Arbor Realty Trust, Inc. (ABR) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Arbor Realty Trust Earnings Conference Call. My name is Shanell and I will be your operator for today. At this time, all participants are in a 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’d now like to turn the conference over to Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Okay, thank you, Shanell, 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, 2012. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risks and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor’s expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I’ll now turn the call over to Arbor’s President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks to everyone for joining us on today’s call. Before Paul takes you through the financial results, I’d like to reflect on some of our recent accomplishments and talk about our business strategy and outlook for the remainder of 2012. We very pleased with this quarter’s progress and certainly our ability to access to capital markets in June for the first time in five years and it’s at the forefront of our recent accomplishments. As we have mentioned on our last several earnings calls, we have been very active in our core lending business as well as in diversifying our portfolio and revenue sources by investing in residential securities. This has resulted in increased core earnings and the reinstatement of our dividend last quarter and we’re very pleased with the opportunities we are seeing in this market to invest our capital and continue to grow our core earnings base. Our pipeline is strong and continues to grow through our deep originations network both in the REIT and through our external manager. We’re accessing approximately $18 million of fresh capital was a very important component in order for us to continue to grow our platform and is a crucial step in positioning us favorably going forward. We’re very confident in our investment strategies and are quite pleased with our ability to deploy this capital quickly through our core lending originations business, residential securities investments, investing in our legacy assets, and through the repurchase of our CDO debt at significant discounts when available. This success has increased our core earnings, and as a result, we’re very pleased to announce today a 33% increase in our dividend to $0.10 per common share for the second quarter, up from $0.0725 for the first quarter. In a moment, Paul will elaborate…

Okay. Thank you, Ivan. As noted in the press release, we had FFO of $17.1 million or $0.68 per share for the second quarter and net income of $15.5 million or $0.62 per share. As Ivan mentioned, we continue to repurchase our debt at deep discounts, recording $21 million in gains from the repurchase of some of our CDO debt in the second quarter and a gain of approximately $4 million from CDO debt buybacks in July. We also recorded $8.6 million loan loss reserve related to one asset in our portfolio and had $1.8 million in recoveries of previously recorded reserves during the second quarter, including a gain on the disposition of a real-estate owned asset. After these reserves and charge-offs of previously recorded reserves, we now have approximately $188 million of loan loss reserves on 20 loans with a UPB of around $272 million as of June 30, 2012. At June 30, our book value per share stands at $7.58, and our adjusted book value is $11.19 aiming back deferred gains and temporary losses on our swaps. Additionally, as Ivan mentioned, we currently have approximately $35 million in cash on hand and $22 million of cash posted against our swaps. And between this cash our REO assets, unencumbered assets and equity value in our CDOs, net of reserves recorded as of June 30, we currently have approximately $470 million of value. 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 4.91% compared to 4.84% for the first quarter. This increase in yield was primarily due to higher yields in our second quarter originations and…

Thank you. (Operator Instructions) Our first question comes from the line of Steve DeLaney, JMP Securities. Steve DeLaney – JMP Securities: Good morning, Ivan. Good morning Paul.

Good morning, Steve.

Good morning, Steve. Steve DeLaney – JMP Securities: I have a couple of things this morning. Thank you for the details on the growing RMBS portfolio as far as the yield and the ROE, and that 5% yield, and also sort of the leverage that you’re 75% of borrowings suggest, indicates to me these are fairly high quality bonds when we look at the non-agency RMBS spectrum of bonds in terms of yield and leverage. I wondered if you had available, you could share with us sort of the average dollar price your cost basis in these bonds?

We don’t have that available as we speak, but we can definitely get, make that available to you. Steve DeLaney – JMP Securities: Okay, all right. Could you say Ivan, whether these are more say front pay type bonds or more promising quality. I’m just trying to get into the spectrum of whether, where you stand in terms of the credit risk profile in which you’re buying?

It’s more of a cash flow and a priority of cash flow. So they are high quality cash flow bonds. The underlying quality assets is not as material to us, it’s really the disposition of the assets. Steve DeLaney – JMP Securities: No, I understand.

On a granular basis. Steve DeLaney – JMP Securities: Right. The cash is king, in that respect.

Yeah. Steve DeLaney – JMP Securities: Got it.

And Steve its Paul. I mean they are, as Ivan said more front pay cash flow and bonds and as far as the cost basis, we did disclose as how much of the bonds we have outstanding as of June, and for the most part these bonds are pretty useful that par maybe slight premiums of discounts here or there, but for the most part they’re pretty much par trades. Steve DeLaney – JMP Securities: Very important. That’s what I was trying to get at with respect to, we know how the lenders tend to look at bonds and haircuts sort of thing and the market like bonds at traded par. This is the bottom line.

John I think the key for us to, is the duration is short. Steve DeLaney – JMP Securities: Yes.

And in fact, the return on the capital is coming much quicker. So we’re trying to keep the duration between 24 and 36 bonds. Steve DeLaney – JMP Securities: That’s helpful. Thank you. You guys this morning I’ve heard you mentioned this before and I just make sure I’m understanding it in the, we communicate this properly to investors. When you’re using the concept of value and it seems you’re taking your cash, you’re taking your unlevered assets and you basically sort of carving out the non-recourse part of the balance sheet. And I think you mentioned a figure of $470 million, which works out about $18 per common share. Can you just in plain common English, help me understand when you look at the company and when you look at this concept of value, what you’re really trying to communicate?

Paul why don’t you walk through the actual analysis, it will be helpful.

Absolutely, Steve, we’re trying to do here is a couple of ways to look at the Company’s value. We look at the adjusted book value as the real value, which comes in $11.19, but lots of investors like to look at it and stay away from GAAP and say well economically what do I have? And so we’ve tried to put in front of you guys a kind of an economic value and so we look at our cash and liquid assets, and equity we have in assets over our debt and we say that’s our value. And that $470 million of value does not take into account the trust preferreds. We left that out because certain people feel that they are obviously 30 year equity type paper it may not, it’d appropriate to look at that space. But if you were to do that and took the $470 million that we quote as value and then takeoff the trust preferred to par you get very, very close to that $11.19 actually comes in probably around that number. Steve DeLaney – JMP Securities: The TruPS are about $150 million?

Right, so we say we’re trying to demonstrate here is that not only is book value 758, but more importantly adjusted book value is $11.19, if you are an investor and you just want to look at this is, what’s the economic value from cash and liquid assets above debt, you still get to that number, and that’s what we’re trying to demonstrate. Steve DeLaney – JMP Securities: Got it the TruPS is the piece that I was missing and that helps me understand how you’re using that concept to building up from the asset side to sort of get up to your adjusted book value.

Right. Steve DeLaney – JMP Securities: The last thing I’ll ask guys, you did congratulations on patting the equity market obviously where the share price is, it’s something you needed to do and you’ve got where the share price is relative to your adjusted book it can be costly. So I guess the question is, we’ve seen I think about 15 preferred stock offerings, and other than the TruPS you don’t have any straight preferreds. Is that an instrument that you would consider to use to as you need incremental capital and just to minimize dilution to the common?

I think we’ll look at all available options that are out there and based on our lines and our volume I think at that particular time, which is not today, we will evaluate what’s the best execution for us. Steve DeLaney – JMP Securities: Okay. Well, thank you for the comments and the time this morning.

Okay. Thanks, Steve.

Thank you, Steve.

(Operator Instructions) And at this time, I am not seeing any questions. I would like to turn the call back over to the management.

Okay, well, thanks for your participation today. And we look forward to continue to grow our company and your participation in our stock. Thank you.

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect, have a great day and enjoy your weekend.