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Arbor Realty Trust's. (NYSE:ABR)

Q2 2014 Results Earnings Conference Call

August 01, 2014, 10:00 AM ET

Executives

Paul Elenio - Chief Financial Officer

Ivan Kaufman - President and Chief Executive Officer

Gene Kilgore - Executive Vice President - Structured Securitization

Analysts

Steve DeLaney - JMP Securities

Jade Rahmani - KBW

Richard Eckert - MLV & Company

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2014 Arbor Realty Trust Earnings Conference Call. My name is Lacy, 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 the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Paul Elenio, Chief Financial Officer. Please proceed.

Paul Elenio

Okay. Thank you, Lacy. 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 June 30, 2014. 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. As you can see from the press release we issued this morning, we had a very strong second quarter on many fronts. Before Paul takes you through the financial results of the quarter, I would like to update you on the significant progress we continue to make in executing our business strategy and focus on our outlook for the remainder of 2014 and 2015.

As I mentioned on our last call, our focus for 2014 continues to be to achieve a number of key operating objectives in order to produce substantial earnings growth in 2015 and beyond while generating strong operating results for the current year. We also remain heavily focused on improving the right side of our balance sheet to enhance liability structure that will insulate us from market volatility in future periods.

We are very pleased with both our operating results for the second quarter and in the significant progress we have made in achieving several key objective which will not only have a positive impact on 2014 but continue to build the strong foundation for substantial future growth and success

As we discussed on the last call, we continued to improve our liability structures with the closing of our latest CLO vehicle in the second quarter. This transaction marks our third CLO execution in an 18-month period. As we have mentioned several times, financial and substantial amount of our investments were non-recourse, non mark-to-market, match funded debt remains a critical component of our business strategy which will allow us to operate efficiently in all environments.

We now have three CLO vehicles -- [$60] million of collateral, $546 million of leverage and the ability to substitute collateral for a replenishment feature in all three vehicles which we believe provides us with a very stable funding source for the next few years and will result in increased leverage returns on invested capital.

We are extremely pleased with our success in this area and in our ability to continue to make substantial improvements with each new securitization including increased leverage in ramp up capacity for future investments as well as reduced pricing along the replenishment features. We continued to cement ourselves as a leader in the commercial mortgage REIT securitization market which we believe is directly attributable to the depth and experience of our securitization team and our strong reputation in the market.

The closing of our third CLO in the second quarter also allowed us to empty out a significant portion of our warehouse lines resulting in approximately $220 million of financing capacity and we now have approximately 92% of our debt stack in match funded non-recourse vehicles which are not subject to mark-to-market provisions including the trust preferreds and preferred stock issuances equity.

The $220 million of capacity and our lines combined with a roughly $110 million of cash available for investment and our cash on hand expected run off and access to capital will allow us to fund our future investment opportunities and continue to pull collateral for additional securitizations when available and continue to deliver mid teen returns on our capital.

Another significant accomplishment during the second quarter was our ongoing ability to successfully access the capital market to fund our growing pipeline of investment opportunities. We raised approximately $56 million of fresh capital to our first senior unsecured debt instrument which has a seven year life and an interest rate of [7 3/8]. We remain very sensitive to dilution and strategic in our approach to capital issuances given where our stock prices currently trade in.

We are extremely pleased with our success in this area allowing us to fund our business with the most cost effective and accretive form of capital. We also continue to have tremendous success in growing our origination platform allowing us to effectively replace our run off with high yielding investments. We originated approximately $170 million of loans in the second quarter with an average yield of approximately 7.75% and generated mid teens leverage returns on these investments as result of financing a bulk of them in our CLO vehicles.

This volume, combined with a $275 million we originate in the first quarter puts our total originations for the first six months of the year at approximately $445 million. We also have a robust pipeline and now expect to be at the high end or perhaps even slightly above the range we guided to last quarter of around $700 million to $750 million of total originations for 2014.

