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

Steven DeLaney - JMP Securities LLC Jade Rahmani - Keefe, Bruyette & Woods Richard Eckert - Lahde Capital Management Lee Cooperman - Omega Advisors, Inc..

Good day, ladies and gentlemen, and welcome to the Arbor Realty Trust Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Paul Elenio, Chief Financial Officer. You may begin..

Okay. Thank you, Vicky, 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, 2015. 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 risk 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. As you can see from the morning’s press release, we had another very successful quarter. We produced strong operating results and continued to effectively execute our business strategy.

Before Paul takes you through the financial results, I would like to reflect on our significant accomplishments and focus on our outlook for the remainder of 2015 and for 2016.

As we discussed on our last call, we completed our primary goal for 2015 of delevering all of our remaining legacy securitization vehicles earlier than expected, which has again allowed us to substantially reduced our debt cost, gain access to the capital that was trapped in these vehicles to deploy into new investment opportunities and grow our core earnings run rate.

We also have continued to focus heavily on issuing new and enhanced non-recourse financing structures. We’ve experienced tremendous success in this area and continue to be a market leader in the CLO securitization arena.

In the third quarter, we issued a new CLO with $350 million of collateral, including a $47 million ramp up feature to fund future loans and investments.

This CLO contains significant improvements from our last securitization, including increased leverage to 77%, a loan replenishment period as well as a continued ability to finance non-multifamily assets. This is our fifth securitization vehicle since the financial crisis.

In each one of these securitizations, we’ve cultivated a loyal and growing base of investors that highly value our strong transaction performance in our diverse platform. We now have three CLOs in place, with nearly $800 million of non-recourse debt, which represents almost 80% of our total financing.

The success we’ve had in managing and improving our liability structure is a critical component of our business strategy, which has allowed us to appropriately match fund our assets with non-recourse liabilities and generate strong leverage returns on our capital.

We also continue to focus heavily on growing our originations platform, while remaining extremely disciplined in our lending approach by investing in senior multifamily loans.

This has allowed us to successfully transition our portfolio to one which is comprised of 87% senior debt, with 73% of that debt being multifamily assets which clearly have proven to be the most resilient asset class and product type in all cycles.

And with the significant improvement we’ve made in our financing facilities, we are generating mid-teens returns on our capital in a very secure part of the capital stack. In fact, the leverage returns we are producing in our senior debt are in excess of the returns that are being achieved by lenders in the subordinate areas of the capital structure.

In the third quarter, we originated $190 million of loans, with an average yield of approximately 6% and generated leverage returns of approximately 14% on these investments. We experienced approximately $146 million of run-off in the third quarter, resulting in approximately $44 million of net growth in the loan portfolio during the quarter.

Additionally, our pipeline continues to grow at a rapid pace.

And although it remains difficult to actually predict our run-offs due to continued improving market conditions, now that we have successfully delevered all of our legacy securitization vehicles, this run-off has substantially increased our cash available to reinvest into our new investment opportunities which will allow us to continue to increase our earnings going forward.

As a result, we now have approximately $175 million of cash on hand, including $50 million of cash immediately deployable in our replenishable CLO vehicles combined with approximately $325 million of capacity in our short-term credit facilities to fund our investment opportunities.

This will allow us to continue to grow our business without an immediate need for additional capital. We remain sensitive to dilution, given our stock price and I’m very pleased with our strong liquidity position allowing us to fund our future investments and increase our earnings without dilution.

Another significant accomplishment is our continued ability to leverage our unique platform and grow our franchise by consistently creating significant additional income streams, which has allowed us to generate earnings well in excess of our dividends.

We continue to produce extremely impressed results in the investment we made in the beginning of the year in the residential mortgage banking business.

In the third quarter, we recorded $1.4 million of income and for the nine months of the year generated $5.9 million of income or $0.12 a share in earnings from this investment which is well in excess of our original projections. This translates into return greater than 50% on our investment in this joint venture to date.

We also generated approximately $4 million of additional income or $0.08 a share during the third quarter from an equity interest that was part of a preferred equity investment that was repaid earlier in the year. These earnings were the result of our portion of refinanced proceeds above the prior existing debt on various assets in the portfolio.

Additionally, we do believe that we will continue to receive proceeds in a range of $250,000 to $500,000 quarterly from the operating performance of these assets on a go forward basis.

These tremendous results continue to demonstrate our unique ability to create significant additional earnings [indiscernible] from structured transactions which we view as an important part of our franchise and an additional means of diversifying our income streams and adding earnings capabilities.

