Paul Elenio - CFO
Ivan Kaufman - President & CEO
David Chiaverini - BMO Capital Markets
Bruce Harting - Barclays Capital
Arbor Realty Trust, Inc. (ABR) Q2 2011 Earnings Call August 5, 2011 10:00 AM ET
Good day, ladies and gentlemen and welcome to the second quarter 2011 Arbor Realty Trust earnings conference call. My name is Kisha, and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions)
I’d now like to hand the conference over to Mr. Paul Elenio Chief Financial Officer. Please proceed.
Thank you, Kisha. 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 June 30, 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.
And with the Safe Harbor behind us, I’d like to turn the call over to Arbor’s President and CEO, Ivan Kaufman.
Thank you, Paul, and thanks everyone for joining us on today’s call. Before Paul will take you through the financial results for the quarter, but first I would like to spend some time talking about some of our accomplishments, operating philosophy and outlook for the remainder of 2011.
As we stated on our last few earnings calls, we’re extremely pleased to have repositioned our balance sheet, eliminating all of our short-term recourse legacy debt and we focused on our core lending business with the goal of increasing our platform and our core earnings overtime.
In the second quarter, we remained active originating five loans totaling $43.6 million with a weighted average yield of approximately 7%. As previously disclosed we originated five loans in the first quarter totaling $30 million and a weighted average yield of approximately 6.5% as well as two loans in the fourth quarter for $15.7 million at a yield for around 6.5%.
Additionally, our pipeline remained strong and will continue to put our capital into new investments with targeted return of 15% on non-leverage basis or leverage basis. We will look for leverage in certain of these investments by financing them with a low cost CDO debt when appropriate as well as with additional financing facilities when available in order to achieve these targeted returns.
In fact, we are pleased to announce that we have recently closed on a new two-year $50 million bridge loan financing facility in July with leverage of about 75% depending on the assets being financed. This new facility will provide us with additional buying power and increase returns on our investments. We will remain disciplined and selective and we are pleased with the opportunities we are seeing in the recovering market to build up our portfolio with high quality assets and increase our core earnings overtime.
Additionally, we have had great success in monetizing our non-performing and unencumbered assets contributing greatly to our liquidity which we are actively deploying in new investment opportunities. Our cash position as of today is approximately $40 million, not including approximately $20 million of cash collateral posted against our swaps and approximately $28 million of cash available for reinvestment of CDOs.
We also have around a $160 million of net unencumbered assets, many of which are either CDO eligible or able to be financed through other facilities which would produce additional liquidity. These assets combined with cash on hand and cash proceed against our swaps gives us approximately $220 million of value. This is in addition to approximately $220 million of value between the equity in our CDO vehicles and our real-estate owned assets for a total value of approximately $440 million.
We’ve also continued to effectively manage our CDO vehicles receiving all of the cash distributions to date. We have three vehicles in place with the ability to invest in new assets to January 2012. One of our CDOs which I mentioned earlier count as $28 million of investable cash for redeployment.
While there can be no assurances that our CDO vehicles will continue to cash flow in the future, we will remain focused on optimizing and utilizing these facilities when possible. We will also continue to mine the value of our legacy assets, selectively lend and invest in the appropriate opportunities and utilize our CDOs and additional financing sources to enhance our returns and increase our clients over time.
And as we've discussed in the past, we've been very successful in repurchasing our debt at deep discounts recording significant gains and retaining substantial amount of our equity value. In the second quarter, we repurchased $3.5 million of our CDO debt for $1.6 million recording a gain of approximately $1.9 million which combined with the gains in the first quarter totals $2.8 million of gains from the debt repurchases for the first six months.
We will continue to evaluate the repurchase of our CDO debt going forward based on availability, pricing and liquidity. As we touched on last quarter, we've acquired some of the real estate securing our loans and investments in the normal course of our lending operations and now have four real estate owned assets totaling $152 million with a net value after debt associated with the properties of around $77 million.
In addition there's a potential for us to add to our real estate owned assets in the future through additional acquisitions and properties securing our loan portfolio. We believe we have an experienced asset management team and are confident in our ability to manage these assets with the goal of maximizing the value of our investments and increasing the NOIs and reposition these assets for future disposition.