We continue to remain extremely disciplined in our lending approach focusing mostly on multi-family whole loans allowing us to invest in new property product capital stack and generate strong risk adjusted returns on our invested capital. As we have mentioned in previous calls, we continue to experience accelerated run off in our portfolio, a fair amount witnessed in our legacy CDO vehicles. We experienced approximately $246 million of run-off in the second quarter, $54 million of which was now legacy CDO vehicles and have totaled approximately $473 million in run off in the first six months of the year, $220 million related to our legacy CDO vehicles.

It is very difficult to accurately predict what our run-off will be for the remainder of 2014 although we do expect some level of continued accelerated run off in our portfolio. As we have discussed the run-off in our legacy CDOs have temporarily reduced our margins as these vehicles continue to delever and therefore our goal remains to fully delever a number of our non-recourse debt vehicles by the end of 2014 or early 2015 which will significantly increase our future earnings.

Another item that was very significant for us in the second quarter was our ability to monetize or record gain of approximately $8 million in one of our remaining equity [kickers]. This resulted from the sale of a 12.5% joint venture interest that owned and operated a commercial property in Brooklyn New York for approximately $8 million, in cash in the past garnering and enhancing the value of equity kickers was an important component of our business strategy and although in the current lending environment these equity kickers are less frequent. This transaction demonstrates our ability to create significant off balance sheet value and substantial earnings from our legacy investments.

Additionally, as previously disclosed we recognized that $58 million gain related to our interest in the 450 West 33rd Street property in July. As we’ve discussed on several calls, we have had to gain deferred on our books for many years and was a significant component of our reported adjusted book value per share. We are extremely pleased to have resolved this outstanding item recording a significant gain in the third quarter and increasing our book value per share by $1.15 to $8.82.

Currently, we are trading at a significant discount to our book value, which is not inline with our peers and we feel like a resolution of this significant item should result in a trading price well at discount book value that is more in line with our peers.

In July, we were also able to successfully negotiate a buy out of the outstanding loans that were issued to Wachovia Bank as part of the 2009 debt restructuring. There were 1 million warrants outstanding with an average strike price of $4 per share. We increased the purchased the outstanding [warrants] for a one time cash payment of approximately $2.6 million which reflects the stock price equivalent to $6.60 per share. We are very pleased to have extinguished these warrants as discounts to our current stock price and at a substantial discount to both our books value and what we believe is true value of our plant price.

Now I would like to update you on our view of the commercial real estate market and discuss the credit status to our portfolio. Overall, the commercial real estate market continues to show signs of steady improvement especially in the multi family sector. Significant amounts of capital continue to enter the space resulting in increased competition in the market. As I mentioned before, we do expect this trend to continue which will result in further yield compression. Again, we remain disciplined in our approach focusing mainly on multi family lending which is an asset class in which we hate a tremendous amount of experience.

We believe, we are well positioned and have a competitive advantage in the market by lever more for our manager who provides us with a consistent pipeline of multi-family bridge loan opportunities from its significant agency platform.

Therefore, the slightly increased competitive landscape we feel confident that our pipeline of investment opportunity will continue to grow and are confident in our ability to continue to generate strong leverage returns on investment pipeline and seeing them with our non recourse sale of vehicles, allowing us to increase our core earnings overtime.

Looking at the credit status of our portfolio in the second quarter, we recorded a $4 million of loan loss reserves related to three assets in our portfolio and recorded $4.8 of recoveries of previously recorded reserves. This translates into net recoveries of previous reserves of approximately $900,000 for the quarter.

And while it is always possible to have some additional write downs in our portfolio going forward we remain optimistic that any potential remaining issues will be minimal and that we continue to have future recoveries on the asset and other gains to offset any potential addition or losses. Although the timing of any potential losses recoveries and gains on a quarterly basis is not something we can predict or control.

In summary, we are extremely pleased with our second quarter operating results and the significant progress we have made over the last several months in achieving our overall objectives. We do remain focused on continuing to achieving these goals, which include further enhancing our liability structure to continue to access the non-recourse securitization market, delevering and replacing a significant amount of our legacy non-recourse debt vehicles, continuing to grow our origination platforms and replace our run-off from further access to capital markets in the most efficient and accretive way to continue to grow our pipeline. We are confident we will be able to achieve these objectives while maintaining our core earnings and dividends in 2014, and more importantly, achieve the ultimate long term goal of positioning us favorably to grow our earnings in 2015 and beyond resulting in increased value to our shareholders.