In summary, we’re extremely pleased of successfully completed all of our 2015 goals and objectives ahead of schedule and with greater results which took a tremendous amount of discipline, patience and skill.

These significant accomplishments included deleveraging our legacy securitization vehicles, substantially reducing our debt cost and trapping the cash in these vehicles to redeploy into higher yielding investments.

Issuing new and improved non-recourse financing structures, growing our originations platform, while continuing to focus on multifamily senior loans generating superior leveraged returns; significantly increasing our liquidity position and reducing our low interest legacy portfolio which was decreasing and dragging our earnings; the substantial contribution to our core earnings from our residential investments and from our structured transactions and a 15% increase in our dividend over last year and our ability to produce significant earnings above our dividend.

We believe the successful execution of our business strategy in 2015 has positioned us extremely well in the market to produce continued growth and success in the future, while allowing us to increase our earnings and dividends overtime.

With our stock trading at 70% of book value, combined with our strong dividend, we believe we are very attractive value for potential investors. I will now turn the call over to Paul Elenio to take you through our financial results.

Paul?.

Okay. Thank you, Ivan. As noted in the press release, net income for the third quarter was $15.3 million or $0.30 per share and AFFO was $17.1 million or $0.34 per share, adding back depreciation expense and non-cash stock compensation expense.

We successfully delevered our last legacy CDO vehicle during the quarter, resulting in recording net non-cash income of approximately $7.7 million.

AFFO without this item as well as roughly $1.1 million in professional fees incurred during the third quarter related to the potential acquisition of our [managers agency] platform was $10.5 million or $0.21 per share which resulted in an annualized return on average common equity of approximately 9% for the quarter.

As Ivan mentioned, during the third quarter, we continued to generate significant additional income streams, recording $1.4 million of income from our residential mortgage business joint venture and $4 million of net income from one of our equity interest, $5 million of which was recorded as income from equity affiliates which was partially reduced by $1 million of expenses related to this transaction that we recorded in operating expenses.

This has resulted in AFFO of approximately $37 million or $0.72 per share for the nine months ended September 30, excluding the non-cash income we recorded from the delevering of our legacy securitization vehicles during the year, as well as the professional fees related to the potential acquisition of $0.72 is well ahead of our dividend of $0.45 per share for the first three quarters and translates into a 10.6% annualized return on average common equity to date.

Looking at the rest of the results for the quarter, the average balance in our core investments was down to $1.53 billion for the third quarter from $1.62 billion for the second quarter, mainly due to the full effect of run-off outpacing our originations in the second quarter.

The yield on these core investments increased to 6.68% for the third quarter from 6.46% for the second quarter, largely due to the collection of unaccrued interest in the third quarter exceeding accelerated fees from early run-off in the second quarter.

And the weighted average all in yield on our portfolio was up slightly to around 6.31% at September 30 compared to around 6.28% at June 30. The average balance in our debt facilities was also down to approximately $1.14 billion for the third quarter from approximately $1.17 billion for the second quarter.

The average cost of funds in our debt facilities increased to approximately 4.13% for the third quarter compared to 4% for the second quarter and our estimated all in debt cost was up to approximately 3.94% at September 30 compared to around 3.86% at June 30, largely due to the delevering CDO III in the third quarter which carried a lower cost of debt.

If you were to include the dividends associated with our perpetual preferred offerings as interest expense, our average cost of funds would be approximately 4.39% for the third quarter and approximately 4.31% for the second quarter and our estimated all in debt cost would be 4.27% at September 30 compared to 4.19% at June 30, again mainly due to the delevering of CDO III in the third quarter which had a lower cost of funds.

Overall, net interest spreads on our core assets on a GAAP basis increased to 2.55% this quarter compared to 2.47% last quarter.

Including the preferred stock dividend as debt cost, our average net interest spreads also increased to approximately 2.25% this quarter from approximately 2.15% last quarter, largely due to other fees and interest in the third quarter exceeding fees from accelerated run-off in the second quarter.

And our overall spot net interest spread including the preferred stock dividends and debt cost decreased slightly from 2.09% at June 30 to 2.04% at September 30.

Our average leverage ratios in our core lending assets increased slightly to approximately 63%, including the trust preferred and perpetual preferred stock as equity for the third quarter compared to 62% for the second quarter.