Additionally, we are pleased with the Board’s decision to authorize the Company to repurchase up to 1.5 million shares of our stock as announced in our press release on June 14, 2011 and we feel this investment of our capital will be accretive for our shareholders. To date, we have purchased approximately 125,000 shares at an average price of around $4.50 and there can be no guarantee as to the number of shares we will purchase in the future.
Now I would like to update you on the credit status of our portfolio and discuss our view on the commercial real estate market. During the second quarter we recorded 12.1 million of loan loss reserves and a small impairment on one of our real estate-owned assets.
The loan loss reserve of $11.4 million was related to three loans with an outstanding balance of approximately $50 million, although, 10 million of those reserves were on one loan for the UPB of $30 million.
We also had some small recoveries in previously recorded reserves during the quarter of approximately $600,000 in addition to the one million of recoveries in the first quarter and 18.1 million of recoveries generated in 2010 to total recoveries of approximately 20 million to-date.
During the second quarter we received 54 million of payoffs, paydowns and monetization of assets. Refinanced to modify 112 million of loans and expended 163 million of loans during the quarter.
At June 30, we had 10 non-performing loans with the UPB of approximately 60 million and a net carrying value of approximately $25 million which was unchanged from March. The overall commercial real estate remarkable recovery remains uneven. Although we have seen some signs of stabilization and recovery at certain segments we feel that a substantial amount of our issues related to legacy assets have been result. However, our portfolio of investments is secured by properties in multiple assets classes and product types, as well as geographically thought the United States and therefore if there is further deterioration in certain markets or assets classes, this could result in additional challenges related to some of the loans I our portfolio.
Additionally, there are times that even though our asset value are adequate to support our loans we experience losses in our portfolio because some borrowers have suffered dramatically from the recession and lack of liquidity, which can directly impact the performance and value of our collateral. So we continue aggressively evaluate our investment and our borrowers as well as market conditions to determine if any further reserves are necessary.
In summary, although there is still some uncertainty related to certain market conditions and assets classes, which could result in an additional losses in our portfolio we are excited about the macro stabilization that has begun and the opportunity we’ve seen in a the market. We believe our deep originations platform will continue to provide us with a steady follow of high quality assets with increased yields for us to actively invests our capital.
We will also continue turn our portfolio rule on and the modernization of unlevered assets recycling our capital into high-yielding opportunities and remain focused on appropriately leveraging these investments with a goal of increasing our net interest rates and core earnings for the balance of 2011 and to 2012 and returning to a dividend aimed stock.
I will now turn the call over to Paul, to take you through some of the financials.
Okay, thank you Ivan. As noted in the press release, we had a net loss in the second quarter of 10.4 million or $0.41 per share and a FFO of 8.5 million or $0.33 per share. We recorded approximately 12.1 million of losses from our portfolio for the second quarter consisting of 11.4 million of loan loss reserves and a $759,000 impairment on a real estate owned asset.
These losses were partially offset by 3.8 million in recoveries of previously recorded reserves. However, 3.2 million of the recoveries were non-cash and with the result of the monetization of a portion of one of our loans in the form of a $32 million, non-recourse participation interest sold at a discount during the quarter.
While accounting purchase this discounted participation was recorded as debt with a 3.2 million non-cash recovery of previously recorded reserves and a corresponding offset of 3.2 million of additional interest expense and therefore this transaction has no net impact on our income statement during the quarter.
Despite the recovery in offsetting interest expense presentation for accounting purposes, economically this transaction was a successful monetization of a portion of one of our loans at the same net value we were carrying along at our own books, generating $29 million of liquidity during the quarter. And so, after the second quarter activity, we have now $171 million of loan loss reserves on 26 loans with UPB of around 319 million as of June 30, 2011. We also continued our effective strategy of repurchasing our debt at deep discounts when available during the second quarter recording a $1.9 million gain from the repurchase of some of our CDO debt and we will continue to evaluate the buyback of our CDO debt going forward based upon availability, pricing and liquidity.