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 second quarter was approximately $13.7 million or $0.27 per share and net income was $11.5 million or $0.23 per share. Adjusted FFO was approximately $14.9 million or $0.29 per share for the quarter adding back approximately 1.25 million of non-cash stock compensation expense.

As Ivan mentioned, we had a very successful quarter including significant profitability. Going in the quarter we recorded a gain and received 7.9 million in cash from the sale of one of our equity investment. And as we disclosed recently, we also successfully unwound the large deferred gain we had related to the 450 West 33rd Street property in July resulting in the recognition of the $58.1 million GAAP gain that will be recorded in our third quarter financial statement.

As we have mentioned on many calls, this deferred gain was a significant component of our adjusted book value and the resolution of this item has increased our pro forma June 30 book value at $1.15 to $8.82 per common share and our adjusted book value is now $9.21 per common share adding back the temporary losses on our [indiscernible].

As Ivan mentioned we recorded $4 million in loan loss reserves related to three assets in our portfolio and had $4.8 million recoveries of previously recorded reserves during the quarter, resulting in net recoveries of approximately $900,000 in the second quarter. And at June 30, 2014, we had approximately $115 million of loan loss reserves on 14 loans in our portfolio with a UPB of around $238 million.

Looking at the rest of the results for the quarter, the average balance in our core investments increased slightly to approximately $1.64 billion for the second quarter from approximately $1.62 billion for the first quarter to slight run-off exceeding originations for the second quarter primarily due to the timing of originations and run-off in the first quarter.

The yield for the first and second quarter on these core investments have slacked at around 6.22% and the weighted average flowing yield on our portfolio increased to around 5.93% at June 30th compared to around 5.79% at March 31st due to the second quarter originations having a higher yield in the second quarter run off.

The average balance in our debt facilities also increased to approximately $1.21billion for the second quarter from approximately $1.17 billion for the first quarter, primarily due to the closing of our third CLO and senior unsecured notes in the second quarter, partially offset by run-off in our legacy CDO vehicle, the proceeds of which are used to pay down CDO debt and the pay down of the significant amount of our warehouse debt with the proceeds from our third CLO.

The average cost of funds in our debt facilities increased to approximately 3.73% for the second quarter compared to 3.68% for the first quarter largely due to run-off in our CDO vehicles combined with the issuance of our senior unsecured notes in the second quarter.

Additionally our estimated all-in debt cost increased to approximately 3.75% at June 30, compared to around 3.52% at March 31, again primarily due to paying down our lower cost CDO debt with the proceeds from run-off in these vehicles and the issuance of our senior unsecured notes.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense our average cost of funds for the second quarter would be approximately 4.06% compared to 3.97% for the first quarter and our estimated debt cost would be 4.08% at June 30, compared to 3.86% at March 31, again primarily due to run off in our CDO vehicle and the issuance of our senior unsecured note.

So overall, net interest spreads in our core assets on a GAAP basis decreased slightly from 2.55% last quarter to 2.49% this quarter. Including the preferred stock dividends is debt cost, our net interest spreads decreased to approximately 2.16% for the second quarter compared to approximately 2.26% for the first quarter, largely due to a temporary reduction in our margins and the impact of our legacy CDO run-off.

Other income decreased approximately $700,000 compared to last quarter due to the sale of all the remaining RMBS securities in the first and second quarter and this will result in other income being immaterial going forward.