And our overall leverage ratio on a spot basis including the trust preferred and preferred stock as equity 1.4 to 1 at both of September 30 and June 30. NOI related to our OREO assets was flat quarter-over-quarter and we’ve generated approximately $4.5 million of NOI from these assets for the nine months ended September 30.

We do expect a loss of approximately $100,000 to $200,000 from our OREO assets in the fourth quarter due to the seasonal nature of income related to a portfolio of hotels that we own which produce substantially more income in the first half of the year.

However, the projected NOI of approximately $4.3 million to $4.4 million for 2015 is above our initial expectations of $3.5 million to $4 million due to improved property performance from several of our OREO assets.

We did have some changes to the right side of the balance sheet this quarter, including the issuance of a new CLO, increasing our CLO debt by $268 million and a reduction in our short-term debt by approximately $200 million, largely due to moving certain assets into our new CLO vehicle.

Additionally, CDO debt was reduced to zero due to successfully delevering our last legacy CDO vehicle in the third quarter. As Ivan mentioned earlier, we now have three non-recourse replenishable CLOs with $768 million of debt, representing 78% of our total debt stack at September 30.

Lastly, as Ivan mentioned, we continue to focus heavily on multifamily senior loans and as a result we have transitioned our portfolio to one that contains 87% bridge loans and 70% multifamily assets at September 30 as compared to 73% bridge and 67% multifamily at the same time last year.

This is a significant accomplishment and again with the improvements we’ve made in our financing facilities, we are able to generate mid-teens returns in our capital in a very secure part of the capital stack. Additionally, our loan to value is around 76% and geographically we have around 29% of our portfolio concentrated in New York City.

That completes our prepared remarks this morning. And I will now turn it back to the operator to take any questions you may have at this time.

Vicky?.

[Operator Instructions] Our first question comes from the line of Steven DeLaney with JMP Securities..

It seems like its getting routine that I’ve got to congratulate you on another earnings beat this quarter as well, so great job.

Ivan, the preferred equity gain, looking at the Q, we see that’s in the Lexford portfolio, could you tell us what type of properties are in that portfolio?.

Those are multifamily properties, a very large portfolio that we had a preferred equity investment in pre-crisis. We successfully took over that portfolio, raised additional capital, retired the additional capital we raised as well as the preferred equity investment and the properties are operating in a very healthy way..

So you were able to refinance it in and pull some equity out, it sounds like?.

A part of it, that’s correct..

Would you describe those properties as fully stabilized or is there still some work to do to improve NOI there?.

I think they are fairly stable. There is still a little bit room left for good management and structuring the financing, but we’re pretty content with the job that we’ve done and perhaps a little bit more through restructuring to get some more out of it..

And I know we’ve talked before about equity kick and how the market has changed, are there any remaining preferred equity interest that you would consider to be material in some of the pre-crisis loan portfolio?.

I don’t see anything in the portfolio right now that stands out that could produce significant results, but I think I would say that we managed to – however we do, we managed to lever off this unique platform and our franchise ability and we always manage to find opportunities on these structured transactions to create additional earnings.

And on this particular issue, this particular situation, as Ivan laid out, we did say in our commentary that although the gain this quarter was largely due from refinance proceeds on several of the assets and we did a great job on that, we are expecting this to be somewhat of an annuity going forward of anywhere from $250,000 to $500,000 a quarter and that’s because the performance of the assets has improved and where our equity interest lies in the waterfall, we are expecting to get some additional proceeds going forward each quarter, which in our mind is like another annuity and another form of income.

Having said that, looking in the portfolio, I don’t see anything that stands out in addition to the items we’ve mentioned. But again, we continue to find ways to generate additional value from our legacy assets..

On CLO V, we did note the three replacement, Ivan did highlight that, to your knowledge, is this the first CLO that’s been done with a three-year rather than a two-year replenishment period?.

First of all, most of the securitization is being done in a market are not revolving....

Static pool..

Static. So we’re one of the few lenders who are able to have a replenishment feature. To my knowledge, this is the last one that we’ve done and I’m not sure there are others in the market that have this feature..

Ivan, do you think – was this unique to the particular collateral set or do you think three years will become your standard structure going forward?.

I think a lot depends on the market and clearly our investors have become really comfortable with our collateral and on the way we operate. So each time that we do issue one, our investors get more and more comfortable with our performance [indiscernible] how we manage things.

So more they get comfortable, the better our performance, I think the greater flexibility we should have given the market remains stable..

