Arbor Realty Trust, Inc. (ABR) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Third Quarter 2012 Arbor Realty Trust Earnings Conference Call. My name is Brea and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) I would like to now turn the conference over to your host for today Mr. Paul Elenio, Chief Financial Officer. Please proceed.

Okay, thank you, Brea and 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 September 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 I begin I want to take a moment to extend our thoughts and prayers to all those affected by hurricane Sandy. As a New York based company with a significant footprint in the metropolitan area and are close to East Coast, we realize that these are extremely difficult times for many people. We are fortunate to report that all of our employees are safe and our initial assessment has revealed no significant damage to any of the properties supporting our loans in the areas affected by the storm. However we realize others are not as fortunate and again our thoughts and prayers are with them. Returning back to the quarters’ results, I would like to start off by reflecting on some of our recent accomplishments and talking about our business strategy and outlook for the remainder of 2012 and 2013. We are very pleased with our progress, especially in our ability to access the securitization market in the form of a new non-recourse collateralized loan obligation vehicle in September combined with our second follow-on equity raised in four months in early October. These transactions are clearly 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 a continued growth in our dividend and we are very pleased with the opportunities we’re seeing in the market to invest our capital and continue to grow our earnings base. Our pipeline is strong and continues to grow through our originations network both in the REIT and through our external…

Okay. Thank you, Ivan. As noted in the press release, FFO was $3.7 million or $0.13 per share for the third quarter and net income was $2.1 million or $0.07 per share. As Ivan mentioned, we continue to repurchase our debt at deep discounts, recording $4.1 million in gains from the repurchase of some of our CDO debt in the third quarter and $30.5 million in gains from CDO debt buybacks for the nine months ended September 30, 2012. We also recorded $4.9 million in net loan loss reserves related to two assets in our portfolio. And after these reserves and charge-offs of previously recorded reserves, we now have approximately $189 million of loan loss reserves on 19 loans with UPB of around $267 million as of September 30, 2012. At September 30, our book value per share stands at $7.58, and our adjusted book value per share is $11.16, adding back deferred gains and temporary losses on our swaps. Additionally, as Ivan mentioned, we currently have approximately $55 million in cash on hand and $42 million of capacity in our short-term credit facilities after our recent equity raise and CLO closing to fund our future investments. This is an addition to $21 million of cash posted against our swaps and approximately $105 million in unlevered assets net of reserves as of September 30. We also currently have approximately $250 million of equity value in our non-recourse CDO and CLO vehicles, net of reserves as of September 30 and approximately $73 million of value in our OREO assets. This value combined with our cash on hand, cash posted against our swaps and net unlevered assets totals approximately $505 million in value and approximately $330 million in value after deducting the face amount of our trust preferred securities outstanding. And based…

(Operator Instructions) And your first question comes from Steve DeLaney with JMP Securities. Please proceed.

Thank you. Good morning, Ivan and Paul and congratulations on a very strong quarter.

Thank you, Steve.

Making good progress here. I’d like to just talk about the outlook for new loan production. I think you’ve reported 12 new loans of $86 million in the third quarter, 7.5% yield. So, could you give us some color about sort of the size – well I know this has to be an rough number, sort of the pipeline of opportunities that you’re looking at, maybe if you could give us some indication of what has moved from pipeline to of committed or in process just so we can get a sense of what the flow might look like over the next couple of quarters?

Sure, Steve. And thanks for your comments. First of all, as you’re well aware we have a pretty diverse sales force in the manager and have a very far reach. And in general, a majority of our production is on home loans for multi-family properties. Due to our capital size and our access to capital all lines most of our production was between $5 million and $10 million on our loan size. Over the last quarter or so, we’ve increased our loan size and we’re seeing a broader array of products now that we have more capital and originating between, maybe $5 million and $25 million. We increased our flow once we increased our capital base in access to CLO market and now have in discussions with additional lines of credit. So, we’re going to look to probably double our flow of originations. Although, it’s extremely competitive out there, we have a long history and deeper relationship. So, we can turn it out pretty easily. I’m going to turn it over to Paul now, just to give you an idea of what’s in the pipeline and what we anticipate in the next couple of months.

Thanks. Yeah, Steve as Ivan said we’re starting to look at some parts, it’s a little bit bigger than we’ve done in the past is the amount of capital we have and the lines we had in place and the discussions we’re having with future lines. I would say that what transferred from the pipeline to kind of committed to close to someone in the neighborhood of $40 million to $45 million in addition to what we put on out as what we funded in October, which was $20 million already. And we think that we should be able to get to a level that we did in the third quarter or maybe even a little bit better than that over the next couple of quarters. It’s too early to say that we will be able to deliver those kinds of numbers, stronger numbers in the third quarter and the fourth quarter yet. But so far it’s looking good, we have $20 million already closed $40 million to $45 million ready to close and then a significant amount of pipeline behind that. So, we are expecting to ramp this up over the next couple of quarters it’s a little hard to give you an exact number, but that’s the high points of where we are with the product.

So, I mean a round number like, a round number like a $100 million per quarter doesn’t sound like it’s a consistent run rate, it doesn’t sound like that out of line or excessive from what you’re saying?

No, we’re very comfortable with that and we’re also very mindful of ramping up our production in line with what we have available on our securities and lines of credit. And as I mentioned in my prepared remarks what we want to always make sure we have is vehicles available. So if there is a credit dislocation and the bank has run into a problem then we don’t get (Inaudible) by the banks and impacted on mark-to-market issues and things of that nature which happened in the last credit crisis. So we’ll grow our platform in a very deliberate manner, taking in consideration our ability to securitize and make sure that there’s a proper match of assets and liabilities in non-recourse vehicles.