NOI related to our REO assets decreased approximately $700,000 million compared to last quarter due to seasonal nature of income related to our portfolio of hotels that we own. We believe these REO assets should produce NOI before depreciation and other non-cash adjustments of approximately $3.5 million to $4 million for 2014, the bulk of which was recognized in the first two quarters. This projected NOI combined with the net interest spread in our loan and investment portfolio gives us approximately $48 million of annual estimated core FFO before potential loss reserves and operating expenses based on our run rate at June 30, compared to approximately $53 million at March 31. This decrease is due to a significant amount of capital we raised in the second quarter from our senior unsecured notes and a ramp up feature associated with our third CLO not being fully deployed as of June 30, as well as the temporary reduction in our net interest margin from the accelerated run off we experienced in our legacy CDO vehicles.

As we have discussed before, although this accelerated run off has temporarily reduced our earnings run rate it continues to delever these vehicles which will allow us to execute our strategy of creating efficiencies from replacing our legacy CDOs resulting in an increase in our earnings run rate in 2015. Additionally, we do expect our portfolio to experience overall net growth in 2014 and this combined with the gain we recognized in the second quarter from the sale of one of our equity investments will allow us to achieve our goal of maintaining our earnings and dividends for 2014 and again grow our core earnings run rate in 2015 and beyond.

Operating expenses were relatively flat compared to last quarter, other than a non-cash charge of $1.25 million in the second quarter related to the vested portion of restricted stock that was granted to our director, employees and employees of our manager. These items were added back to our [AFFO] for the quarter which I discussed earlier.

Next, our average leverage ratios on our core lending assets remain relatively flat at approximately 63% including the trust preferred and perpetual preferred stock as equity for the second quarter versus 62% for the first quarter. And our overall leverage ratio on a spot basis including the trust preferreds and preferred stock as equity was also flat at approximately 1.8 to 1 at both June 30 and March 31.

And after the closing our third CLO in the second quarter, we now have approximately 92% of our debt stack and match funded non-recourse vehicles which are not subject to mark-to-market provision including the trust preferreds and preferred stock issuances as equity as a result of moving a substantial amount of the collateral from our short-term warehouse lines into this vehicle. There are some changes in the balance sheet compared to last quarter that I’d like to highlight.

Restricted cash increased by approximately $60 million primarily due to the ramp up feature associated with our most recent CLO combined with CDO run-off in the second quarter that we used to repay CDO debt in the third quarter. CDO debt also decreased by approximately $86 million compared to last quarter due to our first quarter CDO run-off that was used to repay CDO debt in the second quarter.

Additionally CLO debt and unsecured debt increased $281 million and $59 million respectively due to the issuance of our third CLO and first senior unsecured notes in the second quarter. And repurchase agreements decreased approximately $226 million compared to last quarter from us emptying out a significant portion of our warehouse line as a result of us closing on newer CLO vehicles.

Lastly our loan portfolio statistics as of June 30 shows that about 70% of our portfolio was variable rate loans and 30% of fixed, by product type about 73% of the portfolio were bridge loans, 15% junior participation and 12% mezzanine and preferred equity, our asset class 67% was multi-family loans, 19% was office, 7% land and 4% hospitality. Our loan to value was around 73% and geographically we have around 34% 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, Lacy?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And 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, and congrats on a very -- another very active quarter on to reports your goals. I guess one housekeeping thing, Paul, with respect to the pro forma book value that you gave us I believe it was $8.82?

Paul Elenio

Correct.

Steve DeLaney - JMP Securities

Can I understand that, that included the impact of West 33rd that you also factored in the accretion from the repurchase of the Wachovia warrants or was that not?

Paul Elenio

No. We did not.

Steve DeLaney - JMP Securities

Okay.

Paul Elenio

We did not at that time. Steve, we just basically took the equity at June 30 and pro forma that adjusted our transaction and then divided over the shares that were outstanding as of June 30.

Steve DeLaney - JMP Securities

Okay, got it. And I guess most importantly, I totally get what you’re talking about the run-off and the de-leveraging and therefore the lower REO on the capital that’s trapped in the legacy CDOs. You guys did a great job, I think on fourth quarter call leaving us no doubt what’s going to be part of the story in 2014. I was just looking as your like total capitalization, if we take your equity and the new 7-year notes 22:53 and we take the troughs, you kind of about $700 million what I would call total investment capital.

