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Arbor Realty Trust Inc. (NYSE:ABR)

Q1 2011 Earnings Call

May 6, 2011 10:00 AM ET

Executives

Ivan Kaufman –President and CEO

Paul Elenio – Chief Financial Officer

Analysts

Bruce Harting – Barclays Capital

Operator

Good day, ladies and gentlemen. Welcome to the First Quarter 2011 Arbor Realty Trust Incorporated Earnings Conference Call. My name is Francine, and I’m your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions)

We’ll now like to turn the presentation over to your host for today’s call, Mr. Paul Elenio. Sir, you may proceed.

Paul Elenio

Okay. Thank you, Francine. Good morning, everyone. Welcome to the quarterly earnings call for Arbor Realty Trust. This morning we’ll discuss the result for the quarter ended March 31, 2011. 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.

Ivan Kaufman

Thank you, Paul, and thanks everybody for joining us on today’s call. Before Paul takes you through the financial results for quarter, I would like to reflect on some of our recent accomplishments and talk about our operating philosophy and outlook for remainder of 2011.

As we mentioned on last -- on our last earnings call, we’re extremely pleased with our success in having positioned the firm to return to our core lending business, which we actively began over the last few quarters.

We’re also pleased to be operating on platform with greater flexibility and no short-term recourse debt all while preserved in a substantial amount of our equity value.

As previously disclosed in the fourth quarter, we originate two loans totaling $15.7 million and in first quarter, we originated five loans totaling $30.3 million with weighted average unleveraged yield approximately 6.5% in addition to us garnering a 25% equity pick up on one of these loans. Four of these loans are financed through our low cost CDO vehicles, which will increase returns on these investments.

We also have a growing pipeline and will continue to deploy our capital into the opportunities that provide us with the best (inaudible) award returns and look to maximize returns on these investments utilization of our CDO financings and other potential lending sources when available.

We’ll remain discipline – elective and are pleased with the opportunities we are seeing in this recovering market to build up our portfolio with high-quality assets and an increase our core earnings overtime.

Additionally, we’ve had great success in monetizing our non-performing and unencumbered assets, which contributed greatly to our cash position and as of today, is approximately $85 million not included, approximately $20 million of cash posted against our swaps and approximately $20 million of cash available for reinvestments in our CDOs.

We also have around $115 million of net unencumbered assets, which combined with our cash on hand and cash posted against our swaps gives us approximately $220 million of value. This in addition to approximately $235 million of value between the equity in our CDO vehicles and our real estate owned assets for a total value of approximately $455 million.

We also have been effective in managing our CDOs receiving all of the cash distributions from these vehicles to date. We have three vehicles in place with the ability to invest in new assets until January 2012 in one of our CDOs. While there can be no assurances our CDO vehicles will continue to cash flow in the future. We will remain focused on optimizing and utilizing these facilities when possible.

As I mentioned earlier, we will also continue to wind the value of our legacy assets selectively lend and investment opportunities and utilize our CDO financings to enhance our returns and increase our core earnings overtime.

As we’ve discussed in the past, we’ve been very successful in repurchasing our debt of deep discounts recording significant gains and retaining substantial amount of our equity value. In the first quarter, we repurchased $1.5 million our CDO debt for $600,000 recording a gain of proximately $900,000 and we will continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity.

Additionally, as we mentioned in our last call, we started to acquire some of the real estate securing our loans and investment taking Type 2 properties in the first quarter totaling $132 million subject to $55 million our first lien debt. Paul will take you through the accounting related to these transactions in a moment.

I will stress that we believe we’ve experienced our – we have an experienced asset management team with a diverse set of skills including the ability to develop and operate real estate, which gives us the ability to better manage and enhance the value of our investments.

In addition to these assets, there is the potential for us to continue to add our real estate owned assets in the future to additional acquisitions of property securing our loan portfolio. We’re confident in our ability to manage these assets with the goal of maximizing value of our investments, by operating these properties effectively increasing the NOI’s overtime and repositioning these assets for future disposition.

