May 3, 2013
Executives
Paul Elenio - Chief Financial Officer Ivan Kaufman - Chief Executive Officer
Analysts
Steven DeLaney - JMP Securities LLC Stephen Laws - Deutsche Bank
Operator
Good day, ladies and gentleman and welcome to the Q1, 2013 Arbor Realty Trust Earnings Conference Call hosted by Ivan Kaufman, Paul Elenio and (Joseph Green). My name is Mahmood, I am event coordinator today.
During the presentation your lines will remain on listen-only. (Operator Instructions).
I would like to advise all parties that this conference is being recorded. (Operator Instructions).
And now I would like to hand the call over to Mr. Paul Elenio.
Please go ahead.
Paul Elenio
Okay, thank you, Mahmood. 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 March 31, 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.
Ivan Kaufman
Thank you, Paul and thanks to everyone for joining us on todays call. Before Paul takes you through the financial results I would like to reflect on some of our recent accomplishments and initiatives and talk about our business strategy and outlook for the remainder of 2013.
We are extremely pleased with our first quarter accomplishments, especially in our ability to continue to access the debt and equity markets, to continue to grow our platform and our core earnings. As we discussed on our last call we completed our first perpetual preferred stock offering raising 37 million of capital in February and closed our second non-recourse collateralized loan obligation vehicle in January with 260 million of collateral including 15 million of additional capacity to fund future investments and a ramp-up feature with pricing that was significantly lower than our first CLO vehicle in September 2012.
We also raised an additional 90 million of fresh capital in the first quarter through a common stock offering and the completion of a 6 million share after market offering that we put in place at the end of last year. In addition we increased our short-term funding sources in the first quarter by adding a new $50 million warehouse facility and by increasing the capacity of our existing debt facilities by $30 million while decreasing the cost related to these facilities by approximately 75 basis points.
The new $50 million facility has a one year term with pricing at 250 over LIBOR and a leverage of upto 75% depending on the asset financing. These transactions are clearly at the forefront of our recent accomplishments and we are very well positioned to continue to execute our business strategy of originating attractive investment opportunities and appropriately levering them with the low cost non-recourse CLO debt with replenishment rights generating mid-teen levered returns on our invested capital.
We are very pleased with the opportunities we continue to see to invest our capital through our external manager's top multi-family originations platform and the opportunities we continue to see to invest in residential securities. Recently our manager has made a substantial investment in launching a new CMBS syndication platform that will focus on providing clients with more diverse financing product to meet their needs.
As a result we believe we will obtain substantial future benefits from our manager's new expanded platform providing us with a broader customer base as well as all bridge loans and D note opportunities that are created from this business unit. This will continue to provide quality deal flow for us to invest our capital allowing us to retain our competitive advantage and continue grow our platform returns over time.
In the first quarter we originated $99 million of loans with an average yield of approximately 8.3% with a levered return of approximately 14%. In addition we originated 107 million of loans in April with a yield of approximately 7.8% and expected leverage returns of around 17%.
Our pipeline remains strong and our goal is to continue to deploy our capital into new investment opportunities with mid-teens targeted returns. We also continue to be active in our residential securities platform, purchasing residential mortgage securities in the first quarter totaling $42 million and $24 million in April with mid-teens expected level of returns.
At March 31, 2013 we had a 150 million of residential securities outstanding with corresponding leverage of $120 million. These securities generally have an average expected life of three to four years and are expected to generate an average level of return in high teens.
As I mentioned earlier our goal continues to be to finance a substantial amount our investments with non-recourse debt through CLO vehicles allowing us to match the term of our assets with the term of our liabilities without being subject to event risk. This is a critical component of our business strategy and the tremendous success we've had in the last several months in accessing the securitization market through two non-recourse CLO vehicles has put us in a very favorable position to continue to execute this business strategy effectively.
