Paul Elenio - Chief Financial Officer Ivan Kaufman - President and Chief Executive Officer.

Steve DeLaney - JMP Securities Lee Cooperman - Omega Advisors.

Good day, ladies and gentlemen. And welcome to the First Quarter 2014 Arbor Realty Trust Earnings Conference Call. My name is Derrick, and I will be your operator for today. At this time all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Paul Elenio, Chief Financial Officer. Please proceed..

Okay. Thank you, Derrick. 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 March 31, 2014. 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 maybe 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 would like to reflect on some of our significant recent accomplishments and talk about our business strategy and outlook for the remainder of 2014.

As I mentioned on our last call 2014 will be a transition year for Arbor one in which we’ll focus not just on achieving strong operating results for the current year but more importantly on achieving some of our key operating objectives that will lay the foundation with strong and sustainable growth in our core earnings in 2015 and beyond along with setting up our balance sheet to have the appropriate liability structure that will insulate us from market volatility in the future periods.

We’re pleased with our operating results for the first quarter and more importantly in accomplishing some of our key objectives which will have a positive impact for 2014 and beyond. The first of these accomplishments and perhaps some most significant is the closing of our third CLO earlier this week.

This vehicle contains $375 million of collateral which significantly improved features from our two previous deals including $68 million of additional capacity to fund future investments to ramp up feature for 120 days, increased leverage to 75% and reduced pricing as well as a longer replenishment feature which allows us substitute collateral for a period of two and a half years.

A clear component of our business strategy continues to be to finance the substantial amount of our investments with non-recourse, non mark-to-market, match funded debt allowing us to effectively operate in all environments.

The closing of this transaction marks our third CLO execution in an 18 month period and we now have three CLO vehicles in place with $716 million of collateral, $546 million of leverage and the ability to substitute for an replenishment feature in all three of these vehicles which legally provides us with a very stable funding source for the next few years and will result in increased leverage returns on our invested capital.

We’re extremely pleased with our success in this area and our ability to continue to be a leader in the commercial mortgage REIT securitization market which we believe is directly attributable to debt and experience of our securitization team and our strong repetition in the market as a originator of quality collateral.

These CLO vehicles have also provided us with greater access to additional short-term credit facilities with lower pricing. As a result we’re able to increase the capacity in our warehouse facilities by approximately $70 million since year end and continue to reduce our interest rates course in these facilities.

The closing of our third CLO also allows us the NPL a significant portion of our warehousing lines resulting in approximately 95% of our debt stack currently in match funded non-recourse vehicles which are not subject to mark-to-market provisions including the trust preferred and preferred stock issuances equity.

This also now provides us with approximately $205 million of financing capacity which combined with a $68 million ramp-up feature as well as our cash on hand expected run-off and access to capital will allow us to fund our future investment opportunities and continue to pool collateral for additional securitization to unavailable and continue to deliver mid teen returns on our capital.

Our second significant accomplishment during the first quarter was in our continued ability to successfully access the equity markets issuing our third perpetual stock offerings in the last 12 months raising $22 million of fresh capital in February.

We also raised an additional $6.5 million of capital in our first quarter through the issuance of a portion of the shares available from our after-market offering.

Continued access to capital is crucial for us to grow, continue to grow our platform and we’re pleased with our success in this area and our ability to deploy our capital into accretive investment opportunities and generate mid teen leverage returns by appropriately levering these assets with low course non-recourse CLO debt with replenishment rights.

I’m giving very sensitive dilution and strategic in our approach to new capital issuances focusing on both the type of instrument and the opportunistic investment opportunities available from our growing pipeline and determining both the timing and size of our future equity raises.

Additionally we continue to delever our legacy CDO vehicles with approximately $225 million of run-off in the first quarter, a $165 million of which was in our legacy CDOs. It is very difficult to actually predict what our run-off would be for 2014 although we expected to be in excess of our 2013 run-off.

We also expect the majority of this run-off to take place in the first two quarters with a sizeable portion of it occurring in our legacy CDO vehicles.

As we’ve mentioned in our last few calls these vehicles have been substantially delevered already and any additional run-off will continue to temporarily reduce our margins for 2014 until these vehicles are completely delevered.

Therefore our goal is to fully delever a number of our non-recourse debt vehicles by the end of 2014 or early 2015 which will significantly increase our future earnings.

Another major accomplishment in the first quarter is a tremendous success we had in increasing our origination volume allowing us to replace our run-off and grow our investment portfolio.

