Arbor Realty Trust, Inc. (ABR)

Q2 2010 Earnings Call Transcript

August 6, 2010 10:00 am ET


Paul Elenio – CFO

Ivan Kaufman – CEO


David Chiaverini – BMO Capital Markets

Steve DeLaney – JMP Securities

Lee Cooperman – Omega Advisors

Bruce Harting – Barclays Capital



Good day ladies and gentlemen, and welcome to the second quarter 2010 Arbor Realty Trust earnings conference call. My name is Chanole and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr Paul Elenio, Chief Financial Officer. Please proceed.

Paul Elenio

Okay. Thank you, Chanole, good morning everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we will discuss the results for the quarter ended June 30, 2010. 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 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.

Now that the safe harbor is behind us, I would like to 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 today’s call. Before Paul takes you through the second quarter results, I would like to talk about some of our significant accomplishments during the quarter, and how the successful execution of our strategy has positioned the company favorably for the future.

Throughout the past three years and especially over the last several quarters, we have worked diligently to execute our strategy of managing our portfolio, maximizing our liquidity, and repurchasing our debt at deep discounts when available. As announced last month and discussed in detail on our July 12 call, the completion of the retirement of our debt with Wachovia at a discount for a gain of $157 million was a critical component in completing our goal of restructuring a significant amount of our balance sheet.

This milestone transaction has eliminated nearly all of our short-term recourse debt and it generated a significant gain and increase in book value per share. It has also increased our core earnings substantially through a significant reduction in our interest expense, increased our operating flexibility and positioned the firm well to actively participate in the accretive opportunities that are becoming available on the market.

We are extremely pleased with the way we strategically manage the completion of the Wachovia debt retirement through a combination of corporate liquidity, and the utilization of other debt facilities. This eliminated the need to raise capital or paying significant additional long-term recourse debt in order to complete the transaction, and allowed us to retain a substantial amount of value in the form of unencumbered assets.

During the quarter, we also continued to selectively repurchase our CDO debt at discount purchasing approximately $19 million of bonds for a price of approximately $6 million resulting in a net gain on early extinguishment of this debt of nearly $13 million. This adds to the string of success on these transactions that we have had recording $54 million of gains from the debt repurchases in 2009, and another $47 million in the first quarter of 2010, including the gain from the retirement of our trust preferred debt. We believe that there may be some more opportunities for us to repurchase our debt at discounts going forward, and we will continue to evaluate these transactions based on availability, pricing and liquidity.

We continue to focus on maximizing liquidity and using that liquidity strategically to meet corporate objectives. As of today, we have approximately $40 million of cash on hand, around $25 million of cash collateral posted against our swaps, and approximately $195 million of unencumbered assets. We are also pleased with our ability to manage our CDO vehicles effectively receiving all of the cash distributions from these vehicles in 2009 and the first two quarters of 2010. And while there can be no assurances that our CDO vehicles will continue to cash flow in the future, we will remain focused on optimizing and utilizing these facilities by transferring assets, and originating new loans when available and appropriate.

As we have stated in the past several calls, the aim of our strategy culminating with Wachovia’s debt retirement has been to improve the right side of our balance sheet, and substantially reduce leverage and recourse debt, all to position ourselves to return to our core commercial lending business and take advantage of opportunities in the market. During the second quarter, we originated two loans totalling $5 million with a weighted average unleveraged yield of approximately 11%, have committed to fund approximately $10 million of additional loans with an average yield of around 10%, and continue to build our pipeline for new investments.

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