We believe that success is directly attributable to the depth and experience of our securitization team, our strong reputation in the market of effectively managing our three legacy CDO vehicles through the downturn and our ability to continue to originate quality collateral from our manager's multi-family mortgage origination sales force with a strong national presence and considerable market reach. This expertise combined with the quality flow of originations volumes we continue to generate has allowed us to become a leader in the commercial mortgage REIT securitization market.
As we mentioned on our last call, our second CLO vehicle which closed in January was significantly larger than our first CLO in September and featured a ramp-up period to provide 15 million of additional capacity. This CLO contains 260 million of collateral, 177 million of financing and pricing that is approximately 130 basis points lower than our first CLO.
As we now have two CLO assets of $385 million with 265 million of leverage and the ability to substitute collateral for a period of two years through a replenishment feature of both vehicles. We believe the success we have experienced in accessing the securitization market for our bridge loan product provides us with a significant long-term strategic competitive advantage allowing us to have permanent non-recourse debt with a liability structure that matches our asset maturities without market-to-market provisions.
This has also resulted in additional warehousing line capacity and lower pricing and as a direct result has enabled us to tighten our pricing on our loan products to adjust to the market yields, and while market yields become more competitive and still maintain similar effective yields. On a long term basis we will see the greatest benefit if and when the market backs up and liquidity becomes an issue as our debt structure will enable us to not only maintain stable liability terms but will allow us to continue to operate with the same low cost debt while our assets are priced less competitively resulting in future superior leverage returns.
As a result we now have approximately 105 million of capacity in our short-term credit facilities combined with cash today of approximately $65 million for a total of approximately 170 million cash and capacity to fund future investment opportunities. As we've discussed in the past we have also been very successful in repurchasing our debt at deep discounts recording significant gains and increasing our equity value.
We successfully repurchased 7.1 million CDO bonds for a gain of $3.8 million in the first quarter. As of today we own approximately 161 million of our original CDO bonds at an 89 million discount to par, which represents significant embedded cash flows that we may realize in the future periods.
We will continue to evaluate the repurchase of our CDO debt going-forward based on availability, pricing and liquidity. Now I would like to update you on our view of the commercial real estate market and discuss the credit status of our portfolio.
Overall the commercial real estate market continues to improve. The significant increase in capital market activity in our space has resulted in increased liquidity which has created more competitive market reducing yields on certain types of investments.
The increased level of liquidity and improving market conditions however has also reduced financing cost and increased available funding sources which I mentioned earlier is offsetting most of the yield compression we are currently seeing in the market. The majority of our investments continue to be in the multi-family asset class although we are starting to see accretive opportunities in commercial properties as well.
We believe that multi-family assets will likely make up around 75% of our future originations with the balance invested in commercial assets. As I mentioned earlier we believe we are uniquely positioned and have a strong competitive advantage in the market by levering off of our manager's top Fannie Mae and FHA platform with a significant sales force, considerable market reach and a strong national presence in the multi-family lending arena.
Furthermore with the addition of our new CMBS and syndication platform we are very confident in our ability to continue to produce significant investment opportunities for us to grow our platform and increase our core earnings. Looking at the credit status of our portfolio, in the first quarter we recorded 2.5 million of loan loss reserves related to assets in our portfolio and as of March 31st we had six non-performing loans with a net carrying value of approximately 15 million.
We believe that substantially all our legacy issues are behind us and while it is possible we can have some additional write-downs in our portfolio on our legacy assets, based on market conditions we remain optimistic that any potential remaining issues will be minimum. We also feel as the market continues to improve we could continue to have some recoveries from our assets combined with potential gains from debt repurchase to offset any potential additional losses.
However the timing of any potential losses, recoveries and gains on a quarterly basis is not something we can predict or control. In summary we are very pleased with our accomplishments, especially with the tremendous success we've experienced in accessing the capital market, with multiple equity offerings and perpetual preferred offering in two new non-recourse CLO vehicles as well as in our ability to increase our short term lending sources and reduce our borrowing cost.
We are also very pleased with the investment opportunities we are seeing and in the increase we've had in our core earnings and dividends over the last several quarters. We are excited about the growth in our pipeline and are very confident that our originations network will continue to produce attractive investment opportunity to grow our platform.
