we believe these REO assets should produce NOI before depreciation and other non-cash adjustments of approximately $3.5 million annually going forward.

This projected income combined with approximately $51 million of net interest spread on our loan and investment portfolio gives us approximately $54 million to $55 million of annual estimated core FFO before potential loss reserves and operating expenses looking out 12 months based on our run rate at December 31, 2013.

And as Ivan mentioned, we’re experiencing accelerated runoff in our legacy CDO vehicles lately, the bulk of which appears to be occurring in the first half of 2014. This could result in temporary reductions in our earnings run rate, although we do expect our portfolio to experience overall net growth in 2014 and we are optimistic that we will be able to create efficiencies from replacing these legacy CDO vehicles which should allow us to maintain our earnings base in 2014 and increase our earnings run rate going into 2015.

Operating expenses were down compared to last quarter largely due to approximately $1.3 million in one-time expenses incurred during the third quarter related to a potential transaction with our external manager.

Next, our average leverage ratios on our core lending assets decreased to 62% this quarter compared to 66% last quarter, including the trust preferred and perpetual preferred stock as equity, which mainly was due to our third and fourth quarter CDO runoff, which is used to pay down CDO debt. And our overall leverage ratio on a spot basis, including the trust preferred and preferred stock as equity, was relatively flat at approximately 2 to 1 at December 31 and September 30.

There are some changes in the balance sheet compared to last quarter that I would like to highlight. Restricted cash decreased by approximately $58 million primarily due to CDO runoff in the third quarter that was used to repay CDO debt in the fourth quarter, which combined with some fourth quarter CDO runoff used to repay CDO debt also accounts for the $97 million decrease in CDO debt compared to the third quarter.

Lastly, our loan portfolio statistics as of December 31 show that about 70% of our portfolio was variable rate loans and 30% of fixed. Our product type, about 71% were bridge, 15% junior participations and 14% mezzanine and preferred equity. By asset class, 64% of our portfolio was multifamily, 22% was office, 7% land and 4% hotel. Our loan to value was around 77%, and geographically we have around 35% of our portfolio concentrated in New York City.

That 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.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Steve Delaney with JMP Securities. Please proceed.

Steve Delaney -JMP Securities

Thank you. Good morning, Ivan and Paul. How are you?

Ivan Kaufman

Good morning, Steve.

Steve Delaney -JMP Securities

I apologize. I missed the good part of your prepared remarks, (inaudible) hop on here at the end. On a couple things. Paul, here you noted that the average loan yields had a really nice bounce, 4Q over 3Q, 586 to 562. Have you addressed that in your prepared remarks, the increase?

Paul Elenio

Sure, Steve. I did and I will repeat it. We did have a nice balance in the average yield during the quarter as you mentioned and some of that was due to the third and fourth quarter originations, obviously having higher yields than our overall portfolio yield, because we still have some legacy assets that are obviously earning far less than what the current market is. But the good part of that balance during the quarter had to do with when you do have unexpected runoff from time to time, you will able to accelerate the fee so you can get origination fees and exit fees on these loans. And for accounting purposes, you are spreading them over an effective yield over the life of the loan and the loan pays off early, you could net up and run that through your interest income.

So that had a lot to do with the big balance. And as I pointed out, you will see that because the spot rate going forward went up 10 basis points from 559 to 569, while the average went up 24 basis points. So that 14 basis point differential is really the acceleration of these. And that happens -- and continue to happen when you have accelerated run-off.

Steve Delaney -JMP Securities

It's okay. Over the next couple of quarters, we could see some piece to be yields from that one-time fee income?

Ivan Kaufman

Yeah. I mean it certainly act as a mitigant to some of the loans that are paying off in the legacy CDO. So it allows us to have the additional income if we have a little bit of a loss in earnings during that period on some of the runoff. And if they comes from our new CLOs then it’s really a nice path to our earnings.

Paul Elenio

Yeah, so Steve, to your point, you are correct. It really depends though if the runoff is running off at maturity or running off early. So also running off going forward, the maturity don’t get that paths to yields but if this early do get that path.

Steve Delaney -JMP Securities

Understood. And Paul, did you talk at all about the CLO market and your last year was over a year ago. They would see this with the volume of Europe and Asians running over a $150 million a quarter that you certainly probably have that collateral amount to look at another deal?

Ivan Kaufman

Well, as we -- as I mentioned in my remarks, the CLO strategy is really fundamental for our business. And it’s where we feel, leads have been successful than the CLO market with the kind of securitizations, we have been creating which have replenishment rights and substitutions and things of that nature. So we believe that this year will be a good year for us.

Steve Delaney -JMP Securities


Ivan Kaufman

We’ve heavily with our investors. We've created a deep base and that certainly within our purview to get the transactions done.

Steve Delaney -JMP Securities

And those flexible structures obviously make a lot of sense for your fixed lending strategy. I've been -- if you were to do something here, I think the last year was LIBOR plus 235. Would you expect as your funding cost or should the CLO's improved more in the loans pricing as compressed or is it up the same?

I'm getting the sense of where we are today incrementally with the improvement in CLO/CDS pricing if you are actually able to get the same leveled ROE or maybe you are slightly better than which you might have done on the first two transactions?

Ivan Kaufman

Yeah, we think there would be an improvement clearly for us. There would be a benefit. The market on CLO side and based on the debt of our investors, we believe that’s tightened considerably. While the market remains comparative on the origination side. I think that we've been to able to maintain our spread somewhat so there would be somewhat of the pickup there.

Steve Delaney -JMP Securities

Okay. One last quick thing. Could you give us any update on the timing of when you might be able to recognized the deferred revenue on 450 West 33rd? Thanks for time this morning.

