Arbor Realty Trust, Inc. (ABR) Q4 2012 Earnings Report, Transcript and Summary

Good day ladies and gentleman and welcome to the Fourth Quarter 2012 Arbor Realty Trust Earnings Conference Call. My name is Cathy 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) And now, I would like to turn the call over to Mr. Paul Elenio, Chief Financial Officer. Please proceed, sir.

Okay, thank you, Cathy. Good morning everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we’ll discuss the results for the quarter and year ended December 31, 2012. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. I would like to inform you that Ivan is travelling on business today and has dialed in from his business location. So, we apologize in advance if we run into any technical audio difficulties and if we do we would try to get them corrected as soon as possible. I do need to inform you that the 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 occurrence of unanticipated events. With the safe harbor behind us, I’ll now turn it 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 would like to reflect on how we closed out the year touching on some of our more significant accomplishments, and then turn my focus to our business strategy and outlook for 2013. 2012 was a tremendously successful year for us and this momentum has continued into 2013. We’ve closed out the year with approximately 80% appreciation in our stock price including dividends and we are up approximately another 20% already in 2013. We are extremely pleased with our progress especially in our ability to access the equity and securitization markets to continue to grow our platform and our core earnings and in our ability to grow our dividend over the last three quarters. We completed two equity offerings in the latter half of 2012 raising approximately $37 million of fresh capital and just recently closed our first perpetual preferred stock offering, raising an additional $37 million of capital in early February. We have also had great success in accessing the securitization markets in the form of two new non-recourse collateralized loan obligation vehicles. One in September of 2012 totaling $125 million and a second just last month with $260 million of collateral. These transactions are already at the forefront of our recent accomplishments and have positioned us very favorably to allow us to continue to execute our business strategy of originating attractive investment opportunities to our deep originations platform and appropriately levering them with low cost non-recourse CLO debt with replenishment rights generating mid teens level of returns on our invested capital. We continue to remain very active in our core lending business as well as in diversifying our portfolio and revenue sources by investing in residential securities.…

Okay. Thank you, Ivan. As noted in the press release, we produced FFO for the fourth quarter of approximately $900,000, or $0.03 per share and FFO of $23.5 million or $0.87 per share for 2012. We successfully generated $0.5 million in the fourth quarter and $3.9 million for the full year 2012 of recoveries that previously recorded loan loss reserves in the form of gains from the sale of two of our real estate owned assets. These gains are not included in FFO under its current definition, so adding them back adjusted FFO was $1.4 million or $0.04 per share for the fourth quarter and $27.5 million, or $1.01 per share for the 2012 year. We also reported a net loss of approximately $300,000 or $0.01 per share for the fourth quarter and an income of $21.5 million or $0.79 per share for the year ended December 31st, 2012. We ended 2012 with an adjusted FFO return on average equity of approximately 13.7%, and an adjusted FFO return on average adjusted equity of 9.2%. As Ivan mentioned, we recorded $2.4 million in net loan loss reserves in the fourth quarter related to three assets in our portfolio. After these reserves and charge-offs of previously recorded reserves, we now have approximately $162 million of loan loss reserves on 20 loans with a UPB of around $240 million as of December 31st, 2012. At December 31st, our book value per share stands at $7.34 and our adjusted book value per share is $10.41 adding deferred gains and temporary losses on our swaps. As Ivan mentioned, we believe that our adjusted book value better reflects our true franchise value, as these deferred items will be recognized over time, while the significant economic benefit related to these items has already been realized. Additionally, as…

(Operator Instructions) Your first question comes from the line of Steve DeLaney, JMP Securities.

Thank you, good morning. Congratulations on the continued steady progress here in the fourth quarter.

Thanks, Steve.

Ivan, I wanted to thank you for the outlook on production that was one of my questions as to what increase we might see over and above the 275. I guess, I have two questions on the $360 million, or $30 million a month. When you make that projection, should we assume that you are going to maintain, sort of primarily the same focus on multi-family bridge loans, or are you looking to broaden your lending product menu?

I think that a majority of our production will continue to be multi-family, while there is on this exclusively multi-family in 2012, I would expect it to probably represent around 75%. We are looking at some retail deals and some hospitality deals very very selectively and it is our ambition to do probably 25% diversification. If and when we do another securitization we would like to be able to include net asset class, net securitization to diversify our asset classes that we track.

Your loan pricing, it looks like what you have done so far in the first quarter of this year held up pretty well to the fourth quarter. Do you have a sense on what type of pricing pressure you might see in 2013?

I mean, we have clearly seen the last 90 days pricing tighten up by 50 basis points to as much as 100. I think that some of the benefits of the way we originate, we do get some unique transactions and since we are not looking to do billions of dollars, we can still garner fairly attractive yields. I would say that there will be a continual tightening as there is more liquidity in the markets and we have been able to decrease our borrowing cost, potentially offset that and still deliver consistent mid-teens returns. I would say 2013 is going to be a year of continued spread tightening for the borrower.