As a result of our growing pipeline and available capital we are increasing our guidance for loan originations for 2013 from approximately $360 million to range at $450 million to $500 million. Our primary focus remains on increasing the value for our shareholders by growing our core earnings and dividend over time.
I will now turn the call over to Paul to take you through the financial results.
Paul Elenio
Okay, thank you, Ivan. As noted in the press release, FFO for the first quarter was approximately $8.3 million or $0.24 per share and net income was $6.6 million or $0.19 per share.
This translates into an annualized FFO return for the quarter on average common equity of approximately 12% and an FFO return on average adjusted common equity of 9%. As Ivan mentioned we continue to repurchase our debt at deep discount recording 3.8 million in gains from the repurchase of some of our CDO debt in the first quarter.
We also recorded 2.5 million in loan loss reserves in the first quarter related to two assets in our portfolio and after these reserves and charge-offs of previously recorded reserve now have approximately a 146 million of loan loss reserves on 18 loans with a UPV of around 235 million as of March 31, 2013. At March 31, our book value for common shares stands at $7.53 and our adjusted book value per common share is $9.68.
Adding back deferred gains and temporary losses on our swap. As we've mentioned before 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 Ivan mentioned we currently have approximately 65 million in cash on hand and a 105 million capacity in our short term credit facility to fund our future investments. Looking at the rest of our results for the quarter the average balance and core investments increased to approximately 1.7 billion for the first quarter compared to approximately 1.6 billion for the fourth quarter due to our first quarter and fourth quarter originations.
The yield for the first quarter on these core investments was around 5.63% compared to 5.1% for the fourth quarter. This increase in yield was primarily due to the collection of back interest on certain loans in our portfolio not previously accrued, high yields in our first quarter origination combined with the full effect of our yield in our fourth quarter originations.
Additionally the weighted average all-in yields on our portfolio increased to around 5.22% at March 31, 2013 compared to around 5.05% at December 31, 2012, again primarily due to high yields on our new investments. The average balance in our debt facilities also increased to approximately 1.3 billion for the first quarter, compared to approximately 1.2 billion for the fourth quarter.
The average cost of funds in our debt facilities is approximately 3.38% for the first quarter compared to 3.18% for the fourth quarter. Excluding the unusual non-cash impact in certain interest rates hedges which are deemed to be ineffective for accounting purposes have an interest expense our cost of funds increased to approximately 3.35% for the first quarter compared to around 3.09% for the fourth quarter.
This increase was primarily due to higher cost associated with one of our warehouse facility due to the transfer of assets out of this facility to our second CLO that closed in January combined with first quarter run-off in our legacy CDO vehicles which carry a lower cost of funds. Additionally, our estimated all-in debt cost was approximately 3.17% at March 31, 2013, compared to around 3.12% at December 31, 2012.
As we mentioned earlier we successfully closed our first perpetual preferred stock offering in the first quarter, raising approximately 37 million of capital. This instrument is treated for accounting purposes as equity and the dividend yield of 8.25% associated with this offering is reflected below net income on the income statement as the preferred stock dividend and is therefore not reflected in our GAAP cost of funds.
If you were to include this expense our average cost of funds for the first quarter would be approximately 3.46% and our estimated all-in debt cost will be 3.32% at March 31, 2013. So overall normalized net interest spreads in our core assets on a GAAP basis was approximately 2.28% this quarter compared to approximately 2.01% last quarter.
Including the preferred stock dividend and debt our net interest spreads were approximately 2.17% for the first quarter and our net interest spread run rate is approximately $44 million annually at March 31, 2013 compared to approximately 43 million at December 31, 2012. Other income which primarily consists of net interest spread on certain RMBS securities which are deemed to be linked transactions for accounting purposes as well as asset management and miscellaneous fees increased 800,000 during the first quarter.
