Business context and reporting period
Arbor Realty Trust, Inc. (NYSE: ABR) filed this Form 10-K for the fiscal year ended December 31, 2020. The REIT operates through two segments: a Structured Business investing primarily in commercial real estate loans and related assets, and an Agency Business originating, selling and servicing multifamily loans through Fannie Mae, Freddie Mac, HUD and related programs.
Key financial metrics
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Interest income | $339.5 million | $315.9 million |
| Interest expense | $169.2 million | $186.4 million |
| Net interest income | $170.2 million | $129.5 million |
| Total other revenue | $264.3 million | $219.8 million |
| Net income | $196.2 million | $155.2 million |
| Net income attributable to common stockholders | $163.4 million; diluted EPS $1.41 | $121.1 million; diluted EPS $1.27 |
| Distributable earnings (non-GAAP) | $234.9 million; diluted $1.75 per share | $159.2 million; diluted $1.37 per share |
| Cash from operating activities | $55.2 million | $(226.5) million |
| Cash and cash equivalents | $339.5 million | $299.7 million |
| Total assets | $7.66 billion | $6.24 billion |
| Total liabilities | $6.18 billion | $4.88 billion |
| Total debt obligations | $5.87 billion | Not clearly stated on a directly comparable basis in the supplied filing text |
- The Structured loan and investment portfolio had $5.48 billion unpaid principal balance (UPB), up 28% year over year; net carrying value was $5.29 billion after allowances and unearned revenue. Multifamily represented 81% of UPB. Weighted average current pay rate was 5.23%, or 5.80% including specified fees and costs.
- The Agency servicing portfolio reached $24.63 billion, up 23% from $20.06 billion. Agency originations were $6.71 billion, sales $6.59 billion and commitments $6.81 billion. Sales margin was 144 basis points; MSR income as a percentage of commitments was 243 basis points.
- Operating cash flow was positive, but investing activities used $1.16 billion and financing activities provided $1.13 billion. Cash plus restricted cash totaled $537.0 million; the company separately reported approximately $400 million of cash and available liquidity.
- Structured portfolio yield was 5.83% on average assets of $5.25 billion; funding cost was 3.35% on average borrowings of $4.50 billion. At year-end, the structured portfolio was 90% floating-rate and 10% fixed-rate.
Material changes versus the prior comparable period
- Net interest income increased 31%; common-stockholder net income rose 35% and diluted GAAP EPS increased from $1.27 to $1.41. Distributable earnings increased 48%, but this non-GAAP measure excludes, among other items, MSR income and credit-loss provisions.
- Interest income increased 7%, while interest expense declined 9%, reflecting portfolio growth and lower funding rates. Average core structured assets increased 30%, while their average yield declined 18%.
- Agency loan sales increased about 50% in volume, and the servicing portfolio grew 23%. MSR income rose 82%, reflecting higher commitment volume and a higher MSR rate.
- Credit costs rose materially: the company recorded $61.1 million of provision for credit losses and $14.8 million of net provision for loss sharing in 2020. It adopted CECL on January 1, 2020, reducing opening equity by $28.6 million.
- Derivative losses increased to $58.3 million from $2.0 million, mainly due to swap futures associated with Private Label loans awaiting securitization. Income from equity affiliates increased to $76.2 million, primarily reflecting $75.7 million from a residential mortgage banking investment.
- The structured loan and investment allowance for credit losses was $148.3 million at year-end, compared with $71.1 million at December 31, 2019. The separate allowance for loss-sharing obligations was $64.3 million, compared with $34.6 million.
Outlook, risks and unusual items
- Management expected COVID-19 to continue negatively affecting financial performance and operating results during 2021, while stating the magnitude and duration remained uncertain. No specific 2021 earnings or revenue guidance is provided in the filing.
- At December 31, 2020, approved forbearances covered approximately 0.5% of Arbor’s $18.27 billion Fannie Mae DUS portfolio and 5.2% of its $4.88 billion Freddie Mac portfolio. Agency-serviced loans at least 60 days delinquent totaled $91.3 million, versus $59.2 million a year earlier.
- Seven structured loans with net carrying value of $53.8 million were classified as non-performing, versus three loans with $1.8 million net carrying value in 2019. The filing also describes six land-development loans with $121.3 million carrying value whose maturities had passed and were under extension discussions; these were not classified as non-performing.
- Debt maturity and refinancing risk warrant attention: scheduled debt obligations were $1.63 billion in 2021 and $1.98 billion in 2022. Management anticipated extending or renewing facilities but cautioned that terms could be less favorable. The company reported compliance with financial covenants at year-end.
- Fannie Mae DUS loss-sharing obligations expose Arbor to credit losses. Restricted liquidity requirements were met with a $45.0 million letter of credit and $9.2 million cash collateral; the filing estimates a further $46.0 million of restricted liquidity funding over 48 months, assuming no portfolio changes.
- Fannie Mae and Freddie Mac’s combined multifamily origination cap for the four quarters through 2021 was $140 billion, with 50% directed to mission-driven or affordable housing. Further limits could affect Arbor’s Agency Business.
- Other material risks include real estate credit deterioration, access to financing, interest-rate and LIBOR transition exposure, GSE/HUD approvals, servicing advances, MSR valuation, REIT qualification, and conflicts of interest involving ACM and executives with ACM affiliations.
- Unusual items include the first Private Label multifamily securitization ($727.2 million; $63.6 million of subordinate certificates retained), a new $800 million CLO, debt issuance and refinancing activity, and the sale of a hotel property. The hotel sale generated a $1.9 million loss; a related litigation settlement cost $2.5 million.
- A long-running Extended Stay-related lawsuit remains pending. The court dismissed some claims in 2020 but allowed others to proceed; the company made no loss accrual, stating a loss was not probable and could not be reasonably estimated.
- The quarterly common dividend rose during the year from $0.30 to $0.32 per share; the board declared $0.33 per share in February 2021. Future distributions remain subject to board discretion, earnings, liquidity and REIT requirements.
Most important facts for investors to verify
- Review the composition, assumptions and sensitivity of the $148.3 million loan credit-loss allowance and the $64.3 million loss-sharing liability, including impacts of CECL and COVID-19 forecasts.
- Assess repayment prospects and collateral values for non-performing loans, the land-development exposures, hotel loans and loans receiving forbearance or modification.
- Check refinancing, extension and covenant terms for 2021–2022 maturities, and confirm liquidity availability under warehouse, repurchase and letter-of-credit facilities.
- Evaluate the sustainability and cash conversion of earnings: MSR fair-value estimates, equity-affiliate income, derivative results and non-GAAP distributable earnings materially affect reported comparisons.
- Monitor Agency servicing delinquencies, required advances, Fannie Mae loss-sharing exposure, GSE production limits and the value of the $24.63 billion servicing portfolio.
- Review related-party exposures and governance safeguards involving ACM, executives, affiliated borrowers and managed investment vehicles, as well as the status and potential exposure of the Extended Stay litigation.