Now, I would like to update you on the credit status of our portfolio and discuss our views of the commercial real estate market. In the first quarter, we recorded $2.6million of loan loss reserves and losses on our investments. These, the loan loss reserves were related to four loans with an outstanding balance of approximately $28 million.

We were pleased with our ability to recover $1 million of previously recorded reserves related to two assets in the first quarter, in addition to the $18.1 million of recoveries we generated in 2010. In addition, we received $42 million in loan payoffs and paydowns.

Refinanced and modified $164 million of loans and extended $139 million of loans during the first quarter. At March 31st, we had 10 non-performing loans with a UPB of proximately $60 million and a net carrying value of approximately $26 million.

As you are aware commercial real estate fundamentals and real estate values have remained weak for some times, which clearly impacted every borrower and our portfolio. We believe -- we do believe there has been movement towards a stabilization of the commercial real estate market of late and some segments there have been signs of recovery, although the overall market remains uneven.

We have been aggressive in managing the credit issues related to our legacy assets through the refinance and modification of a substantial amount of our portfolio and by recording the appropriate reserves on our assets to date and while we believe we are adequately reserved at this time and that we have cleaned up a substantial amount of our books, our portfolio of investments is secured by properties in multiple assets classes and product types, as well as geographically throughout the country.

Additionally, what we’ve seen in certain – in some instances is that although our asset values are adequate to support our loans, some of our borrowers have suffered dramatically from the recession and lack of liquidity, which can directly impact the performance of our collateral and potentially lead to additional delinquencies and losses in the future related to our portfolio. So, we will continue to aggressively evaluate the portfolio, as well as the market conditions and the strength of our borrowers determine if any further reserves are necessary.

In summary, we are extremely pleased to have repositioned the company and to have returned to our core lending business. We’ve confident that our deep and versatile origination platform will produce high-quality assets and will continue to actively redeploy our capital into the appropriate investments.

We will also continue to aggressively manage our portfolio, mind the value of our legacy assets and optimize the utilization of CDO debt, as well as other potential financial sources with the goal of enhancing our yields and core earnings overtime and maximizing the return to our shareholders.

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

Paul Elenio

Okay. Thank you, Ivan. As noticed in the press release, we have net income for the first quarter of $267,000 or $0.01 per share and FFO of $700,000 or $0.03 per share. We reported $1.6 million in net losses from our portfolio for the first quarter, consisting of $2.6 million in loan loss reserves and losses on restructured loans net of $1 million in recoveries on previously recorded reserves.

We also charged off $42.2 million in previously recorded loans loss reserves related to the reclassification of certain assets to real estate owned and loans which paid off in the first quarter. As a result, we now have $164 million of loan loss reserves on 27 loans with a UPB of around $382 million at March 31, 2011.

As we mentioned before, we have been very effective over the last few years in retaining equity value the retirement of our debt instruments at deep discounts. In the first quarter we managed to repurchase some more of our CDO debt back at discount, recording approximately a $900,000 gain from this purchase and we will continue to evaluate the buyback of future CDO dept going forward based on availability, pricing and liquidity.

At March 31st, our book value per share stands at $8.55 and our adjusted book value per share is $12.54, adding back deferred gains and temporary losses on our swaps. These book value numbers do not take into account any dilution for the potential exercise of warrants issued to Wachovia, as part of the 2009 debt restructuring.

Additionally, as Ivan mentioned, we currently have approximately $85 million in cash on hand and $20 million of cash posted against our swaps and between this cash, our real estate owned assets, unencumbered assets and equity value in our CDOs net of reserves as of March 31st, we currently have approximately $455 million of total value.

Looking at the rest of the results for quarter, the average balance in our core investments declined by about $100 million from last quarter to around $1.6 billion mainly due to as we discussed acquiring some of the properties that were securing similar loans and reclassifying them to real estate owned, as well as payoffs and paydowns in the fourth and first quarter partially offset by new originations.