The increase was mainly due to the reimbursement of certain fees on loan in our portfolio as well as the first quarter RMBS securities purchase that are linked. The net interest spread earned on the linked RMBS securities is not reflected in the net interest spreads just discussed.
NOI related to our REO assets increased 2.9 million compared to the last quarter due to the seasonal nature of income related to our portfolio of hotels that we own combined with some one-time expenses from a change in the property management of these assets in the fourth quarter. As of March 31st, we have two REO assets we are holding for investment, totaling approximately 125 million, subject to approximately $54 million of assumed debt for a net value of approximately $71 million.
As of today we believe these two assets should produce NOI before depreciation and other non-cash adjustments of approximately $3 million for 2013, the majority of which was recorded in the first quarter again due to the seasonality of our hotel portfolio. This projected $3 million NOI income combines with approximately 3 million in other income related to our RMBS linked transactions and approximately 44 million of net interest spread on our loan and investment portfolio gives us approximately 15 million of annual estimated core FFO before potential loss reserves and operating expenses looking out 12 months based on our run rate at March 31, 2013.
And as Ivan mentioned earlier we originated 107 million in loans and purchased 24 million of RMBS securities in April with levered returns in the mid to high teens which will increase our core earnings going forward. Clearly our goal is to continue to deploy long term growth capital we raised during the first quarter into accretive investment opportunities and continue to grow our core earnings and dividends over time.
Operating expenses were relatively flat compared to the fourth quarter although the first quarter included approximately $600,000 of non-cash expenses from the issuance of $192,500 restricted stock awards to certain of our employees and employees of our Manager as previously disclosed in our 10-K. Additionally just this week we issued 70,000 fully vested shares to our Independent Directors as part of their annual compensation which resulted in non-cash charge in the second quarter of approximately $500,000.
Next, our average leverage ratios on our core lending assets remained relatively flat compared to last quarter at around 67% and 65% respectively including the trust preferred and perpetual preferred stock as equity. And our overall leverage ratio on a spot basis including the trust preferred and preferred stock as equity was down from 2.9 to 1 at December 31, 2012 to 2.2 to 1 at March 31, 2013 mainly due to our equity offerings in the first quarter.
There are some changes in the balance sheet compared to the last quarter that I would like to highlight, the purchase agreement and credit facility decreased by approximately 81 million due to the transfer of certain assets into our second CLO vehicle in January which also accounts for the increase in CLO debt of $177 million and CDO debt decreased approximately 62 million from last quarter due to our fourth and first quarter CDO run-off which were used to pay down CDO debt in the first quarter. Additionally, total equity increased approximately $132 million this quarter primarily due to our common and preferred stock offerings during the quarter.
Lastly, our loan portfolio statistics as of March 31st show that about 69% of our portfolio was variable rate loans and 31% of fixed. By product type about 69% are bridge products; 18%, junior participation and 13% are mezzanine and preferred equity investments.
By asset class 54% was multi-family, 27% was office, 7% hotel and hospitality and 9% land. Our loan to value was around 78%, our weighted average median dollars outstanding was 48% and geographically we have around 32% of our portfolio concentrated in the New York City area.
That completes our prepared remarks for this morning. I will now turn you back to the operator to take any questions you may have at this time.
Operator?
Question-and-Answer-Section
Operator
Thank you. (Operator Instructions).
We already have two questions in the queue. The first one is in the line of Steve Delaney of JMP Securities.
Over to you please.
Steven DeLaney - JMP Securities LLC
Thank you, good morning, Ivan and Paul, how are you?
Ivan Kaufman
Good morning, Steve.
Steven DeLaney - JMP Securities LLC
So I am glad you commented on the CMBS platform. I had noticed that April 12 article in the CMA, and they commented on some recent hires but also referred back to some people you hired in February.
So Ivan, would you just kind of briefly summarize the scope of that team, how many people, are they all based in New York, are any of them regional lenders?
Ivan Kaufman
Sure, most of the team is more of a corporate team that's based in the New York area. We are building out a full and complete CMBS capability of originating and distributing loans and the real emphasis is that it's an expanded product line for our sales staff.