We’ve also remained extremely disciplined in our lending approach focusing on predominantly whole loans in the multi-family space which is an area we have a tremendous amount of expertise in.

This approach allows us to invest in the appropriate part of the capital structure generating strong risk adjustment returns and demonstrate the strength of our origination platform and franchise value.

We originated approximately $275 million of loans in the first quarter with an average yield of approximately 6.9% and generated mid teens leverage returns on these investments as a result of financing a bulk of them in our new CLO vehicle.

For the month of April we originated approximately $60 million of loans with an average yield of 7.7% and incurred approximately $100 million of run-off. As we discussed on our last call based on the continued growth in our pipeline we estimate total originations to be around $700 million to $750 million for 2014.

We do expect 2014 origination volume to be more heavily weighted in the first two quarters as a result of higher expected run-off in these quarters as well as our overall view that the market will become more competitive throughout the year resulting in potential further yield compression on new originations.

Now I’d like to update you on our view of commercial real estate market and discuss the credit status of our portfolio. Overall we continue to see improvements in the commercial real estate market and increases in asset values especially in the multi-family sector.

Over the last year and a half significant amounts of capital have entered this space which continues to make the market more competitive. As I mentioned earlier we do expect this trend to continue which could result in further yield compression.

Again multi-family lending remains our primary focus and as an asset class, we have a tremendous amount of experiencing.

We do believe we’re well positioned and a strong competitive advantage in the market by levering off of our manager who provides us with consistent pipeline of multi-family bridge loan opportunities to its top Fannie Mae and FHA platform. As a result deal flow is up significantly which is growing our pipeline substantially.

As I mentioned earlier we’re very confident in our ability to continue to generate strong leverage returns on our investments by financing them with our non-recourse CLO vehicles allowing us to increase our core earnings over time.

Looking at the credit status of our portfolio in the first quarter we recorded $1.3 million of loan loss reserves and payment charges related to two assets in our portfolio and recorded $900,000 in recoveries of previously recorded reserves.

And while it is possible we could have some additional write-downs in our portfolio on our legacy assets, we believe that substantially all our legacy issues are behind us and remain optimistic that any potential remaining issues will be minimal.

We also feel that we continue the future recoveries on our assets and gains from debt repurchase will offset any potential additional losses. Although the timing of any potential losses recovery and gains on a quarterly basis it is not something we can predict or control.

In summary we’re extremely pleased with our first quarter results and recent accomplishments and will remain very focused on achieving our key objectives going forward.

These objectives include continued access to the non-recourse securitization market, delevering and replacing a significant amount of our legacy non-recourse debt vehicles, continuing to grow our originations platforms while preserving this strong credit quality of our investments and further accessing the equity markets remaining very sensitive to dilution and strategic in our approach to new capital issuances.

We’re confident that we’ll be able to achieve these objectives while maintaining our earnings and dividends of 2014. More importantly this will position us favorably to achieve our long-term goal of increasing our earnings in 2015 and beyond resulting in increased value to our shareholders.

I’ll now turn the call over to Paul to take you through the financial results..

Okay. Thank you, Ivan. As noted in the press release FFO for the first quarter was approximately $8 million or $0.16 per share and GAAP net income was $5.9 million or $0.12 per share for the first quarter.

This translates into an annualized FFO return for the quarter on average common equity of approximately 8.5% and an FFO return on average adjusted common equity of approximately 7%.

As Ivan mentioned we recorded $1.3 million in loan loss reserves and impairment charges related to two assets in our portfolio and had $900,000 in recoveries of previously recorded reserves during the first quarter.

And in March 31, 2014 we had approximately $117 million of loan loss reserves on 14 loans in our portfolio with a (UPB) of around $201 million. On March 31 our book value per common share was $7.55 and our adjusted book value per common share was $9.15 adding back to deferred gains and temporary losses on our swaps.

Looking at the rest of the results for the quarter the average balance in our core investments decreased to approximately $1.62 billion for the first quarter from approximately $1.76 billion for the fourth quarter despite originations exceeding run-off in the first quarter due to the timing of the run-off occurring early versus the originations occurring later in the quarter.

The yield for the first quarter in these core investments was around 6.23% compared to 5.86% for the fourth quarter. This increase in yield was primarily due to acceleration of fees on some of our first quarter run-off which exceeded the acceleration of fees in the fourth quarter.

And weighted average all-in yield on our portfolio also increased to around 5.79% at March 31, 2014 compared to around 5.69% at December 31, 2013 due to the first quarter originations having a slightly yield in the first quarter run-off.

