Arbor Realty Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Arbor is a REIT operating through Structured (commercial real estate lending and investments) and Agency (multifamily loan origination, sale, and servicing) businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
- Q3 earnings: Net interest income was $43.8 million, up 35% year over year. Net income was $97.7 million versus $43.2 million; net income attributable to common stockholders was $82.0 million versus $34.0 million. Diluted EPS was $0.72 versus $0.35. Core earnings, a company-defined non-GAAP measure, were $67.1 million, or $0.50 per diluted share, versus $43.1 million, or $0.37.
- Nine-month earnings: Net interest income was $124.1 million, up 30%. Net income was $83.5 million versus $110.6 million, and common-stockholder net income was $66.8 million versus $85.5 million. Diluted EPS was $0.59 versus $0.93. Core earnings were $167.5 million, or $1.26 per diluted share, versus $117.6 million, or $1.04.
- Revenue drivers: Q3 mortgage servicing rights income was $42.4 million, up 42%; gain on loan sales and fee-based services was $19.9 million, down 7%. Nine-month MSR income was $96.7 million, up 54%, and gain on sales was $60.6 million, up 17%. Equity-affiliate income was $32.4 million in Q3 and $56.8 million year to date, largely from a residential mortgage banking joint venture. No consolidated revenue or operating-margin measure is presented as a simple total in the filing.
- Cash flow: For the first nine months, operating cash flow was $303.7 million, investing cash outflow was $811.7 million, and financing cash flow was $299.9 million. Cash, cash equivalents, and restricted cash ended at $302.5 million, down from $510.6 million at year-end 2019; unrestricted cash was $192.2 million.
- Assets, debt, and equity: Total assets were $6.69 billion and total liabilities $5.37 billion at September 30. Loans and investments, net, were $4.91 billion, with a $146.7 million credit-loss allowance; loans held for sale were $631.1 million and MSRs were $335.2 million. Reported debt obligations totaled approximately $5.04 billion, including $2.52 billion of CLOs. Total equity was $1.32 billion.
- Liquidity and funding: Management reported approximately $500 million in cash and available liquidity and said it believed funding sources and access to additional liquidity would meet needs. About 80% of Structured Business debt did not have mark-to-market provisions, according to management. The company was in compliance with financial covenants at quarter-end.
- Dividends: Q3 common dividends declared were $0.31 per share; the board subsequently declared $0.32 per share, payable November 30, 2020.
Material changes versus comparable periods
- Q3 common-stockholder earnings rose sharply, supported by higher net interest income, MSR income, and equity-affiliate income, as well as a $7.6 million net reversal of credit-loss provision. Year-to-date common-stockholder earnings declined, reflecting $59.5 million of credit-loss provisions, $21.7 million of loss-sharing provisions, and $58.9 million of derivative losses.
- Portfolio growth continued: Structured loans and investments reached $5.10 billion, up from $4.28 billion at year-end 2019. Agency servicing UPB grew to $22.56 billion from $20.06 billion.
- Borrowing costs declined: the reported weighted-average rate on Structured Business facilities and repurchase agreements was 2.85% at September 30 versus 3.94% at year-end; the CLO weighted-average rate was 1.61% versus 3.23%.
- Financing transactions included a new $668 million CLO issuance, the unwind of a $282.9 million CLO and a $70 million debt fund, and $345.8 million of senior unsecured note issuance. Credit-loss accounting changed with adoption of CECL, producing a $28.6 million opening accumulated-deficit adjustment.
Outlook, risks, and unusual items
- Management expected COVID-19 to negatively affect financial performance and operating results for the remainder of 2020. It said Structured Business growth would likely remain limited until capital-market liquidity improved; Agency operations were described as requiring less capital.
- COVID-19 risks include borrower payment stress, delinquencies, defaults, loan modifications, falling property values, margin calls, reduced financing and securitization access, servicing advances, and potential pressure on liquidity and distributions. Forbearance requests covered approximately 0.3% of the Fannie Mae DUS portfolio and 5.9% of the Freddie Mac portfolio.
- Credit quality weakened in certain exposures: eight loans with $53.8 million net carrying value were classified as non-performing, versus three loans with $1.8 million at year-end 2019. CECL credit-loss provisions were $59.5 million for the first nine months; the allowance for loss-sharing obligations was $71.2 million.
- Other notable items: Arbor sold a hotel property and recorded a $1.9 million loss, plus a $2.5 million litigation-settlement charge. Two loan modifications were treated as troubled debt restructurings. A land-development borrower was in negotiations to extend six loans with $120.9 million carrying value that matured in September 2020.
- The filing describes a long-running Extended Stay-related lawsuit. A court dismissed nine of 17 counts in August 2020; claims remain against affiliated entities and director designees. The company recorded no litigation loss accrual, stating a loss was not considered probable and could not be reasonably estimated.
- Interest-rate exposure remains relevant: the filing estimates that a 25-basis-point LIBOR increase would reduce annual net interest income by $8.5 million, while a 15-basis-point increase would reduce it by $5.1 million. Management noted that loan LIBOR floors limit the benefit of rising rates.
- No quantified full-year earnings guidance is provided. Management’s outlook and liquidity statements are forward-looking and subject to substantial uncertainty.
Most important facts for investors to verify
- Whether portfolio delinquencies, non-performing loans, credit-loss reserves, and Fannie Mae loss-sharing provisions improve or worsen as pandemic conditions evolve.
- Whether reported available liquidity remains accessible after restricted cash, collateral needs, servicing advances, and debt maturities are considered.
- Performance and cash distributions from the residential mortgage banking joint venture, a material contributor to reported earnings.
- Whether debt facilities can be extended or renewed on acceptable terms and whether CLO coverage tests remain compliant.
- How recurring cash earnings compare with GAAP earnings and dividends, including the effects of noncash MSR income, CECL adjustments, derivative results, and share issuance.
- Developments in the Extended Stay litigation and the land-development loan extensions, including any resulting loss or cash-flow exposure.