And will create better relations for our borrowers, the direct results for the read is to see greater bridge opportunities in different asset classes and reach a broader customer base and also create potential mezzanine and preferred equity investments. So we've already starting to see the benefit of that additional production and that's one of the reasons why we actually upped our estimates is because it's just starting to have a dynamic impact on our pipeline and products flow.
Steven DeLaney - JMP Securities LLC
I thought that might be it because you've been running about a 100 million and -- 90 to a 100 and now it's (cash) you went in kicking in but it sounds like you're starting to see some flow or some potential for it.
Ivan Kaufman
Yeah, I guess basically we had given guidance to about 30 million a month in originations so I am stepping it up now going forward to approximately 50 million a month and that's still just perceived -- treading lightly and watching our growth in a very steady way which we've been very deliberate about.
Paul Elenio
The other reason we upped our estimates for the year and clearly on our run rate going forward as Ivan mentioned we're going to get it hopefully to 50 million a month. We did a 100 million of products in March, we've done a 107 in April.
So we're already at 207 here and we are seeing it step-up. So it's a by-product of the fact that we've had a strong April with the capital we've raised.
And so we think that the 450 to 500 is a much better target for us. On a run rate hopefully it will be more than that going forward but for this year that sounds right though.
Steven DeLaney - JMP Securities LLC
Okay, so from the product standpoint since they are going to broaden out a little bit, the bridge loan opportunities, I clearly get that because there are going to be a lot more floating loans, you can put those in your CLO structures. Now if they are doing like fixed rate 10 year loans for CMBS sale, isn't that going to -- the B note of that wouldn't that generally be also be a fixed rate loan in which you have to figure out a financing method where you apply swaps to those?
Ivan Kaufman
We may, but the yields maybe so significantly higher that we wouldn't have to do that. We're thinking that the yields could be in the 12% to 15% range in general on an unlevered basis and the spread in that is sufficient enough, and the yield in that is sufficient enough and with some of the perpetuals right now we've accessed in the market it's pretty much to match duration to what we are borrowing at and what we will be lending at.
Steven DeLaney - JMP Securities LLC
Okay, that's helpful, that makes sense. Then it was pricing more along the lines, it's just the mez loan probably.
Ivan Kaufman
Yeah, pretty much so and the markets is still in recession so being on the origination side, and having the opportunity to price your B note or mezzanine note really puts us in a strategic advantage in originating loan also getting attractive deals.
Steven DeLaney - JMP Securities LLC
Thank you. And Paul, one final thing for you, the 50 million annual run rate core FFO at March, I heard you say, I know that's below loan loss provisions.
What else? Is there anything else that is not coming out of that 50 million like management incentive fees, how should we look at the 50 million?
Paul Elenio
Yeah that's right Steve. The 50 million is core FFO run rate as of March going forward without loan loss reserves because that's not something we can easily predict…
Steven DeLaney - JMP Securities LLC
I understand
Paul Elenio
Although we think they are legacy and it doesn't include your operating expenses. You'd have to look at the operating expenses from the prior year maybe grow it a little bit, so if that was 27-28 last year, if it's 29 or 30 this year wherever you think it's going you net those two out and you say well that's the net core FFO, on all the shares we have outstanding.
And I think when you do that you'll still see a pretty strong number. Keep in mind we did raise a decent amount of capital in the first quarter so there was a little bit of a drag for the quarter on that capital but we went to work immediately and in April we did 107 million of loans and we think we are going to deploy our capital very quickly and effectively to grow it going forward.
Steven DeLaney - JMP Securities LLC
Yes so I mean if you weren't fully deployed, the 50 million run rate obviously at June we would expect that to be slightly higher with the 100 million additional loans.
Ivan Kaufman
Yeah there is a little bit of a lag between the time we raised the capital and put it out. It wasn't that big of a lag it probably affected us for about a month maybe but we have been pretty effective in terms of not raising the capital until we have the pipeline and there is a little delay in getting that pipeline across.
