ARBOR REALTY TRUST INC quarterly report, Q1 FY2023

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Arbor Realty Trust, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Arbor is a REIT and commercial real estate lender, operating a Structured Business that invests primarily in bridge loans and an Agency Business that originates, sells and services multifamily loans.

Financial results and condition

  • Earnings: Net income was $102.2 million, up 28% from $79.9 million. Net income attributable to common stockholders was $84.3 million, up 32%; diluted EPS was $0.46 versus $0.40. The common dividend declared for the quarter was $0.40 per share.
  • Interest and revenue: Interest income rose 97% to $327.9 million, while interest expense increased 166% to $219.4 million. Net interest income increased 29% to $108.6 million. Other revenue was $73.1 million, up 24%; derivative gains fell to $4.2 million from $17.4 million. The filing does not provide a single consolidated operating-margin measure.
  • Yields and funding costs: Structured loan portfolio weighted average pay rate was 8.60% at quarter-end, versus 8.17% at year-end 2022; related debt funding cost including financing costs rose to 6.97% from 6.50%. Management says higher benchmark rates lifted asset income but also increased borrowing costs.
  • Credit costs and portfolio: Loans and investments, net, declined to $13.43 billion from $14.25 billion as $1.19 billion of runoff exceeded originations of $268.0 million. The allowance for credit losses rose to $153.1 million from $132.6 million. Q1 credit-loss provision was $22.5 million versus $2.4 million a year earlier, primarily reflecting the macroeconomic outlook. The portfolio’s weighted average pay rate and loan balance are not measures of realized credit performance.
  • Cash flow: Operating activities used $56.8 million, compared with $836.8 million provided in Q1 2022. Investing activities provided $828.0 million, chiefly from loan payoffs exceeding funding; financing activities used $540.0 million. Cash, cash equivalents and restricted cash totaled $1.479 billion at quarter-end, including $704.8 million of restricted cash.
  • Debt and equity: Balance-sheet debt carrying amounts totaled approximately $12.99 billion; total liabilities were $13.43 billion and total equity was $3.16 billion. Credit and repurchase facilities carried a weighted average note rate of 7.06%. Arbor issued $95.0 million of 7.75% senior notes and used $70.8 million to repurchase 8.00% notes. The company raised $82.7 million through ATM common-stock issuance. Management reported compliance with financial covenants at March 31.
  • Agency performance: Agency originations totaled $1.09 billion and loan sales were $932.7 million. The servicing portfolio grew to $28.91 billion. Agency sales margin was 1.56%, versus 1.18% in Q1 2022; the comparison includes derivative gains in the prior-year margin.
  • Supplemental measure: Distributable earnings, a non-GAAP measure defined by the company, were $122.2 million, or $0.62 per diluted share, compared with $92.9 million, or $0.55. Arbor cautions that this measure is not operating cash flow or a measure of liquidity.

Material changes and developments

  • Common-stockholder net income and diluted EPS increased year over year, supported by higher net interest income, servicing revenue and equity-affiliate income. Higher credit-loss provisions and lower derivative gains partly offset those improvements.
  • The Structured loan portfolio contracted as payoffs and paydowns substantially exceeded new originations. The Agency servicing portfolio expanded by $914.6 million during the quarter.
  • Servicing loans 60 or more days delinquent increased to $232.1 million, or 0.80% of the servicing portfolio, from $38.7 million, or 0.14%, at year-end 2022. The filing also reports two loans totaling $3.3 million in bankruptcy and one $1.0 million loan in foreclosure at quarter-end.
  • In March, the board authorized up to $50 million of common-stock repurchases. Through April 30, Arbor had repurchased 3.55 million shares for $37.4 million, averaging $10.56 per share. The board declared a subsequent $0.42-per-share dividend, payable May 31, 2023.

Outlook, risks and unusual items

  • No quantified earnings or origination guidance is provided. Management said rising rates could support net interest income because most structured loans float while some debt is fixed-rate, but warned that higher rates may depress property values, weaken borrower debt-service capacity, reduce originations and increase credit losses.
  • Management cited capital-market volatility and tighter financing conditions, including banking-sector disruption, as risks to liquidity, funding costs and investment activity. At March 31, $2.12 billion of debt facilities were subject to margin calls tied to interest spreads. Management reported approximately $785 million of cash and $560 million of replenishable CLO cash availability as of May 4; restricted cash and CLO cash are not necessarily freely available for general use.
  • Unfunded loan commitments were $1.05 billion at quarter-end. Texas and Florida represented 24% and 15% of the loan and investment portfolio, respectively; five borrowers accounted for 11% of total assets. A $20.5 million Q1 increase in structured-loan credit-loss allowance was attributed primarily to the macroeconomic outlook, including higher rates, inflation and unemployment forecasts and expected pressure on property values.
  • In April, Arbor foreclosed on properties securing four bridge loans with $217.4 million of UPB, then sold the properties and provided replacement financing. It reported no loss on the original loans and recovery of outstanding interest. Also in April, it amended and extended certain related-party project loans; related-party arrangements and balances are described in the filing.
  • An Extended Stay litigation settlement of $38 million was approved by the Bankruptcy Court on April 25. Arbor’s contribution is capped at $7.4 million and had been accrued at year-end 2022; the settlement was expected to take effect in Q2 2023. The filing says no other material litigation is pending or threatened to the company’s knowledge.
  • Other risks include Fannie Mae DUS loss-sharing exposure, REIT distribution requirements, loan collateral and valuation uncertainty, concentration risk, and possible non-renewal or less favorable terms on financing facilities. Arbor said its CLO coverage tests passed at the latest April determination dates. Its risk factors were reported as unchanged from the 2022 annual report.

Most important facts for investors to verify

  • Whether increased delinquencies, risk-rated loans and credit-loss reserves translate into realized losses, modifications or further reserve increases.
  • How much reported cash and CLO liquidity is unrestricted and available after funding commitments, collateral needs, distributions and debt maturities.
  • Whether floating-rate asset income continues to outpace higher funding costs, and how property values and borrower performance respond to rates and tighter credit.
  • Progress on loan runoff versus new Structured originations, Agency loan sales and growth and economics of the servicing portfolio.
  • Outcomes of the litigation settlement and the April collateral sale/re-financing, plus the extent and terms of related-party exposures.
  • Debt maturities, facility renewals, margin-call provisions and CLO covenant headroom; also confirm the effect of share issuance and repurchases on per-share earnings and book value.