And one final thing from me, if I may, we have been told in the second quarter call, I think we talked about you have the four Daytona Hotels and I think you announced that you had a PSA on one of the hotel and I think we were looking for a fourth quarter possible sale in gain of maybe $1.5 million.

It looks like from the Q, [bent down] some information that suggested maybe there’s been more activity, so could you – Paul, one of you, just give us an update on the status of all the Daytona Hotels as it sits now?.

We did on our last quarter call talk about that we had one of our Daytona assets in real estate held for sale because we had a PSA on it. We did expect that transaction to close early in the fourth quarter and it has.

And we had originally talked about $1.5 million gain, I think we are expecting that gain, even though we are still finalizing the work to be about $1.6 million.

In addition to that one asset, we managed to get a quick deal done on a second asset and that was not listed as held for sale in the second quarter, was listed as head for sale in the third quarter as we signed up the agreement early in the third quarter and then we just closed on that deal literally yesterday or the day before and we are expecting almost $2 million or $2.1 million gain on that asset as well.

So we managed to liquidate two of the four remaining at the time we spoke last Daytona properties at a nice gain and we now have two left on our books that are still in real estate owned..

And our next question comes from the line of Jade Rahmani with KBW..

Just wanted to ask if you could give your perspective on recent market volatility and what you think, if anything, the market is signaling about perhaps the recycle trajectory of underwriting standards or anything else?.

Clearly, there’s been a lot of turmoil in the CMBS market and that’s a factor of the risk retention rules and some of the other rules that’s taking place, which I believe have an impact on that market and the pricing of that market and the credit standards of that market.

Overall, in general, I think there is some concern that the markets [indiscernible] and you’re seeing a little bit of a tightening take place right now.

And I’m not sure whether that’s a factor of that – a lot of the institutions filled up their tank for the year and gliding into the year end and being more choosy, just because of the fall or whether there is a little bit of a change in terms of the credit culture.

But we’re definitely seeing a little bit of a shift in the box being a little tightened. So the first quarter should be quite interesting to see how the revised regulations on risk retention and the Reg A affects the CMBS market and whether or not commercial loans will suffer some level of backup as the CMBS market becomes wider in terms of price.

We’ll see how that develops. And we’ll see how the commercial banks and the other lenders adjust their credit when they have a new allocation of capital. So we’re watching and seeing ourselves, we’re fairly cautious. We focus primarily, as we say on the call and our portfolio reflects, in the multifamily segment of the market, which is fairly stable.

But even there, we’ve seen a good run up in rents and some cap rate compression, we’re proceeding with caution as well..

And just in terms of any opportunities there, on the bridge lending side, have this started to have any material impact on your pricing, are you seeing also potential deals take longer to close especially the [indiscernible] and borrowers a little more nervous and more interested in locking up financing, maybe even slightly higher spread than a few months ago?.

I think in the third quarter, we – in the early third quarter, things were little slower [indiscernible] little bit of a rush, people doing some year-end transactions and we actually had a little bit of a surge in our portfolio, our pipeline. But I think there is a little bit more caution out there.

We do have a lot of people doing lot of tax free exchanges from sales and doing new sales. That’s driving the market as well. And that has pushed volume up. So without a question, there has been cap rate compression.

I think that the regs don’t affect the multifamily sector as it does the commercial sector, as Fannie May and Freddie Mac have provided a lot of liquidity and consistency in this space..

Just touching to a disclosure in the 10-Q, can you give some color on the office building that, I think, was acquired through foreclosure?.

We had a senior loan for a while that’s been non-performing on an office property in the Pittsburgh area that we’ve been watching that asset for a while, it’s been non-performing, although we’ve been trapping cash in a lot box, because we have a senior lender. And two things happened during the quarter.

We’ve extended out that loan a few times, we came up on a maturity default, we like the asset, we like where we are in the value, and we ended up taking that property back during the third quarter. Our basis in that asset is just under $6 million. It’s an office property in Pittsburgh; we like where we are in the value a lot.

And we’ve written down that loan obviously by $2.5 million and now our basis is $5.9 million. We did manage too, in my prepared remarks I mentioned we did manage to end up with some of the interest that was [back owed] to us in the third quarter from the cash.

So we recorded that in interest income and we took back the asset and we have it on the books at $5.9 million and we like that property at that value..

In terms of the outlook, will you have to put in dollars to stabilize the property or is it performing in terms of occupancy level?.

