Arbor Realty Trust, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Arbor is a REIT operating a Structured Business that invests in real estate loans and related assets, and an Agency Business that originates, sells and services multifamily loans through government-sponsored and other programs. Figures below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $125.5 | $81.7 | $321.8 | $253.3 |
| Interest expense | $55.6 | $37.9 | $144.1 | $129.2 |
| Net interest income | $69.9 | $43.8 | $177.7 | $124.1 |
| Total other revenue | $69.6 | $76.9 | $229.5 | $146.0 |
| Net income | $86.1 | $97.7 | $251.4 | $83.5 |
| Net income attributable to common stockholders | $72.8 | $82.0 | $211.4 | $66.8 |
| Diluted EPS | $0.51 | $0.72 | $1.56 | $0.59 |
| Distributable earnings (non-GAAP) | $75.7 | $67.1 | $219.6 | $167.5 |
| Diluted distributable earnings per share (non-GAAP) | $0.47 | $0.50 | $1.44 | $1.26 |
- At September 30, total assets were $12.17 billion, up from $7.66 billion at year-end 2020; total equity was $2.14 billion, versus $1.48 billion. Loans and investments, net, were $8.99 billion (gross UPB $9.17 billion), compared with $5.29 billion net at year-end.
- Cash and cash equivalents were $380.7 million and restricted cash was $569.9 million. Management reported approximately $800 million in cash and available liquidity. Restricted cash is not freely available for general purposes.
- Total debt obligations were $9.62 billion: $3.40 billion of credit and repurchase facilities, $4.72 billion of CLOs, $1.10 billion of senior unsecured notes, $258 million of convertible notes and $142 million of junior subordinated notes. Debt maturities and facility renewals are significant funding considerations.
- For the nine months, operating cash flow was negative $0.4 million, investing cash flow was negative $3.76 billion, and financing cash flow was positive $4.17 billion. Cash, cash equivalents and restricted cash increased by $413.7 million to $950.7 million.
- Common dividends declared were $0.35 per share in Q3; the board subsequently declared $0.36 per share, payable in November 2021. The nine-month declared common dividend was $1.02 per share.
Material changes versus comparable periods
- Q3 net interest income rose 60% year over year, largely as the Structured Business portfolio expanded; interest expense also increased with higher borrowings. The company cited lower average yields on core interest-earning assets, partly offset by lower financing costs.
- Q3 common-stockholder income fell 11% and diluted EPS fell from $0.72 to $0.51. Equity-affiliate income declined to $5.1 million from $32.4 million, primarily reflecting lower income from the residential mortgage-banking investment. Agency loan-sale gains and MSR income also declined, while servicing revenue increased.
- For the nine months, common-stockholder income increased to $211.4 million from $66.8 million. Results benefited from higher net interest income and other revenue, including substantially lower credit-loss and loss-sharing provisions than in 2020. Prior-year results included $59.5 million of credit-loss provision and $21.7 million of loss-sharing provision; 2021 recorded net reversals of $12.7 million and $1.1 million, respectively.
- The Structured loan portfolio grew to $9.17 billion, with 89% in multifamily assets. Q3 Structured originations were $2.47 billion; nine-month originations were $5.40 billion. The weighted-average current pay rate was 4.56%, down from 5.23% at year-end 2020.
- The Agency servicing portfolio grew to $26.21 billion from $24.63 billion at year-end 2020. Nine-month Agency loan sales were $4.33 billion, versus $4.17 billion a year earlier.
- Funding and capital expanded: the company issued three CLOs during the nine months, including CLO 16, and issued $445 million of senior unsecured notes and Series D and E preferred stock. It also raised $342.6 million net from common-stock issuance. Common shares outstanding increased to 143.0 million from 123.2 million at year-end.
Outlook, risks, contingencies and unusual items
- Management said COVID-19 had not significantly affected the company to date but emphasized that the duration and economic effects remain uncertain. Potential impacts include lower property values, delinquencies, defaults, modifications and reduced liquidity. Approved forbearances covered about 0.2% of the Fannie Mae DUS portfolio and 2.8% of the Freddie Mac portfolio.
- Interest-rate risk is material: most debt is variable-rate, while portfolio LIBOR floors limit the benefit of rate increases on asset yields. The filing’s sensitivity analysis estimated that a 25-basis-point LIBOR increase would reduce annual net interest income by $8.4 million before interest on cash and escrows; a 50-basis-point increase would reduce it by $13.2 million. Management cautioned that actual results may differ.
- Structured Business growth depends on continued access to capital markets and warehouse and repurchase facilities. Management expected facilities to extend or renew but could not assure renewal on equally favorable terms. Approximately $2.30 billion of structured debt was in warehouse and repurchase facilities; $65.1 million of securities were financed with $32.2 million of margin-call-subject debt. All reported financial covenants were met at quarter-end; all CLO tests also passed at the subsequent October determination dates.
- Unfunded commitments to borrowers totaled $638.1 million, up from $353.8 million at year-end, and are payable as contractual conditions are met. The company also expects to fund $46.1 million of additional Fannie Mae restricted liquidity over 48 months, assuming no portfolio changes.
- Six loans with net carrying value of $53.0 million were classified as non-performing. The credit-loss allowance on structured loans and investments was $131.5 million. Six land-development loans had a $121.4 million carrying value and a cumulative $71.4 million allowance; related project risks include construction financing, cost increases, demand and litigation.
- Fannie Mae DUS loss-sharing obligations were $62.8 million; the stated maximum quantifiable guarantee liability was $3.62 billion, which the filing says is not representative of expected actual loss. Five borrowers’ 32 loans represented 11% of total assets. Texas and New York accounted for 18% and 15% of the loan portfolio, respectively.
- The Extended Stay litigation remains pending. The amended complaint seeks approximately $139 million in aggregate from director designees, with claims against affiliated entities also remaining. The company has not accrued a loss, stating that a loss was not considered probable and could not be reasonably estimated.
- Management provided no earnings guidance. It noted that FHFA’s announced 2022 Fannie Mae and Freddie Mac multifamily origination caps were $78 billion each, with affordability requirements; future restrictions could affect profitable Agency originations. October subsequent events included a $194.8 million net Series F preferred-stock offering and a $535 million Private Label securitization, of which Arbor retained $47.5 million of subordinate certificates.
- Management’s non-GAAP distributable earnings measure excludes or adjusts for several items, including MSR income and amortization, credit provisions and derivative effects; the filing cautions it is not cash flow or a liquidity measure and may not be comparable to other companies’ measures.
Most important facts for investors to verify
- Whether portfolio growth and higher net interest income can be sustained as loan yields, funding costs, rates and refinancing activity change.
- The credit quality and collateral values behind the large, multifamily-concentrated loan book, including non-performing loans, land-development exposures, unfunded commitments and borrower concentrations.
- Availability, renewal terms and collateral or margin-call requirements for warehouse and repurchase facilities, and the capacity to meet debt maturities and liquidity needs.
- How MSR valuations, Agency originations and servicing income respond to prepayments, interest rates, GSE limits and changes in the servicing portfolio.
- The effect of common and preferred equity issuance on per-share results, and whether distributable earnings support the declared dividend over time.
- Developments in the Extended Stay litigation, DUS loss-sharing exposure, COVID-related borrower performance and other disclosed contingencies.