Understood. And Ivan you mentioned that it’s an extremely competitive market. I think that’s understandable given that you’re setting a target of 15% leverage return and in this world I mean that’s an attractive portfolio return before expenses, do you see that looking forward that this 7.5% average coupon that might understandably come down a little bit. I mean what are you seeing when you’re making commitments now, how does that compare to which you write where you’re able to price loans in the third quarter?

It’s definitely gotten a little bit more competitive, but on the offsetting side, I think what you’ll see is our debt cost should come down because when we accessed the CLO market, which we feel fairly comfortable in doing based on the investor appetite in our relationships. The first one was expensive. We had to break the ice, but we’re extremely comfortable that there will be savings on that side. So we think that if there is a little bit more competition on the originations side, it will be offset on the debt side.

Great. Well thank you for the comments and I was glad to hear that everyone at Arbor and your properties and all came through the storm in good shape. Thank you.

Thank you, Steve.

Thank you [hurricane] - Steve.

(Operator Instructions) Your next question comes from the line of Lee Cooperman with Omega Advisors. Please proceed.

Well, thank you. Good morning and I echo Steve’s gracious comments a moment ago. I have the same questions I always ask you guys, but give you a chance to update it every quarter? Which book value do you think is most representative of the company’s value? I think Paul mentioned 10.54 NAV effective it’s offering. Second, what is a realistic return on equity in your business and the timetable to get there? And third, while I understand the motivation for equity raise-ups, it is somewhat depressing - it’s got to be depressing to you, Ivan only as much as you own that we’re selling stock at half of NAV. Where are we in that process, have we got raised enough money now and between maybe getting access to other sources of capital that the equity raises are behind us or what can you say about that? So, it’s really three questions.

Sure. I’ll take the last one first and I’ll comment on that. And you’re correct. It is painful to raise equity. But as you know I’m an operator and I understand what it is to build the business and sometimes there are short-term sacrifices for long-term gains in raising the equity. And being able to access stellar market and build our originations we freed up a lot of capital, and a lot of liquidity to continue to build that platform. We believe that the - our core earnings will increase substantially, which will help us to achieve a value closer to what our real NAV is. So it’s timing and it’s patience. And as you can see on a quarter-by-quarter basis we’re growing our core earnings. And we believe that, that should continue to grow, the rest I’m going to turn over to Paul for his color.

Sure, Lee. Thanks Ivan. Lee we’ve talked about this in the past and you’re right we - I put out a number of 10.54 NAV today and that NAV is really basically the adjusted book value as of September 30th performance for the equity raise we did in early October, we think that’s the real number. We think it’s the real number because the only adjustments we’re making to that next to our book value number are items that are just a matter of time before they come into equity and to earnings and they really – one of them as you know is a monetization of an equity ticker that we’ve tax deferred that will no future economic benefit to us but it’ll just eventually turnaround and come into our book value, so we believe that’s real. And the other is the change in the value of our interest rate swaps with where interest rates have gone those values have obviously declined and they’re starting to improve as they’re getting closer to maturity. So in our eye that’s just a matter of time before the swaps mature and the value creeps back into our balance sheet. So we do look at the 10.54 as a real number. And having said that you’ve asked several times, what’s a reasonable return on that NAV that we’re posting as the real value, certainly we’d like to get the number higher than it is maybe 10%, which is somewhere around $30 million. Right now we’re at $15 million to $16 million – $16 million to $17 million in the core earnings. And I think it’s important to note that in the last nine months that number has increased substantially back at the yearend, we had this discussion on the yearend earnings call.

What is really I believe you asked the same question-

I think Ivan I asked the question I said, I ask this every quarter.

So Paul’s is going to give you the progress from what he stated, where we’re today and hopefully we’ll have the same progress three quarters from now.

Yeah. And I think at year end we were talking about our core run rate number of $8 million now nine months later we’re talking about the core run rate of $16 million that’s a pretty significant increase and clearly that’s due to us getting back into the origination business in a very meaningful way. I think the other point is we’re hoping as far as the timeframe of when we can think we can get to a 10% return, it’s hard to peg that, but we are optimistic that this is going to continue to grow quickly especially in light of the ability to access the securitization market, the capital markets are ready twice and now be able to get our originations up to a more meaningful number on a quarterly basis. When we do that combined with lowering our debt cost as we think we’ll have more cheaper financing available to us in the future, we think it will make a more meaningful impact on the core earnings going forward. So it’s hard for us to give you exact timeframe, but the progress has been substantial and I think we’ll continue to hopefully see that progress.

And part of that too is as we take a lot of these unencumbered assets that are either OREO or need to be disposed off we redeploy that capital into interest earning assets or the OREO, which was troubled those NOIs will improve over time. In addition we have swaps that are in place that will burn off and will contribute. So we’re very deliberate we’ve made enormous progress. We will continue to be deliberate and patient and we will get there I’m as anxious as you are giving my holdings. And we will weigh very carefully any future equity raises we have enough power now to continue to grow our platform and generate enough volume to once again access the debt markets and we’re quite comfortable with our ability to function and operate.

Got you. Well my goal for you guys would be in 2015 to be earning a buck of share as 10% on the existing book in the book, and the book of course will be higher than hopefully been.

I’m pleased that you gave me that much time.

Yeah, I’m a patient guy.

Okay.

Congratulations guys for moving in the right direction.

Thanks Lee.

Thanks Lee.

Okay. I’d like to now turn the conference over to Ivan Kaufman for closing remarks.

Okay, well. We appreciate your participation. We know it’s been a difficult week for the nation and that there are many people who are suffering and having difficulties. We extend our feelings and a helping hand to those who we can. And we hope we recover as quickly as possible. Take care.

Ladies and gentlemen, that concludes today’s conference. You may now disconnect and have a great day.