As June 30 our book value per share stands at $8.07 and our adjusted book value per share is $12.15 adding back deferred gains and temporarily losses on our swaps. These book value numbers do not take in account any dilution for the potential exercise of warrants issued as part of a 2009 debt restructuring. Additionally, as Ivan mentioned we currently have approximately $40 million of cash on hand and $20 million cash posted against our swaps. And between this cash our REO assets, unencumbered assets and equity value in our CDOs net of reserves as of June 30, we currently have approximately $440 million of assets.
Looking at the rest of the results for the quarter, the average balance in our core investments was relatively flat at around $1.6 billion for both the first and second quarters. The yield for the second quarter on these core investments was around 4.64% compared to 4.50% for the first quarter. Excluding a nonrecurring prepayment that we received on an early payoff in the second quarter, the yield on these core assets was relatively flat around 4.54% compared to approximately 4.50% for the first quarter.
Additionally, the weighted average all-in-yield on our portfolio was also flat at around 4.50% at both June 30 and March 31, 2011. The average balances on our debt facilities also remain relatively flat from last quarter at approximately $1.3 billion. The average cost of funds in our debt facilities was approximately 3.87% for the second quarter compared to 4.08% for the first quarter without the one-time non-cash interest expense charge of $3.2 million related to the monetization of one of our assets that I mentioned earlier.
Excluding the unusual impact on interest expense from certain swaps for both the first and second quarters, our average cost of funds was approximately 3.80% for the second quarter compared to around 4.0% for the first quarter. This decrease was mainly due to the maturity of certain interest rate swaps late in the second quarter.
Additionally, our estimated all-in debt cost was around 3.68% at June 30th, compared to around 3.94% at March 31st. And this decrease again was primarily due to the burn-off of certain interest rate swaps during the quarter.
The overall normalized net interest spreads on our core assets increased 50% to approximately 0.75% this quarter from approximately 0.50% last quarter primarily due to the reduction of interest expense, the maturity of certain interest swaps during the quarter.
Also as Ivan mentioned, we are actively deploying our capital as well as utilizing our existing and potentially new financing sources with the goal of increasing our net interest spreads and returns overtime. Additionally, as we mentioned on our last call, we acquired two sets of properties and securing certain of our loans in the normal course of our lending operations.
Property operating income related to our OREO assets increased $2.8 million compared to last quarter, largely due to the acquisition of a portfolio of multi-family properties at the end of the first quarter. With the preliminary estimated NOI excluding depreciation expense in the range of $1.5 million to $2.0 million annually on those properties. This was partially offset by a decrease in income from a portfolio of hotels we acquired in the first quarter that are seasonal in nature.
The late acquisition in the first quarter also accounted for a substantial amount of the $3.4 million increase in property operating expenses and the $1.5 million increase in depreciation expense during the quarter.
So overall our operating expenses increased approximately $600,000 more than operating income during the quarter, mainly due to the seasonal nature of our portfolio of hotels with a projected annual NOI excluding depreciation expense of approximately $3 million, the bulk of which occurs in the first quarter.
As of June 30th, we have OREO assets of approximately $152 million subject to approximately $75 million of assumed debt and there is the potential for us to add to our OREO 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 71% in our core lending assets and around 82% including the trust preferred as debt for the second quarter compared to 70% and 81% respectively in the first quarter. And our overall leverage ratios on a spot basis were 3.4:1 at June 30th and 3.3:1 at March 31.
The slight increase in the average leverage ratios was primarily due to the monetization of a portion of two of our assets during the quarter in the form of non-recourse participation interest, which we recorded as debt for accounting purposes, partially offset by reductions in our CDO debt from run-off in CDO 1.
Additionally, as Ivan mentioned, we were successful in closing on a new warehouse lending facility in July which depending on utilization could affect our leverage ratios going forward.
There are some changes in the balance sheet compared to last quarter that are worth noting, cash and cash equivalents decreased approximately 25 million from last quarter primarily due to deploying some of our capital into new originations, partially offset by payoffs, pay downs and the monetization of two of our assets to a non-recourse participations during the quarter which also accounts for the majority of the $34 million increase in notes payable.
