Arbor Realty Trust, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. Arbor is a mortgage REIT operating a Structured Business that invests in commercial real estate loans and related assets, and an Agency Business that originates, sells, and services multifamily and other loans through government-sponsored and housing agency programs.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $254.1 million | $170.2 million |
| Net income | $377.8 million | $196.2 million |
| Net income attributable to common stockholders | $317.4 million | $163.4 million |
| Diluted earnings per common share | $2.28 | $1.41 |
| Distributable earnings, a non-GAAP measure | $313.7 million; $2.01 diluted per share | $234.9 million; $1.75 diluted per share |
| Cash provided by operating activities | $216.8 million | $55.2 million |
- Revenue and margins: Interest income was $466.1 million, up 37%; interest expense was $212.0 million, up 25%. Structured Business average asset yield was 5.18%, versus 5.83%, while average borrowing cost declined to 2.79% from 3.35%. Agency loan-sale gains and fees were $123.0 million, up 30%; MSR income was $130.2 million, down 21%; and net servicing revenue was $74.8 million, up 38%.
- Portfolio: Structured loans and investments grew 122% to $12.16 billion at year-end, with 96% floating-rate and 4% fixed-rate assets. Multifamily represented 91% of this portfolio. The weighted average current pay rate was 4.26%, compared with 5.23% a year earlier. Agency servicing UPB rose 9% to $26.96 billion.
- Origination and securitization activity: Structured originations were $9.72 billion. Agency originations were $6.41 billion and sales were $6.42 billion; the reported sales margin was 1.92%, up from 1.44%. Arbor completed four CLOs totaling $5.20 billion in real estate-related assets and cash, and two Private Label securitizations totaling $985.1 million.
- Credit and provisions: The company recorded net reversals of credit-loss provisions of $21.1 million and loss-sharing provisions of $6.2 million, compared with provisions of $61.1 million and $14.8 million, respectively, in 2020. The structured-loan allowance was $113.2 million at year-end, versus $148.3 million. Three structured loans with net carrying value of $20.1 million were classified as non-performing, versus seven loans with $53.8 million in 2020.
- Cash flow: Operating activities provided $216.8 million; investing activities used $6.75 billion, primarily for net structured-loan funding; financing activities provided $6.89 billion, mainly from CLOs, debt facilities, and securities issuance. These financing inflows funded substantial portfolio growth.
Debt, liquidity, and capital
- At December 31, 2021, balance-sheet debt obligations totaled approximately $12.06 billion, including $4.48 billion of credit and repurchase facilities, $5.89 billion of CLOs, $1.28 billion of senior unsecured notes, $259.4 million of convertible notes, and $142.4 million of junior subordinated notes. Total liabilities were $12.52 billion and total equity was $2.55 billion.
- Management reported approximately $900 million of cash and available liquidity, in addition to other liquidity sources, including recurring servicing-portfolio cash flow estimated at approximately $121 million annually. Balance-sheet cash and restricted cash together were $891.3 million; restricted cash is not freely available for general purposes.
- About 68% of structured debt, or $7.64 billion, was described as not subject to mark-to-market provisions. The remaining $3.53 billion of structured debt was in credit and repurchase facilities. Management expected to extend or renew facilities as they mature but cautioned that favorable renewal terms were not assured. Debt obligations due in 2022 totaled $3.36 billion, including facilities and other debt maturities.
- The company raised $514.6 million net from common-stock issuance and $556.4 million net from Series D, E, and F preferred issuance; it used $93.3 million to redeem Series A, B, and C preferred stock. The quarterly common dividend increased to $0.37 per share, the seventh consecutive quarterly increase. A $0.37 dividend was declared in February 2022.
Material changes, outlook, and risks
- Year-over-year changes: Common-stockholder net income nearly doubled, supported by higher net interest income, agency sales gains, servicing revenue, and reversals of prior credit provisions. MSR income and income from equity affiliates declined; affiliate income was $34.6 million, compared with $76.2 million in 2020, primarily reflecting lower earnings from the residential mortgage banking investment. Common shares issued increased materially, so investors should consider dilution when assessing per-share growth.
- Management outlook: The filing gives no specific earnings or distributable-earnings guidance. Management said COVID-19 had not significantly affected the company to date but noted continuing uncertainty. It highlighted potential 2022 rate increases and warned that higher rates could raise borrowing costs faster than asset yields, given loan floors. FHFA’s 2022 multifamily origination caps were $78 billion each for Fannie Mae and Freddie Mac, with affordability requirements; future restrictions remain uncertain.
- Key risks: Credit deterioration or declining collateral values; dependence on CLO, warehouse, and capital-market funding; refinancing and facility-renewal risk; floating-rate debt and uneven interest-rate sensitivity; servicing advances and Fannie Mae DUS loss-sharing; potential loan repurchases for representation-and-warranty breaches; GSE/HUD approval and regulatory requirements; and the transition from LIBOR to SOFR. The company also cited COVID-19, competition, cybersecurity, REIT qualification, and environmental and other regulatory risks.
- Credit and servicing indicators: Agency servicing delinquencies of 60 days or more were $77.6 million, down from $91.3 million; no serviced loans were in bankruptcy. Forbearances covered 0.2% of the Fannie Mae DUS portfolio and 2.6% of the Freddie Mac portfolio at year-end. Fannie Mae loss-sharing collateral requirements were $63.7 million, including a $45.0 million letter of credit; the letter-of-credit facility expires in September 2023.
- Unusual items and contingencies: The company recognized a $2.5 million litigation settlement expense related to a hotel property sold in 2020 and recorded a gain after acquiring an office property in satisfaction of debt. Extended Stay litigation remains pending; Arbor said no loss accrual was recorded because a loss was not considered probable and estimable. The filing describes substantial related-party relationships and transactions involving ACM and the CEO’s affiliates. The auditor issued unqualified opinions on the financial statements and internal controls; the audit identified MSR valuation and credit-loss allowances as critical audit matters.
Important facts for investors to verify
- Reconcile reported net income, diluted EPS, and non-GAAP distributable earnings, including the impact of credit-provision reversals and the decline in equity-affiliate income.
- Review debt maturities and covenant terms, particularly 2022 maturities, CLO cash-flow triggers, collateral requirements, and refinancing capacity.
- Assess whether continued portfolio growth can be funded at attractive spreads without excessive leverage or common-stock dilution.
- Monitor loan performance, collateral values, unfunded commitments of $975.2 million, DUS loss-sharing exposure, servicing advances, and the adequacy of reserves.
- Evaluate MSR fair-value assumptions and sensitivity: the filing estimates a $16.4 million decrease in MSR fair value from a 100-basis-point increase in the discount rate.
- Review the Extended Stay litigation, related-party transactions and governance arrangements, and the company’s ability to maintain REIT status and GSE/HUD approvals.