Can you us give very roughly Paul like some sense of how much of that capital is currently trapped in these three legacy CDOs currently and sort of that timeframe of when might that number go from whatever it is today? What’s the timeframe to get that down to the zero?

Ivan Kaufman

Yeah, so -- it’s Ivan. How are you?

Steve DeLaney - JMP Securities

Hey, Ivan, how are you?

Ivan Kaufman

Nice. So, the concept of the trapped equity and Paul will give you the numbers. Is that when a loan current pays off in the CDO, in the legacy CDOs, the impact to that is an direct loss of income, right, because you’re losing the interest earning asset, but you’re keeping the debt, so, where we are at the point now where the return on the equity in our vehicle is diminishing everyday. So, we’re working now to de-lever those vehicles which one going to try and get them done in the fourth quarter.

And what will happen is we’ll continue to see further acceleration of run-off in those vehicles and refinancing of those assets. And then we’ll able to put that equity back to work and get significantly higher returns. So each and everyday the equity in that vehicle is getting lower returns and we’re at that crossover point. Paul you want to layout how much is in there?

Paul Elenio

Sure. As Ivan mentioned, Steve, it does temporary reduce the margins in the ROE, but it achieve the longer term which is the continue de-lever these vehicles and hopefully get them to a point at the end of ’14 or hopefully the latest early ’15 where it make sense to unwind them and replace them and we’ll get efficiencies from that.

Right in the three CDO vehicles we have roughly $275 million to $3 million of equity tied up in those vehicles. And as far as when we’ll be able to deploy that? That will certainly be determined greatly by how much additional accelerated run-off we see here and when we get to that point where it makes all the sense to replace these and terminate them.

Right now, we continue to see accelerated run-off and we’ll see where it goes for the remainder of year. As Ivan mentioned, when we do get run-off, not only do you lose the interest on the asset, because the cash is used to pay down debt. It also goes to pay down the senior bondholders, which is the lowest cost debt in the vehicle. So that’s why the ROE continues to decline in those vehicles, because not only are you not having access to that trapped cash, but its going to pay down the lowest cost debt trench in the vehicles until those trenches are repaid.

Ivan Kaufman

Yes. So our leverage is significantly below 50% at this point in the first through legacy vehicles and I think we’re approximately at 50% in the third one. And that’s what we’re wrestling with. And at the same time, we’re also dealing with adding new securitization vehicles which has a little bit of cost too. Because when you ramp up in those vehicles you’re paying a cost on those, because we don’t have any assets.

So we’re really building the foundation to replace those vehicles at the same time having a duplicate cost of putting new vehicles on place, in place and absorbing that. So that’s kind of the foundational elements that we’re putting in place.

Paul Elenio

And just to continue that point that Ivan just made. We put it in our prepared remarks, another small point. Some of the reduction in margin during the quarter was a little artificially lower than it should have been, because as you know we did close our third CLO in the second quarter.

We did average senior unsecured notes in the second quarter and we did have a ramp up in that third CLO, also the run-off during the quarter. So lot of that cash wasn’t fully deployed as of June 30, Steve, and also the run-off during the quarter unlike the run-off in the first quarter, which was largely from CDOs. In the second quarter, we did have around $130 million of our run-off in our CLOs.

So that’s why we mentioned in our prepared remarks, its about $110 million of cash that we’re able to deploy that sitting in our CLOs that’s unvested and we expect to deploy that cash rather quickly. We also mentioned that our pipeline is very strong and we do expect to seeing that growth in the portfolio for the year.

So we realized that this issue is an issue that reduces our ROE. The strategies we put in place are to continue to grow our pipeline and originations to show net growth to be able to offset some of that. We did have that large equity kickers which helps and then put us in the position to deliver these vehicles later in the year that really grow ’15.

Steve DeLaney - JMP Securities

And to accelerate the de-levering, do your structures had some kind of cleanup call provision that lets you kind of break the trust, if they gets below 10% of the original principle balances? Or do you just have to wait from them to for all senior notes to be fully paid off?