Restricted cash in our CDO vehicles increased approximately $12 million from last quarter largely due to approximately $20 million runoff in the second quarter in CDO 1 which was subsequently used to pay down debt in July partially offset by the movement of our unlevered assets into our CDO vehicles during the quarter.
Additionally, we currently have approximately $28 million investable cash in CDO 3 also total CDO debt decreased approximately $24 million compared to last quarter mainly due to runoff in CDO 1 during the first quarter which was used to pay down debt in the second quarter. Additionally, as I mentioned earlier, we had $20 million of runoff in CDO 1 in the second quarter which we used to further pay down our CDO debt in July.
The addition of other comprehensive losses increased by about $2 million for the quarter, this was primarily due to a decrease in the market value of interest rate swaps from a change in the outlook and interest rates. GAAP requires us to flow these changes in value of certain of our interest rate swaps through our equity section. We also recently issued 105,000 fully vested shares to independent directors in July which will add approximately 500,000 of non-cash expense to our third quarter.
And lastly, our loan portfolio statistics as of June 30th show that about 68% of the portfolio was variable rate loans and 32% were fixed. By product type about 60% of the portfolio was bridged, 20% junior participation interest and 20% mezzanine and preferred equity investments.
By asset classes, 41% was multi-family product, 35% was office, 9% hotel, 11% land and 1% condo. Our loan-to-value was around 87%, our weighted average median dollars outstanding was 58% and geographically we had around 41% of our portfolio concentrated in New York City.
That completes our remarks this morning. I will now turn it back to the operator to answer any questions you may have at this time. Operator?
(Operator Instructions) Your first question comes from the line of David Chiaverini with BMO Capital Markets. Please proceed.
David Chiaverini - BMO Capital Markets
The yields on new loans I noticed, I heard you say 6.5% in the first quarter what was it for the new originations in the second quarter, I missed it?
The second Dave blended about 7% all-in yield.
David Chiaverini - BMO Capital Markets
7%. And how much of those went into CDOs rate or CDOs in general?
Of the new product in the second quarter to-date none of those are being financed our CDOs, but we are sizing them now to see which ones are appropriate to go into those vehicles.
Yeah. And for us, Its Ivan speaking, for us it’s an issue of seeing if the CDO are eligible and getting the optimum mix of which loans should into our CDOs and which loans should go into the new loans that we’ve arranged to get the maximum utilization out of that vehicle.
David Chiaverini - BMO Capital Markets
Okay, great. And I know there is a pretty decent decline in the cost of borrowings in the quarter, I know some of that is from a lower LIBOR, as LIBOR was down you know between 5 and 10 basis points in the quarter. But what was in most behind the rest of the decline in the cost of borrowing?
The majority of the rest of the decline Dave was the runoff of certain of our interest rate swaps. Again, some fixed rate loans that either matured or extended into variable rates so getting little bit of a benefit from having those swaps runoff on assets we locked in it spreads years ago and LIBOR had moved down, so we were at a low built-in spread now that swaps are running off and the course of those swaps are reducing interest expense.
David Chiaverini - BMO Capital Markets
Okay, and regarding portfolio growth it was nice to see this was the first time in about four years that the portfolio actually grew quarter-to-quarter, but now that the replenishment periods are ending on, well have ended on two of the three CDOs and the other one is going to be ending January of next year.
In terms of the portfolio and portfolio growth should we expect it to kind of remain stable through this year now that you’ve got the new $50 million facility from a multi-family lending. You know what can we expect from portfolio growth, should it start to decline and kind of run off as the CDOs run off or do you expect, are you going to attempt to get additional financing to keep the portfolio up, just what are your thoughts there?
Well there are a couple offsetting factors. First of all, we are seeing a healthy pipeline of new loans to put on board and in fact, with the recent backup in the markets especially the securitization markets we’re actually seeing not just a good flow but healthier spreads. We’ve been fortunate in putting a little line in place which should allow us to originate more loans and show some growth.
On tope of that, we’ve been extremely successful in monetizing some of our non-performing loans and turning those into new performing loans and also a lot of the non-performing loans were not leveragable.