Yield for the quarter on these core investments was around 4.52%, compared to 4.75% for the fourth quarter. Without a non-recurring item of additional interest received in the fourth quarter on a loan that exceeded our investment basis in the assets. The yield on these core assets was around $4.52% for the first quarter, compared to 4.59% for the fourth quarter.

These decrease was primarily due to the reduced rates on modified loans, partially offset by the reclassification of two loans to real estate owned, one of which was non-performing combined with higher rates on new originations.

Additionally, the weighted average all-in yield in our portfolio was around $4.50% at March 31, 2010, compared to 4.59% at December 31, 2010. This decrease was again mainly due to reduced rates on modified loans, partially offset by the reclassification of loans to real estate own and higher rates on new originations.

The average balance in our debt facilities remained relatively flat from last quarter at approximately $1.3 billion, as did the average cost of funds in our debt facilities, which is approximately 4.10% for both the fourth and first quarters.

Excluding the unusual impact on interest expense from our swaps, our average cost of funds was also relatively flat at approximately 4% for the first quarter, compared to around $396 for the fourth quarter and our estimated all-in debt costs was around 3.94% at March 31st, compared to around 3.90% at December 31st.

So overall normalized net interest spreads in our core assets decreased to proximately 0.52% this quarter from 0.63% last quarter, primarily due to the reduction of interest income for modified loans, partially offset by the reclassification of two loans to real estate owned and higher interest rates on new originations. Also as Ivan mentioned, we are actively engaged in the redeployment of our capital with the goal of increasing our net interest spreads overtime.

Additionally, we acquired two sets of properties in the first quarter that were securing certain of our loans in the normal course of our lending operating. One of the acquisitions happened in February and was related to an $85 million performing loan secured by six resort hotels in Florida. The loan had a weighted averages interest rate of approximately $3.75% and a net carrying value of $71.6 million prior to the acquisition.

As a result, we recorded this asset on our books as real-estate owned at fair value and eliminated our loan in consolidation and we are now recording net operating income from this property including depreciation expense instead of interest income.

We do believe that the NOI before depreciation on this asset will approximate the yield on our original loan for a full year. However due to the seasonal nature of the operations, we expect the net income from these hotels to fluctuate from quarter to quarter with a bulk of the net income occurring in the first two quarters of the year.

The second acquisition which occurred at the end of the first quarter was related to a portfolio of multi-family properties which was securing a $29.8 million non-performing loan which had a net carrying value of $11.4 million before the acquisition.

These properties were subject to approximately $55 million of first lien debt which we assumed upon acquisition and these assets are now reflected on our balance sheet as real estate owned at fair value.

Although we are currently evaluating the operations of these properties based on our preliminary estimates, we believe the NOI excluding depreciation expense to be in the range of $1.5 to $2 million annually.

As we said earlier, there is the potential for us to add to our real estate assets in the future in the normal course of our lending operations which could have a more significant impact on our financial statements going forward.

Next, our average leverage ratios were around 70% on core lending assets and are 81% including the trust preferred trust for the first quarter compared to 67% and 77% respectively in the fourth quarter.

And overall leverage ratios on a spot basis were 3.3:1 at March 31st and 3.2:1 at December 31st. The increase in the average leverage ratios was primarily due to the reclassification of certain of our assets to real estate owned in the first quarter.

There are some changes in the balance sheet compared to last quarter that are worth noting. Cash and cash equivalents decreased approximately $34 million from last quarter primarily due to deploying some of our capital into new -- originations and the payment of the $11 million management fee from 2010 during the first quarter. The decrease in cash was partially offset by payoffs and pay-downs of our loan and investment portfolio during the quarter.

Restricted cash in our CDO vehicles increased approximately $31 million from last quarter, also due to runoff in the first quarter. However, substantial amount of this cash was utilized in April through the successful movement of some our [unlevered] assets into our CDO vehicles.

As we mentioned earlier, we acquired two sets of properties during the quarter, one of which was subject to first lien debt which accounts for the increase in real estate owned assets and related debt of approximately $132 million and $55 million respectively during the quarter as well as the majority of the reduction in loans held for investments from the reclassifications of these assets.