The average balance on our debt facilities also decreased to approximately $1.17 billion for the first quarter from approximately $1.26 billion for the fourth quarter primarily due to our first and fourth quarter run-off in our legacy CDO vehicles, the proceeds of which are used to pay-down CDO debt partially offset by temporary increases in our short-term financing facilities as we pooled collateral for our third CLO which closed earlier this week.

The average cost of funds in our debt facilities increased to approximately 3.68% for the first quarter compared to 3.28% for the fourth quarter largely due to run-off in our CDO vehicles which is used to pay-down lower cost CDO debt.

Additionally our estimated all-in debt cost increased to approximately 3.52% in March 31, 2014 compared to around 3.34% at December 31, 2013 again primarily due to paying down our lower cost CDO debt with the proceeds from run-off in these vehicles.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense our average cost of funds for the first quarter would be approximately 3.97% compared to 3.53% for the fourth quarter and our estimated debt cost would be 3.86% at March 31, 2014 compared to 3.60% at December 31, 2013 primarily due to the issuance of our third perpetual stock offering in the first quarter.

So overall net interest spreads in our core assets on a GAAP basis was relatively flat at approximately 2.55% this quarter compared to approximately 2.57% last quarter.

Including the preferred stock dividends is debt cost, our net interest spreads decreased slightly to approximately 2.26% for the first quarter compared to approximately 2.32% for the fourth quarter and our net interest spread run rate is now approximately $49.5 million annually at March 31, 2014.

Other income increased $300,000 compared to last quarter. The increase was mainly due to gains in the sale of certain of our RMBS securities. As we mentioned in our press release we’ve sold substantially at all of our remaining RMBS securities in the first quarter which will result in other income related to securities being immaterial going forward.

The NOI related to our REO assets increased $2.7 million compared to last quarter due to seasonal nature of income related to our portfolio of hotels that we own.

We believe these REO assets should produce NOI before depreciation and other non-cash adjustments of approximately $3.5 million for 2014, the bulk of which we recognized in the first two quarters.

This projected income combined with approximately $49.5 million of net interest spread in our loan and investment portfolio gives us approximately $53 million of annual estimated core FFO before potential loss reserves and operating expenses looking at our 12 months based on our run rate at March 31, 2014.

And as Ivan mentioned we’re experiencing accelerated run-off in our legacy CDO vehicle, the bulk of which appears to be occurring in the first half of 2014.

This could result in temporary reductions in our earnings run rate although we do expect our portfolio to experience overall net growth in 2014 and we’re optimistic that we’ll be able to create efficiencies from replacing these legacy vehicles which should allow us to maintain our earnings base in 2014 and increase our earnings run rate going into 2015.

Operating expenses were relatively flat compared to last quarter. As I mentioned in our proxy we are expecting to grant approximately 300,000 shares of restricted stock through our directors, employees, and employees of our manager in the second quarter, divested portion of which will be reflected as a non-cash expense in the second quarter.

Next, our average leverage ratios on our core lending assets remain relatively flat compared to last quarter at approximately 62% including the trust preferred and perpetual preferred stock as equity, and our overall leverage ratio on a spot basis including the trust preferreds and preferred stock as equity was down slightly from approximately 1.9 to 1 at December 31 to 1.8 to 1 at March 31.

And after the closing our third CLO this week, we now have approximately 95% of our debt stack and match funded non-recourse vehicles which are not subject to mark-to-market provision including the trust preferreds and preferred stock issuances equity as a result of moving a substantial amount of our collateral from our short-term warehouse lines into this vehicle.

There are some changes in the balance sheet compared to last quarter that I’d like to highlight. Restricted cash increased by approximately $42 million primarily due to CDO run-off in the first quarter that we used to repay CDO debt in the second quarter.

CDO debt also decreased by approximately $120 million compared to last quarter due to our fourth and first quarter CDO run-off that was used to repay CDO debt in the first quarter. Additionally available for sales securities decreased $35 million from the sale of substantially (all around) debt securities during the quarter.

As I mentioned earlier repurchase agreements increased approximately $89 million compared to last quarter due to leveraging our first quarter origination that will pool for our third CLO that closed earlier this week. This transaction resulted in increased capacity in our warehouse lines upon the closing of this CLO.

And equity increased approximately $30 million in the first quarter primarily due to the issuance of our third perpetual stock offering and the issuance of a portion of our common shares from our aftermarket program.

Lastly our loan portfolio statistics as of March 31 shows that about 70% of our portfolio was variable rate loans and 30% was fixed, our product type about 73% of bridge loans, 15% junior participation and 12% mezzanine and preferred equity, our asset class 66% of multi-family loans, 19% of office, 7% land and 6% hospitality.