Paul Elenio

I’ll let Gene comment on that, Gene Kilgore who held that securitization area. So I hope he is little more technical than we are in terms of the ability to break them.

Gene Kilgore

Hi, Steve, yeah, we do have the ability to do that, Steve, basically at any point. I mean, there is notice required of course for the note holders. But basically we have the ability to call all those legacy vehicles at any time.

Steve DeLaney - JMP Securities

Great. Good enough. Okay, guys, well, thanks so much for the comment. That’s taken up too much of your time, but like I say, congrats on, you made it clear what the objective was in the plan. And I think with 40% of your total capital somewhat in suboptimal situation I think the results are pretty remarkable, so congrats on that.

Gene Kilgore

Thanks very much, Steve.

Operator

Our next question comes from the line of Jade Rahmani with KBW. Please proceed.

Jade Rahmani - KBW

Hi. Thanks for taking the question. Just the follow-up to the CDO question. I mean, do you think that the level of pay downs you experienced in the first half is sustainable run rate or should decline because to get some portfolio growth I think you would assume moderation?

Ivan Kaufman

Yeah. That’s a good question, Jade. And it’s very tough to predict as we put it on prepared remarks what run-off would be going forward with the amount of capital we’re seeing into the space. The amount refi capability, some of these borrowers and investors have.

But we do believe that run-off will taper down a little bit here in the third and fourth quarter combined with the fact that we do think we’re going to have a pretty strong originations third quarter which we try to guide to with the robust pipeline. So you’re right. We do expect our originations to be at the high end if not exceed the range we guided to last quarter and we do expect the run-off to taper a little bit here in the third and fourth quarter which will result we believe in net portfolio growth. However, we don’t have a crystal ball and what the run-off will be. That’s guess at this point. And of course, origination volume could be higher or lower depending on what we see is market opportunities as well.

Paul Elenio

I think that due to the liquidity in the market and the return of the CMBS market, we were quite surprise at some of the pay-offs that they were done that earlier. At this point in time, accelerated run-offs as we de-lever these facilities at a point of time beneficial to us, so we’re at that crossover point, and I believe in the fourth quarter if there is accelerated run-off that actually will stop benefit once these facilities deleverage. So it won’t impact us negatively at that point going forward.

Jade Rahmani - KBW

Okay. Regarding this CLO run-off what was that attributable to and what kind of prepayment rate does that imply?

Paul Elenio

I guess, the nature of our assets in our CLO vehicles are short-term in duration, that general 24 to 36 months. I think once again due to the performance on a lot of these assets being far greater than even the owner expected, we expected add liquidity in the markets, these assets which were transitional just got ready for 31:17 permanent financing not much quicker.

So I think that’s good news for us, because it really reflects on the quality of our asset. And what’s also good news is our facilities are setup with replenishment features so when loans pay-off we just replenish them with new ones.

And on the other side of it, we continue to effectively generate new multi-family loans that we put into these vehicles and our pipeline is very strong. So that just part of our business operations, we’re pretty comfortable with that. And it’s the typical story with the lender, they are always nervous when the loans are put on, because this initial thought is at risk, but when they get paid off that’s hard to see it go. On the other hand our business model is set up for that and our vehicle are shown up for that.

Jade Rahmani - KBW

Okay. Can you discuss the competitive environment and also if you believe yields are likely to compress and volumes pull back maybe, I mean, the third quarter sounds like you’re expecting to be strong, but maybe have your views on the competitive outlook change?

Ivan Kaufman

Well, our third quarter and the loans in our pipeline that are closing. We are pretty comfortable with the yields that are set and it’s pretty remarkably considering that there is yield compression that we’ve been able to maintain the yields on our assets.

We expect there to be further yield compression, more competition and given our level of volume, given our managed ability to originate these volumes. We are little bit inflated on and we’re still able to win deals and on the margin not have to compete to the same level.

One of the benefits that we have in the space that we’re in, in the smaller loans, bars are not a sensitive to yield as they are in a larger loans. So we’ve cogged out a nice niche to have a little bit of installation from that yield compression.