Paul Elenio

Sure, Steve, it's Paul. It’s a tough answer. We are obviously monitoring it, the loan we believe comes due in June. We don’t know what the answer will be whether loan would be refinance, whether the loan will be paid off or cashed out.

Obviously, they’ve invested in that if the loan was to be refinanced and we were -- if the loan was to be refinanced or paid off, we would list our guaranty and be able to record that deferred gain which we think obviously would be significant for us with certainly bridge that gap very nicely between book value and adjusted book value. But we don’t control it. We are monitoring it but we do believe that loan comes due in June. We'll just have to see where that goes in June whether it get refinanced, pushed out or paid off.

Steve Delaney -JMP Securities

Okay. Thanks for the time this morning. All the best in 2014.

Ivan Kaufman

Thank you, Steve.


(Operator Instructions) Our next question comes from Lee Cooperman with Omega Advisors. Please proceed.

Lee Cooperman - Omega Advisors

Thank you. Like Steve, I missed the first part, of course. I apologize if I ask a question that you addressed. But I’ve asked this question numerous times on past calls. And I think the response has been that you kind of think your adjusted book value which is now $922, will ultimately be more indicative value than the GAAP book value of $753. So my question is with the consistent equity offerings and the one, I guess, announce this morning of about 7 million shares in extra shelf financial offering, what this each additional share so that net to you under $7 a share give you in a way of earning power.

And so, I guess, I’m really looking that as a question of return on capital versus cost of capital. It seems it’s very expensive capital given the belief that the business is worth close to the $9 and some of these stocks are less than $7 net of expenses.

So, I’d like to know, what are you doing with that money? And then a second question, I mean, what return you will earn of that money? And will it accrete to the current distribution of $0.52 or detract from it and secondly, if you could discuss the status of the discussions of merging the manager into the public entity?

Ivan Kaufman

Sure, how you are doing, right?

Lee Cooperman - Omega Advisors

I’m good. How are you doing?

Ivan Kaufman

Good. Well, it’s a little wet and cold up here. I’m sure you are on a much -- to a more point in the environment.

Lee Cooperman - Omega Advisors

It is sunny.

Ivan Kaufman

Okay. I’m coming to visit you.

Lee Cooperman - Omega Advisors

(Inaudible) So, ’13, we mentioned we raised about $200 million and we did access to perpetual market and given the yields that we’re creating about 14%, that was a very attractive way for us to be not dilutive to our book. And clearly going forward, we will be very sensitive to any book value dilution and look to access to perpetual markets where it’s appropriate. But also note that even with the equity raise, that we did last year, we continue to grow our core earnings and our core dividend.

So we were very successful at picking those funds and having a positive impact on the company. As we do and I’ve previously discussed, having an active originations platforms and access in the securitization market is fundamental to positioning us for future period. In my comments, I’ve mentioned the discipline in our growth and our strategy is really core to building our franchise. So, I think, we tried to juggle growing our core earnings, growing our platform and having the least impact on the dilution and we are very sensitized to that. Paul, you have any comments on that?

Paul Elenio

No, I think that’s exactly our strategy. As you are aware, when we do get accelerated legacy CDO run off, there’s a need for more liquidity then if it’s not in the CDOs, in the CLOs or warehouse, we can use that liquidity right away. So a lot will depend clearly on where the runoff comes from but we’re certainly very sensitive to dilution. We’ll look to see instruments like the perpetual preferred to continue to grow. And certainly, we’ll definitely monitor where our runoff is and where we think we can put that capital into accretive investment opportunities.

As far as the 7 million or 7.5 million shares that you mentioned today that you may have seen in our 10-K filing, that’s not an offering, that’s an aftermarket offering that we just put up. We had one in place last year. We utilized it very effectively. If expired, we decided to put one up again. We’ll be very sensitive to dilution of common where our stock is trading. But it’s a nice tool to have up, a nice tool in the tool box, a nice instrument.

You can raise capital when you needed effectively. You don’t have to do it all at once. It’s much cheaper. It’s not an indication that we’re using it right now. We just want to have it up and have it as an option for us. Right now, we’ll certainly look to stay away from common dilution and see if we can get something done in a different level of instrument like, Ivan said a perpetual preferred but it’s nice to have that up as an option.

Ivan Kaufman

And of our core objective is to figure out how to delever our CDOs, which has a lot of trapped equity in it, kind of a low return. And if we’re successful in doing that, we’ll have a lot of equity. And we’ll deploy that into higher-growth core earnings, which will have a very positive impact on our dividend going forward. So that’s what makes ’14 a little bit of a challenge. It’s something that we feel we can accomplish. But that is also contemplated in part of our utilization of potential equity raises.

Paul Elenio


Lee Cooperman - Omega Advisors

Okay. And second question -- thank you for that answer by the way. The second question is regarding status of the discussions putting the manager into a public entity?

Ivan Kaufman

I mean, those discussions have not been restarted yet. I believe that we may address some discussions with the Board. We do believe that the synergies between the two entities could have a very good result. So we will go back to the drawing board and examine whether or not there’s a potential transaction that could be had, that would be accretive to the company.

Lee Cooperman - Omega Advisors

All right. Thank you. Good luck. And if you need some sun, come on down.

Ivan Kaufman

Maybe, I’ll you see you, Thursday.

Lee Cooperman - Omega Advisors


Ivan Kaufman



We have no further questions. I would now like to turn the call back over to management for closing remarks. Please proceed.

Ivan Kaufman

Well, thank you everybody for your time this morning and more importantly for your support in 2013 to help us achieve our goals. Look forward to our next call.


This concludes today's conference. You may now disconnect. Have a great day.

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