In addition, other comprehensive losses decreased by about $9 million for the quarter. This was primarily due to a significant increase in the market valve of our interest rates swaps from a change in the outlook of interest rates. This also makes up a majority of the increase during the quarter in other liabilities. GAAP requires us to flow the changes in value of certain of our interest rate swaps through our equity section.

And lastly, our loan portfolio statistics as of March 31 show that about 67% of the portfolio was variable rate loans and 33% was fixed. By product type, 66% were bridge loans, 13% junior participations and 21% mezzanine and preferred equity.

By asset class, 38% is multifamily product, 37% is office, 9% hotel, 11% land and 1% condo. Our loan to value was around 88%, a weighted average median dollars outstanding was 60% and geographically we had around 41% 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 so that we may answers any questions that you have at this time. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We have a question coming in from the line of Bruce Harting from Barclays Capital.

Bruce Harting – Barclays Capital

Good morning, if you had to prioritize the, you know, the opportunities right now, you are seeing in the lending side, relative to available capital or cash flow versus having to raise any capital, how would you sort of prioritize that or rank that?

And in terms of the opportunities, I mean, is there enough flow that you are seeing that the prioritizing that would allow you to sort of grow into higher earnings faster, just trying to get a sense of the urgency right now in terms of working with what you have on the balance sheet versus new opportunities out there? Thanks.

Ivan Kaufman

Bruce, it’s Ivan. That’s a great question and clearly that is a little bit of a moving target. Unfortunately it has been a positive moving target for us. We’ve had certain payoffs and certain monetization of a lot of our unencumbered assets which have allowed us to redeploy that capital.

In addition, we’ve a pipeline that is building at a very healthy pace. I think we closed at about 30 million bucks last quarter and that should be increasing and our pipeline is growing very significantly. We’ve about 20 million of room in our CDOs and we have some other expected payoffs as well as significant cash as well as our leverage we’re working on as well.

So and we are looking at monetizing some of our unencumbered assets. So, I think we have significant enough dry powder to handle that growing pipeline and really begin to return to core earnings. We did have some payoffs that were a little ahead of time, so we were a little surprised that some of those loans paid off so we are actively looking to re-invest that capital at higher rates.

As I mentioned on our last call, we’re seeing bridge loans kind of priced in the LIBOR 5 and 6 range and we’re seeing mezzanine loans kind of in the mid-teens range as I thought our pipeline looks like. So what I would expect to see is a growing pipeline. Clearly, adequate cash to fund in the next couple of quarters and really work on getting those core earnings up and I think we’re really focusing on those core earnings for 2012.

We would like to gets them a little bit earlier, but I think a lot has to do with where the loans pay off and how quickly we can redeploy that capital, but we do have significant cash capital capacity to handle the next couple of quarters based on growing pipeline.

Bruce Harting – Barclays Capital

Thanks. Where are you seeing your -- relative to loans that you are working out and then loans, your concentration over the next two or three years in your strategy in terms of geographic opportunities, are there -- will there be any change in your strategy in terms of that?

Ivan Kaufman

I think one of the things that we certainly learned is we are going to stick with close to the city and the Tri-State area as possible. And as most people in real estate have recognized that the city, although it did fall -- it didn’t fall as rapidly. There was more liquidity in city assets and it recovered the quickest.

The other sector which was really the core in the franchise of what helped build the company is the multifamily sector. So we are sticking to a lot of cash flow assets on the multifamily sector working on B class assets throughout the United States.

So, that’s where you’ll see a significant amount of what we’re doing. What we won’t do where many firms get hurt, extremely careful is buying loans out in the market as opposed to originating them ourselves. So the focus will be on our own originations as opposed to purchasing loans and New York and the Tri-State area and multifamily assets.

Bruce Harting – Barclays Capital

Thanks, Ivan.

Ivan Kaufman

Thanks, Bruce.

Operator

And as there are no further questions in the queue I’ll like to turn the call back over to management for closing remarks.

Ivan Kaufman

Okay. Thanks for listening to our script this morning and we look forward to the next couple of quarters. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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