ARBOR REALTY TRUST INC quarterly report, Q3 FY2013

Arbor Realty Trust, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013; filed November 8, 2013. Arbor is an externally managed REIT investing primarily in commercial real estate loans and investments, including bridge and mezzanine loans, participation interests and preferred equity.

Financial performance and position

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Interest income	$25.7 million	$20.0 million	$73.1 million	$59.1 million
Net interest income	$15.1 million	$10.5 million	$41.4 million	$28.1 million
Net income attributable to common stockholders	$3.7 million	$2.1 million	$13.3 million	$21.8 million
Diluted EPS	$0.08	$0.07	$0.33	$0.84
Operating cash flow	Not provided for quarter	Not provided for quarter	$22.5 million	$11.5 million

Assets and liquidity: Total assets were $2.0 billion at September 30, up from $1.7 billion at December 31, 2012. Cash and cash equivalents were $64.7 million; restricted cash was $113.0 million and is not generally available for unrestricted corporate use.
Portfolio: Loans and investments, net, totaled $1.55 billion, including a $143.0 million loan-loss allowance. The broader loan and investment portfolio, including securities, was approximately $1.8 billion, with a weighted average current pay rate of 5.19%.
Debt and equity: Total liabilities were $1.54 billion and total equity was $437.8 million. Debt facilities had a reported carrying value of $1.32 billion; repurchase agreements and credit facilities were $158.6 million, CDOs $736.4 million, CLOs $264.5 million and junior subordinated notes $159.2 million. GAAP common book value was $7.51 per share, versus $7.34 at year-end 2012.
Distributions: Common dividends declared were $0.13 per share for Q3, versus $0.10 in Q3 2012. The board declared the $0.13 dividend after quarter-end. Series A and B preferred shares carry annual rates of 8.25% and 7.75%, respectively.

Material changes versus comparable periods

Q3 net interest income rose 44%, reflecting higher average loan and investment balances and asset yields; management cited average asset yields of 5.62%, up from 5.03%. For the nine-month period, net interest income increased 47%.
Q3 common-stockholder income increased 78%. For the first nine months, common income fell 39%, chiefly because the prior-year period included substantially larger gains on CDO debt extinguishment and a real estate sale, and 2013 included preferred dividends. Nine-month 2013 CDO extinguishment gains were $4.9 million versus $30.5 million in 2012.
Loan-loss provision, net of recoveries, declined to $0.8 million in Q3 from $4.8 million, and to $4.1 million year to date from $20.6 million. The allowance fell from $161.7 million at year-end to $143.0 million, including $22.8 million of charge-offs.
Loans and investments, net, increased 17% from year-end. In Q3 the company originated 17 loans totaling $147.9 million and received full payoff of 15 loans totaling $110.3 million.
Financing and capital raising expanded: the company completed a second CLO, issued common and preferred shares, and reported approximately $197 million of net proceeds from 2013 common and preferred offerings. The second CLO added $177 million of notes. Common shares outstanding increased to 49.1 million from 31.2 million at year-end.
YTD FFO, a non-GAAP measure, was $18.7 million, or $0.46 per diluted share, compared with $22.7 million, or $0.87. Adjusted book value was $9.26 per share, down from $10.41 at year-end; the filing attributes its adjusted measure partly to deferred revenue and derivative valuation adjustments.

Outlook, risks, contingencies and unusual items

Management said existing funding sources were expected to meet short- and long-term liquidity needs, but long-term requirements depend on continued access to debt and equity financing. The filing notes market volatility, financing availability and cost, property values, borrower repayment capacity, interest rates and loan performance as key risks.
All reported debt covenants and CDO/CLO coverage tests were in compliance at September 30 and on the latest October determination dates. A breach could divert CDO/CLO cash flows to debt repayment and suspend residual distributions; management cautioned that it might not have enough liquidity to cure a breach.
Contractual principal payments total $466.8 million in 2014, including CDO and other facility obligations; projected interest is additional. Several warehouse and revolving facilities mature in 2014, and the company had $58.3 million of reported availability under repurchase agreements and credit facilities.
Credit exposure includes 18 impaired loans with $239.3 million carrying value before reserves and $143.0 million of reserves. Five non-performing loans had approximately $44.7 million gross carrying value and $16.1 million net carrying value. Five land-development loans totaling about $111.3 million mature in September 2014 and carry a cumulative $43.7 million allowance.
Loan exposure is concentrated: five borrowers represented approximately 32% of total assets. New York, Florida and Texas represented 32%, 11% and 9% of the loan and investment balance, respectively; land loans had a weighted-average internal risk rating of 4.2 and a 91% last-dollar LTV.
An Extended Stay-related litigation trust sought leave to amend lawsuits and, if granted, would seek $139 million in aggregate from company-affiliated parties and director designees. Arbor contested the claims, intended to defend them, and recorded no litigation accrual because it did not consider a loss probable or reasonably estimable.
The company is externally managed by ACM, with disclosed management and related-party conflicts. An independent special committee was evaluating a possible acquisition of ACM’s Fannie Mae, DUS, FHA and CMBS platforms and internalization of management; terms and completion were uncertain. Advisory fees were approximately $1.3 million to date.
Other notable items: a multifamily property and related $11.0 million mortgage portion were classified as held for sale; a $50.2 million Lightstone-related note was repaid upon redemption of preferred units; and Q3 included a $1.2 million gain from repurchasing CDO notes at a discount.

Important facts for investors to verify

Whether loan originations and higher asset yields can sustain net interest income while maintaining credit quality and adequate reserves.
Near-term refinancing and repayment requirements, facility availability, restricted-cash constraints, and the company’s access to capital markets.
Performance and collateral values of impaired, non-performing and land-development loans, including the 2014 maturity exposure.
Progress and potential financial, governance and dilution effects of any transaction with ACM, alongside related-party lending and management arrangements.
Developments in the Extended Stay litigation and any change to the company’s assessment that no loss accrual is required.
The sustainability of common and preferred dividends relative to recurring earnings, cash flows and REIT distribution requirements.