Arbor Realty Trust, Inc. — Second Quarter 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 2, 2013. Arbor is an externally managed REIT focused on commercial real estate finance, principally multifamily and commercial bridge, mezzanine and participation loans, preferred equity, securities and real estate-owned assets.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $24.3 million | $19.5 million | $47.3 million | $39.1 million |
| Interest expense | $10.3 million | $9.8 million | $21.0 million | $21.5 million |
| Net interest income | $14.0 million | $9.7 million | $26.3 million | $17.6 million |
| Total other revenue | $8.8 million | $8.5 million | $19.1 million | $17.3 million |
| Net income | $4.2 million | $15.6 million | $11.4 million | $19.8 million |
| Net income attributable to common stockholders | $3.0 million | $15.5 million | $9.6 million | $19.7 million |
| Diluted EPS | $0.07 | $0.62 | $0.25 | $0.79 |
| Funds from operations (FFO), diluted per share | $4.8 million; $0.11 | $17.1 million; $0.68 | $13.1 million; $0.34 | $19.0 million; $0.77 |
- Net interest income improved as average asset yields and portfolio balances increased. For the first half, management reported an average asset yield of 5.55% versus 4.88% a year earlier; average borrowing cost was 3.26% versus 3.32%.
- Loan-loss provision, net of recoveries, was $0.8 million for Q2 and $3.3 million year to date, down from $7.9 million and $15.7 million, respectively, in 2012. Twenty loans had impairment reserves totaling $146.6 million against $247.6 million of pre-reserve carrying value at June 30.
- Operating cash flow was $13.1 million for the first half, investing cash flow was negative $220.0 million and financing cash flow was positive $228.4 million. Cash and cash equivalents ended at $50.7 million, up from $29.2 million at year-end; restricted cash was $34.1 million and is not generally available for corporate needs.
- Total assets were $1.93 billion and total liabilities $1.54 billion at June 30. Stockholders’ equity was $395.3 million, including $67.7 million of preferred stock; total equity was $397.2 million.
- Reported repurchase agreements and credit facilities were $101.1 million; CDO debt $744.1 million; CLO debt $264.5 million; junior subordinated notes $159.0 million; notes payable $51.5 million; and mortgage debt on real estate owned $53.8 million. Management reported $121.9 million of availability under repurchase and credit facilities. Debt facilities were in covenant compliance.
- The loan and investment portfolio was $1.69 billion unpaid principal balance across 146 investments, with a 5.13% weighted average pay rate. Multifamily represented 57.9% of principal; New York accounted for 30% of portfolio balance. Five land loans totaling $111.2 million mature in September 2013; four have accrued interest that management had suspended because collection was considered doubtful.
Changes versus prior comparable period
- Q2 net interest income rose 44% and first-half net interest income rose 50%, reflecting portfolio growth and higher yields on new originations. Loan-loss provisions fell substantially year over year.
- Common-stockholder income and EPS declined sharply because 2012 included substantial gains on extinguishment of debt ($21.0 million in Q2; $26.3 million for the first half) and first-half 2012 also included $5.0 million of discontinued-operations income. 2013 recorded a $3.8 million first-half debt-extinguishment gain and no discontinued-operations income.
- Arbor issued common and preferred equity and completed its second CLO in January 2013. These capital raises helped fund investment growth and reduce or refinance certain borrowings, while common shares outstanding increased to 43.1 million from 31.2 million at year-end 2012.
- Adjusted book value per common share was $9.63, down from $10.41 at year-end; GAAP book value per common share was $7.60, up from $7.34. Adjusted book value is a company-defined non-GAAP measure.
Outlook, risks and unusual items
- No formal earnings or operating guidance was provided. Management stated that existing funding sources were expected to meet short- and long-term liquidity needs, while noting that long-term requirements depend on access to additional debt and equity financing. The company must distribute at least 90% of REIT taxable income to maintain REIT status.
- Management cited uncertainty in commercial real estate and capital markets, financing availability and cost, interest-rate movements, collateral values, borrower performance, loan concentration and competition. A 0.25 percentage-point LIBOR increase was estimated to reduce annual net income and cash flow by about $0.2 million; a comparable decrease was estimated to increase them by about $0.8 million, assuming balances remained unchanged.
- Arbor had six non-performing loans with $44.9 million carrying value before related reserves and approximately $14.8 million net carrying value. It had $11.5 million of unfunded loan commitments, with about $5.8 million of restricted cash available for the CDO-financed portion. Cash collateral posted for swaps was $15.7 million; further declines in swap values could require additional collateral.
- The Extended Stay litigation trust sought permission to amend and consolidate claims; if allowed, the proposed claims against company affiliates and director designees would seek $139.0 million in aggregate. Arbor denied liability, intends to defend the claims, and recorded no litigation accrual because management did not consider a loss probable or reasonably estimable.
- Related-party and governance matters warrant attention: the external manager is affiliated with the CEO and other company insiders; 2013 included loans involving entities with interests held by executives or directors. The company reported $5.6 million of base management fees for the first half and no incentive fee.
- The board declared a $0.13 per-share common dividend for Q2, payable September 3, 2013. Hotel-property operations are seasonal, with most revenue typically earned in the first two calendar quarters.
Important facts for investors to verify
- Near-term maturities, extensions and repayment prospects for the $111.2 million land-loan exposure due September 2013 and the $53.8 million real estate-owned mortgage due in 2014.
- Collateral valuations, reserve adequacy, charge-offs and recoveries, and trends in non-performing and modified loans.
- Liquidity available after excluding restricted cash, the renewal and covenant terms of facilities, and the potential cash impact of swap collateral requirements.
- Whether CDO/CLO coverage tests remain compliant; a breach could divert residual cash flows to debt repayment. All tests passed at the latest July 2013 determination date.
- Developments in the Extended Stay litigation, including the motion to amend and the proposed $139.0 million aggregate claim.
- Effects of equity issuance and preferred dividends on common per-share results, and the terms and oversight of related-party transactions and the external management agreement.