Our loan to value was around 73% and geographically we have around 30% of our portfolio concentrated in New York City. That completes our prepared remarks for this morning.

And I’ll now turn it back to the operator to take any questions you may have at this time, Derrick?.

(Operator Instructions) Our first question will be from the line of Steve DeLaney, JMP Securities..

Thank you. Good morning Ivan and Paul and congrats on your recent 10th year anniversary as a public company..

Good morning, Steve. Thank you..

Yes. So obviously a huge sequential increase in loans, we usually think of the fourth quarter is being the busiest quarter of the year and the first quarter maybe a little light on originations but you certainly buck that trend.

And then we also noticed the average loan size was way up, is it about $15 million in the first quarter compared to $8 million to $9 million. So my first question would be are there are couple of large lumpy loans in there that we should make note of or is there simply is there any change and focus on larger loans.

So any color if you could give us around both the increase in volume and the average size would be helpful?.

I think Steve its Ivan. Just in general as we return to the lending market quarter-by-quarter we keep increasing our loan sizes and as we expand our credit facilities and we increase our capability in our securitization allows us to go after bigger loans.

And that’s just was on a quarter-by-quarter basis until we got comfortable that the securitization would be there. So that has a lot to do with it..

Okay..

We’re hoping once smaller loans getting our systems processes and then getting ourselves in position to securitization.

When we securitize the first two deals they were smaller deals and you can’t have outsized loan so the larger the deal, the larger the loans that we can do and the more vehicles we have out the more capable we have to do larger loans.

So it has to do with the growth of the platform and our business strategy and staying disciplined and we’ve just gotten to the point where we can now do loans of significant amount and utilize our vehicles which is possible from a course strategy..

Okay. That’s great, helpful. And we did notice that the third deal $375 million was significantly larger than the first two that were $260 million and $125 million respectively. One thought on your CLOs I mean you continue to be able to obtain replenishment periods and ramps.

It appears to me that, that Arbor is the only issuer at least among the public commercial mortgage REITs that’s being able to obtain that kind of flexibility and the structures everyone else is using sort of a static pool approach.

Is there something unique about the loans you’re putting in, the AAA buyers are comfortable with giving you that reinvestment period?.

I think it speaks to the manager and the fact that we’ve successfully managed our legacy deals very effectively. We maintain relationship with our investors and we have a very, very good name in the market and we maintain those relationships with our investors. So I think we’re very unique in the ability to have these hyper financing vehicles.

And unlike other people or other of our competitors who originate and securitized in our static facilities, we view these vehicles as financing vehicles which gives us a tremendous competitive advantage in the market if there was a liquidity issue.

In addition it allows us to also lower our warehouse and cost with our line lenders because there is a takeout for these loans. So it has to do with the experience of the manager and secondarily the collateral which we traffic in meaning mostly multi-family the company has such a deep history of and the investors are comfortable with it.

So we’re staying very disciplined, sticking to our net – but I’ll also want you to note there in this last CLO we did have a small percentage of being able to put another asset class in there.

So we continue to expand the (terms) to make it a better financing vehicle for the company, but we’re unique in this space to be able to have a vehicle like this..

It definitely appears so. And lastly Ivan you mentioned in your prepared remarks that you expect in the second half of this year to see some increased competition.

I’m curious whether you’re thinking that, that would be new players coming into this space, new sources of capital or is it just pricing pressures as people are trying to just get bigger, bigger in this space where this sort of comment on where you see the biggest competition coming from for Arbor?.

Right. I think as you can see in the REIT space there was a lot of capital being raised and there was pressure to put that money out. So there was definitely more liquidity with new system players, there are some new players coming into the market. So just based on the additional liquidity and some new players we’re seeing a lot of pressure.

We’re very sensitized also to the fact that asset values continue to increase and that people are being a little bit – they’re going two ways, they’re being a little bit more aggressive on loan terms and look more aggressive on the credit quality.

So that’s one of the reasons why we were a little bit more aggressive in the first quarter to build our portfolio thinking that we get a little bit too competitive in the third and fourth quarter that would be able to back off a little bit..

Makes a lot of sense. Well thank you both for the comments and good quarter..

Thanks, Steve..

(Operator Instructions) Your next question will be from the line of Lee Cooperman, Omega Advisors..