On a flip side of that, we’re expecting our liability cost to go down plus our warehousing lenders and hopefully get off another securitization that will be even tighter. So we’ll try to offset some of that. But the volume that we have in our pipeline and our expected closing are somewhat consistent with the prior quarter, not that much different, but we are expected to see further yield compression within the market.

Jade Rahmani - KBW

Okay. Regarding the types of loans you’re originating, I think the average loan balance declines to below $10 million and I think last quarter it was $13 million, was there anything notable there?

Paul Elenio

Jade, its Paul, we did have a few larger loans in the first quarter and Ivan guided to on the last quarter call in response to a similar question. We are starting to be able with the securitization vehicles we had in the expertise, playing some of the larger loans.

And I think its just coincidence. In the first quarter we did originated a few larger loans. In the second quarter our loan size was average about $8 million, so it’s a little bit less. But we do have some larger loans in the pipeline as well. So I think it just timing. Our niche is small loans, but we do -- we’ve been able to effectively compete in some of the larger loans lately because of the size of the securitization vehicles we had in the expertise. But I just think the second quarter was a little bit of timing.

Jade Rahmani - KBW

Okay. And just lastly on the REO portfolio, it sounds like you’re expecting essentially breakeven earnings in the second half. I mean, what is that about the portfolio that drives such steep seasonality?

Ivan Kaufman

The main portfolio that deals with seasonality is a portfolio or resort hotels in Southern Florida. And so those hotels are obviously a lot more active in the first quarter and a little bit into the second quarter. And as you get into the summer they are not as active here. Basically you have not as much activity and you’re spending that time maintaining the hotel and it’s just a nature of having resort hotels in Southern Florida.

Unfortunately the [accounting] does not allow us to spread those earnings evenly over the year, so we deal with seasonality in the first two quarters are profitable on the second two quarters run a loss in that portfolio.

Jade Rahmani - KBW

Great. Thanks for taking the questions.

Operator

And our next question comes from the line of Richard Eckert with MLV & Company. Please proceed.

Richard Eckert - MLV & Company

Thanks for taking my call. I just had a question about the timing of the originations. In the first quarter you indicated that you expected them to decelerate in the second half of the year. But it looks like now, just given the pattern from the first two quarters that you’re actually at least in the third quarter expecting an increase in originations. Can you just give us some kind of guidance as to what the pattern is that you expect at this time and we won’t necessarily hold you to it?

Ivan Kaufman

We don’t always have control over when a pipeline closes and we actually expected the second quarter to be a little higher, but one of our larger multi-family loan packages I think about an $80 million deal is actually slated to close probably today or Monday.

So that is a little bit of a shift, that would have occurred in the second quarter, and would have been more true to form with our comments, so that one loan probably has impacted that comment only because it was a little bit slow to get close.

But it was our objective to accelerate our originations because we feel that would become more competitive in the second half. So we effectively did it. We just got dragged down by one loan to not actually be true to that statement, but pretty much true to the business strategy.

Within the second half, I think that depending on our run-off and depending on the opportunities that we see, we may have the opportunity to have greater net growth in our portfolio if we’re seeing the right opportunities. So that will just depend on the opportunities that come in the door.

That’s why in my prepared remarks I commented that we’ll probably exceed the prior range that we setup. We are little surprised with our ability to win certain deals without having to dip into the same competitive arena as everybody just based on a network of relationships that we have. So, hopefully we can show a little more, but we don’t want to guide toward, because market can get that much more competitive and we’re just cautious on how we precede.

Richard Eckert - MLV & Company

Fair enough. Thank you very much.

Paul Elenio

Thanks, Rich.

Operator

(Operator Instructions) And at this time I show that we have no further questions. I would like to turn the call back to Paul Elenio, Chief Financial Officer for closing remarks.

Paul Elenio

Okay. Everybody thank you listening it on the call. We’re very pleased with our progress for the second quarter and achieving lots of the key objectives we’ve laid out and also keeping an eye on being able to sustain our earnings and dividends for ’14 and we look forward to speaking to you again next quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may all disconnect. Good day everyone.

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