So we’re able to turn non-performing loans into new loans and also take those new loans and then leverage them more effectively. That of course, may be offset by potential payoffs in CDO one and CDO two. Clearly, any payoffs that occur in CDO three, we’ve the ability to re-leverage off those assets in those lines.
So I would expect to see some level of growth in our portfolio. Our estimates here probably originate $25 million to $30 million per month. If we have more runoff and able to leverage a little bit more we can always turn that up a little bit if we choose.
David Chiaverini - BMO Capital Markets
My last question was just about credit and on non-performing loans, have come back down a lot and provisions, was still relatively low up a little bit from the first quarter but just any commentary on the health of your borrowers and what you are seeing?
Well, you know, clearly our portfolio is in reasonable shape. But I think the biggest complexity that we are seeing in the market and a lot of people are seeing in the market is when dealing with your loans, you are dealing with special services and when you are dealing with special services, it takes a long time to resolve a particular asset. And sometimes, the technicalities in resolving those assets have not that you can do it on the line assets itself, but the delay and duration of resolving those assets which could impact the performance in those assets and that’s what’s creating the delay in getting some of our resolutions, and timely resolutions and also predictable resolutions.
So that’s some of the absurdity we are facing, so the invention of the special service or making decisions in terms of managing the collateral and protecting the different participants has created uncertainty for us in some of these resolutions and sometimes it take a lot longer and sometimes the lack of decision making on part of the special services also could lead in certain circumstances to potentially deterioration of collateral and that’s why sometimes there is a level of uncertainty and we can’t get our hands around.
The good news is they have very few assets that are in that category that narrowed down to just a couple and that’s why we are fairly comfortable as we have said in our last calls that we are well through managing our legacy assets.
David Chiaverini - BMO Capital Markets
Okay. And outside of those loans that currently identified non-performing loans, what you are hearing from your borrowers are trends are positive and healthy from what you are hearing from them?
I think clearly the trends are much more positive you know and there are certain markets that are moving back and are almost where they were pre-2008 like New York City and New York City is an unbelievably strong market and some of the tertiary markets we have seen as well.
The multi-family market has continued to improve steadily and the core markets have improved more dramatically and now in the tertiary markets it’s starting to pickup. So you know we’re very comfortable with multi-family; we’re doing a lot of multi-family lending and I would say probably 80% of the loans that we’re putting on are multi-family oriented new ones and we’re very comfortable with that.
But overall, you know there is improvement and the market is not a 100% consistent, but we do feel a level of improvement. Clearly the less asset class to improve and the tertiary markets are land, but even that’s starting to pickup a little bit on interest [fee rates].
(Operator Instructions) Your next comes from the line of Bruce Harting with Barclays Capital. Please proceed.
Bruce Harting - Barclays Capital
In the stronger markets what is the profile of the people you are lending to how has that changed from you know pre-financial crisis and what are the -- and I imagine meeting your tougher standards can you just remind us what some of those tougher lending underwriting standards are?
Sure. I think there are two aspects to it, one the borrower type and the documentation, clearly as and what we’re getting over heated, we as well as Wall Street and everybody else were getting more liberal on the type of borrowers we were lending to and that was including borrowers who were less experienced and less capitalized. And clearly in today’s market you know looking at borrowers who have deeper experience, more liquidity and greater history, so the borrower himself is better.
Number two, the level of leverage is significantly less than it was. Number three; we’re doing majority home loans, doing very, very few mezzanine loans, predominantly home loans. Number four, we’re really avoiding tertiary markets and spending in primary markets.
And number five, our documentations is going back to where we used to do more normalized. And the last part is we’re not buying loans from Wall Street which is why we are very, very hurt and those loans were the loans that had or to credit agreements as well as interjected special services. So we’ve really gone back to our roots and are really doing solid lending to good borrowers on home loans without documentation and structure in asset classes and in the areas that we’re much more comfortable.
There are no further questions in queue at this time. I would now like to hand the conference back over to Paul and Ivan for any closing remarks.
Okay, thank you everybody for your participation and look forward to our next conference call. Thank you.
Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect your lines. Good day.
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