Alright. Hopefully with the financing maybe gaining a little more accommodating and lower rates, you still think you can get sort of this mid-teen type ROI when you leverage --?

Yes, I do. Also, given the fact that we put another CLO in place it’s much more efficient, the transaction costs are much less and we have a ramp up. We could fund directly into our CLO, avoiding duplicate transaction cost for financings. So, we believe that the efficiencies that we are achieving on the financing side should offset the tightening of the spreads on the lending side.

Okay, that’s helpful. I guess, as you look at the market opportunity out there, obviously you have got your own direct origination channels, so you are not looking to just buy loans in the sector market. When you look at the $275 million in 2012 or the $300 million plus in next year, are you in some way, Ivan, setting those kind of targets based on the capital that you have available or is it a function of – the volume of loans it sort of meet your quality standard. What I am getting at it is, the stock has done very well, if you were to continue to have access to more capital, would it be possible to attract a larger volume of loans to put that capital to work without having to cut your credit standards?

Sure, we can definitely ramp up our originations significantly above where we are at. We monitor a number of things, we monitor our run off, our capacity, our liquidity, and our cost of capital because we don’t want to just raise capital for the sake of raising capital, we are very sensitive to where our stock price has been. It’s more strategic in terms of what we want to accomplish, but there is more capacity in terms of our originations that where we are originating. We are monitoring, it’s based on those factors. If there were certain unique opportunities that increment in yield we would evaluate that accordingly. But it is something that the management is active on a day to day basis in terms of monitoring and measuring the opportunities versus our cost of capital, and as well as access in the securitization market in the debt side.

Okay, well listen, thanks for the comments and congratulations on a great turnaround year for Arbor.

Thank you very much, Steve.

Thanks, Steve.

Thank you for your question. Your next question comes from the line of Stephen Laws of Deutsche Bank, please go ahead.

Hi, good morning. Thanks for taking my questions. I always follow Steve, yes a lot of great questions as well. Can you maybe talk a little bit about the modified and extended loans during the quarter? What you are seeing there, what type of terms you are able to get on those and how much more of that do you expect to see kind of going forward as more of the, I guess legacy loans hit kind of an extension or maturity date?

Paul, I am going to turn that to you.

Sure, absolutely. Yes, Steve, I mean, the modifications and the extensions have definitely slowed as the legacy portfolio is on tremendously solid footing. But we do still have some of the same loans that have come after extension and we do have some new modifications. I think that the trend lately though has been more in favor of us. In the past when the dislocation occurred and we were modifying loans, we were normally giving rate concessions to get a better credit quality loan and more predictable earnings and loan performance. Lately what we have seen is a trend the other way when people are coming up for modified and extension unless it is a specific loan that we know we are extending based on a contractual term. We are able to extract a little bit more in the yield. So, this quarter we did extend and modified some loans, but ones we did extend we extract a little more yield out of them. So, we will have some of these going forward as some loans that we have still have extension options on them, but it has been slowing over the last couple of quarters.

Great. Thanks for the color on that especially (inaudible) for moving back in your favor there as well. Looking at the over collateralization test, CDO III is fairly close to the limit, although it did improve sequentially from the last quarter when it was 105.64. Can you maybe touch on that a little bit? Do you think that will continue to improve there or is there any risk you have or any concerns you guys have with that CDO III?

I guess we always have concerns when the cushion spend. We’ve effectively managed it. Gene Kilgore manages our securitization and CDO has done a very very good job. We are sensitive to maintaining and making sure that vehicles for cash flows and we’ll work very hard to do so. In terms of concern, given the cushion we do have a level of concern, but we will pay a lot of attention to it and try and operate that as efficiently as we can.

Steven, it is Paul. As Ivan said, we do have a level of concern with the cushion being tight. However, I do want to point out that the third CDO was the more highly levered CDO that we did in the legacy book, so the cushion was never really very large to begin with so it is a tight cushion, but it is the CDO that had the highest leverage and while we do have some concern as loans pay off. We’re hopeful that the cushion could improve with loans paying off. Other things could go the other way and we do have a concern, but as the vehicle continues to delever some of these has to get better over time.

And then the CDO was more of a whole loan CDO with higher quality collateral and that is the part of the reason why it is always operated on a lower cushion.

Great. Thanks for that and I think my other couple of question on pipeline and cash flow were addressed even in your prepared remarks are your previous answers and again congrats on a nice year, but also important to nice start to this year with the CLO and some new financing facilities.

Thank you Steve.

Thanks.

I would now like to turn the call over to Ivan Kaufman for closing remarks.

Okay, well thanks for everybody’s support in 2012 and we’re looking forward to an outstanding 2013. As Steve mentioned we are off to a great start in terms of stock performance and (inaudible) and look forward to our next earnings call. Thank you very much.

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