It is performing; its occupancy is pretty strong. We may have to put a couple of dollars in to improve the property from an appearance perspective and performance, but we’re not looking at significant dollars and we certainly – any dollars we put in, we feel we’re well undervalued where we own it right now.

So we’re totally comfortable with that approach in holding it, putting in some dollars and getting it more stable and getting its value up..

And then just on the prospect of potentially internalizing the manager or doing some kind of transaction, is this an active topic? Is it taken off the table? Why hasn’t there been more movement on the topic, and perhaps it’s to do with ABR’s valuation? And then just a follow-on to that would be if there was some kind of merger, would ABR be able to maintain REIT status?.

I’m going to add to that question, what we’ve disclosed is all we really can say, which is that we are in discussions, we continue to be in discussions. As I mentioned in my prepared remarks, we did have some professional fees incurred during the third quarter as a result of those discussions. So this is an active deal, to your question.

But all we can tell you at this point is we are in discussions, we continue to be in discussions. If and when we ever get to the point where there is a deal, we will announce that. We’re not at that point.

And at this point, I can’t guarantee there will be a deal and if there is a deal what that deal will look like from a structuring perspective or what it will mean to the REIT. We’re just not at that point yet..

[Operator Instructions] Our next question comes from the line of Richard Eckert with Lahde Capital Management..

Paul, forgive me if you’ve answered this, but I’ve been jumping in on and off. You cited $5 million in income from equity affiliates. That looks like a substantial portion of your income on that line item for the year.

Can you tell me what that related to?.

Rich, you jumped in late. We did have some commentary and answer some Q&A on it already. But what that was is we had a preferred equity investment and with that preferred equity investment, we had an equity interest as well.

We managed to work that portfolio of assets in a way to get all of our preferred equity investment and any additional capital we raise paid off. And we also managed to take some of those properties within that portfolio to multifamily portfolio and refinanced the debt on several of those assets.

And the refinance proceeds were in excess of the initial debt stack and those proceeds flowed down, those excess proceeds flowed down in a waterfall and we were the recipient of some of that waterfall and that was $5 million net of $1 million in expenses we had, would be $4 million. That was an event that happened in the third quarter.

Additionally, what we talked about is now that the debt has been refinanced, the properties are performing quite well.

We’ve seen some improvements in several of the properties and we’re expecting going forward to have somewhat of an annuity on our equity interest of about $250,000 to $500,000 a quarter, proceeds that would flow down to us in the waterfall from the performance of those assets..

And our next question comes from the line of Lee Cooperman with Omega Advisors..

Let me try to put a few things together, I want to make I understood correctly.

[indiscernible] being in the right place to capital stack that you’re comfortable you could generate a mid-teens ROE, is that what I heard?.

Yes..

Second, you had unused lending capacity of around $175 million at the current time?.

Right now we have $325 million in capacity in our short-term lines and that’s artificially a little high because we just closed our fifth CLO and emptied out our warehouse lines, then put those into the last securitization. So now, as we do new originations going forward, that capacity will start to get used.

But currently, we have about $325 million of capacity in our line and about, I think in our commentary, $175 million what we call liquidity between cash on hand and cash that’s immediately deployable in our CLOs..

The reason I’m asking these questions, when times were not as good for us as they are today, in 2012 we [sold 3.5 million shares for $5.80; 2013 we actually sold 5.6 million at $8 and then in September we sold 6 million in $7.08] as stock is now lower than it was when you sold stock, the company is in materially stronger condition.

You guys are large owners. If I can apply $9.35 book value, it’s the real book value, you can earn mid-teens ROE, we deserve to sell at book value, okay.

And so if I can buy something under $7 that’s worth $9.35 and you have the liquidity, the only reason we shouldn’t be doing it is if this transaction, as other gentlemen asked about, is alive and you’re restricted.

But I’d say if you’re unrestricted or can get unrestricted, we should consider taking a part by liquidity and buying back something you’re selling in the marketplace for, I don’t know, [$0.70 for a dollar] or something like that?.

I think your thought has a lot of merit if the circumstances are correct. And as you know, it took us quite a bit of time to really delever the facilities that we had in the legacy facilities to generate this kind of cash. We’re quite pleased with having this capability.

I think it opens up a lot of options for us, depending on which way the company moves..

[Operator Instructions] I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. Ivan Kaufman, Chief Executive Officer. Please go ahead, sir..

Thank you everybody for participating. We’re really pleased with our third quarter results and the first three quarters have been outstanding. We look forward to a successful completion of 2015..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..