ARBOR REALTY TRUST INC quarterly report, Q1 FY2020

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Arbor Realty Trust, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. The company operates a Structured Business investing in real estate loans and related assets, and an Agency Business that originates, sells and services multifamily loans. Unless noted, figures below are in U.S. dollars.

Financial performance and position

  • Revenue and earnings: Interest income was $88.5 million, up 24% year over year; interest expense was $50.0 million, up 19%; net interest income rose 31% to $38.5 million. Total other revenue fell to $2.3 million from $44.8 million, principally reflecting $50.7 million of net derivative losses versus $2.5 million a year earlier.
  • Profit: GAAP net loss was $68.4 million, compared with net income of $30.0 million in Q1 2019. Net loss attributable to common stockholders was $59.3 million, or $0.54 per diluted share, versus income of $22.7 million, or $0.26 per diluted share. Results included $54.4 million of provision for credit losses and $21.5 million of provision for loss-sharing obligations. The company reported non-GAAP core earnings of $40.7 million, or $0.31 per diluted share, versus $36.1 million, or $0.33, restated to the revised measure.
  • Revenue drivers: Mortgage servicing rights income increased 54% to $21.9 million. Gain on sales, including fee-based services, declined 13% to $14.3 million; servicing revenue, net was $13.3 million, roughly flat year over year.
  • Cash flow: Operating activities used $233.2 million, investing activities used $510.8 million, and financing activities provided $759.8 million. Cash, cash equivalents and restricted cash totaled $526.4 million at quarter-end, including $222.3 million of cash and equivalents and $304.1 million of restricted cash.
  • Balance sheet and debt: Total assets were $6.93 billion, total liabilities $5.71 billion and total equity $1.23 billion. Debt obligations totaled approximately $5.43 billion on the balance sheet. Credit facilities and repurchase agreements were $1.85 billion; CLOs $2.51 billion; senior unsecured notes $591.9 million; convertible notes, net $264.7 million; junior subordinated notes $141.1 million; and debt-fund borrowings $68.7 million. The company reported compliance with financial and CLO covenants at March 31.
  • Portfolio and liquidity: Structured loans and investments, net, were $4.64 billion, against $4.80 billion gross principal; the allowance for credit losses was $142.3 million. Loans held for sale were $991.7 million and mortgage servicing rights were $289.0 million. Management reported approximately $350 million of cash and available liquidity, in addition to other sources. The agency servicing portfolio was $20.20 billion.
  • Distributions: The company declared a common dividend of $0.30 per share for the quarter. A further $0.30 per-share dividend, payable July 15, 2020, was declared after quarter-end.

Material changes versus Q1 2019 and year-end 2019

  • GAAP earnings shifted from net income to a substantial loss, reflecting unusually large derivative losses and credit-related provisions. The company attributed the increased credit provisions largely to the adverse economic outlook associated with COVID-19 and adoption of the new CECL accounting standard.
  • Net interest income grew with portfolio expansion, although average yields on core Structured Business interest-earning assets declined. Average funding costs also declined.
  • Structured loan originations were $856.2 million, compared with $416.3 million in Q1 2019; the structured portfolio grew 12% from year-end to $4.80 billion. Agency originations were $1.08 billion, including $282.3 million of Private Label loans. Agency loan sales were $957.1 million, down from $1.10 billion.
  • The allowance for credit losses on loans and investments rose from $71.1 million at year-end to $142.3 million at March 31. The company recorded a $28.6 million cumulative reduction to equity on CECL adoption, followed by first-quarter provisions; the total Q1 credit and loss-sharing provisions were approximately $75.9 million.
  • The company issued $275 million of 4.50% senior unsecured notes due 2027 and completed CLO XIII, issuing $668 million of investment-grade notes to third parties. It also unwound CLO VIII, repaying $282.9 million of notes. Senior unsecured notes increased from $319.8 million at year-end to $591.9 million.

Outlook, risks, contingencies and unusual items

  • Management expected COVID-19 to negatively affect financial performance and operating results for the remainder of 2020; the extent and duration were described as uncertain. It expected Structured Business growth to be limited until capital-market liquidity improved, while saying Agency Business growth was less dependent on capital markets.
  • For April 2020 payments, the company had received forbearance requests covering approximately 0.5% of its Fannie Mae DUS portfolio and 4.0% of its Freddie Mac portfolio. Management anticipated further economic stress in May and June. It also launched a $2 million rental-assistance program in April.
  • COVID-19 risks include borrower and tenant payment stress, declining collateral values, defaults and modifications, margin calls, more costly or unavailable financing, difficulty executing securitizations, and pressure on liquidity, earnings and distributions. The company’s hotel property temporarily ceased operations in April.
  • During Q1, the company posted $54.7 million of cash collateral related to margin calls on securities repurchase facilities. It said this exposure was reduced to about $40 million through collateral payments, restructuring and use of proceeds from an April debt issuance. In April, it issued $40.5 million of 8.00% notes due 2023.
  • The Fannie Mae DUS loss-sharing allowance was $70.8 million. The maximum quantifiable liability under the DUS guarantees was $2.76 billion, which the filing says is not representative of expected loss. The company also had $183.8 million of unfunded loan commitments and expected to fund $37.1 million of additional restricted liquidity for Fannie Mae over 48 months, assuming no portfolio paydowns, prepayments or defaults.
  • The filing describes longstanding Extended Stay-related litigation; no loss accrual was recorded because management did not consider a loss probable or reasonably estimable. It also discloses related-party transactions and investments, including loans to entities with executive or affiliate connections.
  • The board authorized a $100 million common-stock repurchase program in March. By April 30, 993,106 shares had been repurchased for $3.9 million. The company also declared the Q1 common dividend and stated that REIT status requires distribution of at least 90% of REIT taxable income.
  • No specific full-year earnings guidance was provided. Management cautioned that forward-looking statements depend on uncertain assumptions, particularly regarding COVID-19, real estate markets, capital availability, interest rates and GSE relationships.

Important facts for investors to verify

  • How borrower delinquencies, forbearance requests, loan modifications and collateral values developed after March 31, especially across multifamily, hotel and other stressed property exposures.
  • Whether CECL and DUS loss-sharing reserves prove adequate as economic forecasts and credit performance change.
  • Available unrestricted liquidity, margin-call exposure, facility renewals and maturities, and the effect of subsequent financing transactions; distinguish cash from restricted cash.
  • Execution and profitability of Private Label securitizations, including the company’s retained B Piece exposure and derivative volatility.
  • Sustainability of core earnings and the $0.30 common dividend, recognizing that core earnings is a non-GAAP measure and is not a measure of operating cash flow or liquidity.
  • Developments in the Extended Stay litigation, related-party exposures, and any changes to GSE servicing or capital requirements.