Thank you, and good morning. I’ll leave the tough question to Mr. Steve, there’s a good job in asking good questions and maybe I could ask you some easy ones. It maybe a difficult question to actually answer, but if you kind of look at the legacy CLO run-offs coupled with the opportunity in a new CLO that you just priced.

Would you think the combination will allow us a, to maintain the present dividend and sometime in 2015 raised the present dividend as the new CLO was employed, that’s the question one? And second my favorite question is which book value that you guys believe in there are a lot of shareholders in the company in ‘15 is 755 or something in between?.

Hey Paul why don’t you take a shot at that and I’ll comment afterwards..

Sure. Lee, I’ll handle the first part of the question and then will go to that – your favorite question.

But certainly yes we do feel that the combination of the run-off and the delevering we’re seeing in these legacy CDO vehicles combined with the more favorable terms we’re seeing now in our new CLO issuances will allow us to definitely be able to delever these vehicles towards the end of the year maybe into early 2015 hopefully replace them with more efficient vehicles which we think as we said in our prepared remarks will certainly set the stage for us to grow our earnings in 15 and beyond on a more substantial pace.

As far as being able to maintain our dividend and our earnings yes we’re very focused on that, we do believe that we’ll go into it despite the run-off in the legacy CDO vehicles we still – as we said in our commentary are expecting to grow the portfolio net during the year, I think we’ve done a really good job of being good stewards of capital, very sensitive to dilution and being able to raise the capital in order to continue to grow the portfolio despite the run-off being trapped in the legacy CDO vehicle and continue to maintain that earnings base in our dividend.

So we have every intention to maintain that earnings base for 2014 in that dividend, but really more importantly really get these key objectives behind us and be able to setup 2015 and beyond to be very strong earnings years. And there are a couple of reasons to that.

One, not only being able to have more efficient vehicle and the new financing structures we’re seeing. Two, when we’re able to replace the legacy CDO vehicles and the future run-off out of those legacy assets we’ll hopefully be able to be redeploy through replenishment features we should be able to garner in the new vehicles.

And lastly and I think very significantly is we’ll have to burn-off of those swaps that we had associated with those loans which is really tampering our net spreads with a higher interest cost. And that burn-off of those swaps would be earlier than they normally would be if we’re able to delever those vehicles and replace them.

As far as the second question whether we think which is the right book value? Certainly we think the 915 is the right value.

As you’re aware there were two components that are driving the difference between book and adjusted book and the one that have to deal with the value of the swaps keeps getting smaller and smaller each quarter as the swaps get closer to maturity. That number is down to $20 million, it was as high as $50 million or $60 million a couple of years back.

So we have a $20 million item that just naturally over the next two to three years will accrete back into equity as the swaps get closer to maturity and it has been doing that each quarter, this quarter it was $2 million pickup from equity from the change in value of the swaps that was positive.

The second is the 450 West transaction which we’ve talked extensively about. And that transaction we believe that financing comes due in June, obviously we don’t completely control it, but we’ve been working very hard to see if we can figure out a way that we can end up releasing our guarantee on that and booking that.

As you know it doesn’t have an economic benefit because we received the cash before but that’s a $16 per share.

So if we can get that done that will really bridge the gap between book and adjusted book and that’s why we feel the adjusted book is the right number because we feel those items are – had been monetized already for the most part and it’s just a matter of booking and accounting adjustment here to get it back..

Got it.

It sounds to me though there is a question not only the dividend sales, but after your business plan is fluctuated that we’d probably look into dividend bump sometime during 2015?.

Yes. We think by delevering these vehicles and putting these vehicles in place and not having to deal with the run-off on the delevered older vehicles and some of the lower rates on the legacy that you’ll see a cruel increase in core earnings in 2015 as well as getting rid of the swaps.

And it should be very significant and what would be really nice is that to go along very nicely with the issue that you mentioned on the adjusted book verse the real book and the growth in the dividends could help us achieve growing our stock price to our real book..

I guess one last question I had asked before.

Has your special committee making any progress on the possibility of the private entity and the public entity being put together?.

I don’t believe the special committee has gotten back together yet. We just got a Board Meeting this week. So I don’t believe that, that discussion has begun on a special committee basis but we’ll inform you as to when the appropriate time is..

Good. Thank you. You guys are doing a good job and I appreciate it. Thank you..

Thanks, Lee..

At this time I’m showing no further questions in queue. I’d like to turn the call back over to Mr. Ivan Kaufman for any closing remarks..

Hey thanks to everybody for their participation. I’m very, very pleased with our first quarter and the significant accomplishments we’ve made in order to be in our business plan for this year. Thank you everybody. Have a nice day..

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day..