Steven DeLaney - JMP Securities LLC
I understood. Well thank you guys for the comments and congrats on a great start for the year.
Ivan Kaufman
Thanks Steve.
Operator
Thanks for your question. Stephen Laws of Deutsche Bank is next.
Over to you please.
Stephen Laws - Deutsche Bank
Hi, good morning. Thanks for taking my questions.
I appreciate the detailed prepared remarks and I know Steve set out a number of things in his questions. So maybe two quick things, can you talk about what do you intend to do with the CDOs there are in situation where the past replenishment periods, any chance you would call those or you expect those to run down, maybe comment on what the current CLO markets are, I know you hit on it a little bit but any additional color there about how the CLO markets are today for new vehicles?
Thoughts on that would be helpful please.
Ivan Kaufman
Sure. I mean as you know we have three CDOs up and there is a cross-over point where they get de-levered to run off and at that point in time we would call in when it was appropriate to do it economically.
The benefit of those CDO vehicles is that their liability costs are unbelievably low and even though they have reduced in leveraged it's still very beneficial to have it in place. The first one that will go away would be the first vehicle.
We are not at that point today to call it and it's something we evaluate on a continuous basis to see if calling it and a re-leveraging of the assets could produce a better return. So depending on how the assets run off we'll dictate when that occurs and that will be the cross over point to call those, re-lever those assets and free up some of the equity as those vehicles got de-levered.
With respect to the CLO market now clearly from CLO one in September to the one we did in January there was enormous improvement, not just in terms of our cost of funds but also in terms of the flexibility in that vehicle. We are seeing significant improvement now in that market for an issue like ours so if we had the collateral we would love to be able to create another one.
Creating another one really gives us critical mass in our liability structure and allows us to more effectively manage our business on a longer term basis so we are very keen and looking at that. What's very interesting to know is that although there have been a lot of different security issues in the market nobody really has issued a CLO like us which is really deemed as a financing vehicle which is flexible.
For whatever reason we are one of the few issuers who have been able to figure out that market, A, without collateral and our expertise and we actually get them done and C, just as importantly investors are still clamoring for that kind of debt instrument. So we are very eager to return to that market and we think that, that market like the rest of the debt market has shown considerable tightening and it would be real strategic and advantageous for us to get another one as we soon as could
Stephen Laws - Deutsche Bank
Great thanks for the color there and then could you maybe talk about you have utilized a number of different ways to raise additional capital equity offering, some others and ATM. Can you talk about as you go forward maybe what type of mix you would like to see in the capital stack as you look to raise additional capital to deploy into new investments?
Paul Elenio
Yeah, Steve it's Paul. I think that's a good question and a lot of that would depend on what type of product and what type of pipeline we see in front of us.
As we mentioned in our prepared remarks we still think 75% of our product flow will be multi-family bridge. We are seeing some opportunities in the commercial side.
We could start to see a few more mez opportunities that have higher yields but are less leveragable. So a lot of that will depend on our mix of products and what the market is doing.
We would like to have a mix of common and preferred and other end securitization and other types of debt that make sense to our product right now where the common stock is, we have taken a little bit of a hit over the last week or so, so we look to maximize the equity offering based on where we are trading, where our multiples are and what the opportunities are on the debt side as well as the preferred stock side. So I think we will just monitor this going forward and when we feel we need capital and the common stock is not a good currency for us we will look to the perpetual preferred or other types of markets that make sense that maybe not as dilutive.
And when we feel the common stock is a good currency for us we will look to access it there, again depending on our deal flow and our pipeline.
Stephen Laws - Deutsche Bank
Thanks for taking my questions appreciate the comments.
Operator
Thank you for your questions we have no further questions. (Operator Instructions).
Ivan Kaufman
Okay if there are no further questions thanks for your participation today and we look forward to our next call. Thank you.
Operator
Thank you, Mr. Kaufman, Mr.
Elenio and Mr. (Green) and gentlemen your conference call now comes to an end.
You may disconnect. Thank you very much for joining.