Arbor Realty Trust, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated financial statements. Arbor is an externally managed REIT investing primarily in multifamily and commercial real estate loans and investments.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue, including interest and other revenue | $31.2 million | $35.7 million |
| Net interest income | $13.1 million | $13.3 million |
| Net income | $3.0 million | $16.9 million |
| Net income attributable to common stockholders; diluted EPS | $1.1 million; $0.02 | $15.0 million; $0.30 |
| FFO attributable to common stockholders; diluted FFO per share | $1.5 million; $0.03 | $12.6 million; $0.25 |
| AFFO attributable to common stockholders; diluted AFFO per share | $6.9 million; $0.13 | $18.2 million; $0.36 |
| Operating cash flow | $3.8 million | $2.3 million |
| Cash and cash equivalents at period end | $145.1 million | $188.7 million at Dec. 31, 2015 |
| Total assets; total liabilities; total equity | $1.872 billion; $1.311 billion; $561.4 million | $1.827 billion; $1.262 billion; $565.1 million at Dec. 31, 2015 |
Q1 investing activities used $113.9 million, principally reflecting loan and investment funding exceeding payoffs. Financing activities provided $66.5 million; cash declined by $43.6 million during the quarter. Restricted cash was $20.1 million at quarter-end. The company reported $281.7 million of available capacity under credit facilities and repurchase agreements, and compliance with debt covenants.
Loans and investments had $1.677 billion of unpaid principal balance and a $1.582 billion net carrying value. The portfolio’s weighted-average current pay rate was 5.60%; weighted-average funding cost was 3.66% excluding financing costs, or 4.09% including them. Debt included $759.7 million of CLOs, $183.9 million of credit facilities and repurchase agreements, $94.0 million of senior unsecured notes, and $157.3 million of junior subordinated notes. Debt maturities were reported as $158.7 million in 2016 and $325.8 million in 2017, among other maturities.
The common dividend declared for Q1 was $0.15 per share, versus $0.13 in Q1 2015. The board subsequently declared another $0.15 per share, payable May 31, 2016.
Material changes versus the prior comparable period
- Net income fell 82% and common-stockholder income fell 92%. The prior-year quarter included an $11.0 million gain on acceleration of deferred income and a $4.3 million loss on termination of swaps; Q1 2016 had neither item.
- Interest income decreased 5%, while interest expense decreased 8%; net interest income declined 2%. Management attributed lower interest income mainly to lower average yields and reduced income from accelerated runoff. Lower financing costs, including the absence of prior-year CDO-unwind fees, partly offset the decline.
- Property operating income fell 37%, primarily reflecting property sales. Real estate operating results decreased 51% year over year.
- Q1 2016 included $3.1 million of acquisition costs related to the proposed agency-platform purchase. Real estate-sale gains were $0.6 million, compared with $4.0 million in Q1 2015; income from equity affiliates also declined, to $1.9 million from $3.1 million.
- The net loan and investment portfolio increased from $1.450 billion at year-end to $1.582 billion. Arbor originated 18 loans totaling $218.2 million and extended 13 loans totaling $188.7 million during the quarter.
Outlook, risks, contingencies and unusual items
- Proposed acquisition: Arbor agreed to acquire its manager’s agency business for $250 million, payable 50% in cash and 50% in partnership units, subject to purchase-price adjustments and required shareholder, government, GSE and other approvals. A shareholder vote was scheduled for June 1, 2016; closing was expected by Q3 2016, with no assurance it would occur. The manager also granted a two-year option to acquire the management agreement and internalize management for $25 million in year one or $27 million in year two. Advisory costs were $3.1 million for the quarter and $7.6 million to date.
- Subsequent property sale: Three multifamily properties classified as held for sale at quarter-end were sold in April 2016 for $41.0 million. Arbor expected to recognize an approximately $11.0 million total gain and used part of the proceeds to repay the associated debt.
- Credit exposure: Nine impaired loans had a $189.7 million carrying value before the $86.7 million allowance. Three fully reserved loans totaling approximately $22.9 million were classified as non-performing. Six impaired land-development loans had a $118.6 million carrying value and $49.1 million in cumulative reserves; collection of some accrued interest was considered doubtful. Higher-risk loans and investments totaled $155.3 million before reserves, with a 94% weighted-average last-dollar LTV.
- Concentration and market risks: Twenty-three loans to five borrowers represented 23% of total assets. Multifamily properties represented 74% of loan portfolio UPB; New York represented 30% of portfolio UPB. Management cited financing-market access, interest rates, real estate values, borrower credit quality, loan payoffs, and possible future modifications or delinquencies as risks. A 25-basis-point rate increase was estimated to raise quarterly net interest income by about $0.5 million; a 25-basis-point decrease was estimated to raise it by about $0.3 million, based on the filing’s sensitivity analysis and assumptions.
- Commitments and litigation: Unfunded loan commitments were $10.5 million, including $2.7 million of restricted cash available for certain CLO-financed commitments. The Extended Stay-related litigation seeks approximately $139 million in aggregate from director designees, with portions also sought from affiliates. Arbor is defending the claims, recorded no loss accrual, and stated that a loss was not considered probable and could not be reasonably estimated.
- Related parties: Arbor relies on its external manager, whose ownership and leadership overlap with Arbor’s executives. The filing discloses multiple loans and investments involving officers, the CEO, the manager, or their affiliates, as well as the proposed acquisition from the manager.
Management stated that existing funding sources should meet short- and long-term liquidity needs, while noting that longer-term requirements depend on access to additional debt and equity financing. No specific earnings or portfolio guidance was provided. Forward-looking statements are subject to economic, real estate, financing, interest-rate, credit, regulatory, capital-access and investment-pipeline risks.
Important facts for investors to verify
- Whether the $250 million agency-business acquisition received all required approvals, closed on the expected terms and timing, and how its financing and operating results affected Arbor.
- Whether the April 2016 multifamily-property sale produced the expected gain and fully resolved the related property debt.
- Subsequent performance, reserves and recoveries for impaired, higher-risk and non-performing loans, particularly the land-development exposures.
- Availability and renewal of short-term financing facilities, upcoming debt maturities, covenant headroom, and liquidity after acquisition and dividend payments.
- Any developments in the Extended Stay litigation and the potential consequences of the disclosed related-party arrangements.