ARBOR REALTY TRUST INC quarterly report, Q2 FY2019

Arbor Realty Trust, Inc. — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019; unaudited. Arbor operates a Structured Business investing in commercial real estate loans and related assets, and an Agency Business originating, selling and servicing multifamily loans. It is organized as a REIT.

Financial performance

Amounts below are in millions, except per-share data.

MetricQ2 2019Q2 2018Six months 2019Six months 2018
Interest income$82.2$59.3$153.4$110.9
Interest expense$48.3$37.9$90.1$71.3
Net interest income$33.9$21.4$63.3$39.6
Total other revenue$50.1$46.9$94.9$100.1
Net income$37.4$24.6$67.4$61.7
Net income attributable to common stockholders$28.9$17.2$51.6$43.4
Diluted earnings per common share$0.31$0.25$0.57$0.66
Common dividends declared per share$0.28$0.25$0.55$0.46

Q2 common-stockholder income rose 68%, led by growth in Structured Business net interest income and higher equity-affiliate income. For the first half, common-stockholder income rose 19%, while diluted EPS declined from $0.66 to $0.57; the filing reports substantially higher weighted-average diluted shares in 2019. Six-month results also included a $4.3 million tax provision versus a $4.3 million tax benefit in 2018. Agency gain-on-sale revenue and MSR income were lower year over year for the first half, partly offset by higher servicing revenue.

Financial position, liquidity and cash flow

  • At June 30, total assets were $5.60 billion, up from $4.61 billion at December 31, 2018. Net loans and investments were $3.84 billion, and loans held for sale were $601.8 million.
  • Reported debt obligations totaled approximately $4.17 billion: credit facilities and repurchase agreements $1.62 billion; CLOs $1.88 billion; debt fund $68.4 million; senior unsecured notes $211.0 million; convertible notes $253.7 million; and junior subordinated notes $140.6 million.
  • Cash and cash equivalents were $198.9 million; restricted cash was $316.5 million. The company reported $1.63 billion of available capacity across listed debt instruments, including $577.7 million for Structured Business facilities and $1.05 billion for Agency Business facilities. Restricted cash and facility capacity are not necessarily freely available for general use.
  • Six-month cash flow: operating activities used $77.7 million, investing activities used $628.4 million, and financing activities provided $880.8 million. Cash, cash equivalents and restricted cash increased by $174.7 million to $515.4 million. The operating cash outflow reflected, among other items, Agency loan originations exceeding sales and an increase in amounts due from related parties.
  • Debt maturities disclosed for the remainder of 2019 were $894.0 million and for 2020 were $1.17 billion. Management reported compliance with financial and CLO covenants at June 30; all listed CLO tests passed at the July 2019 determination dates.

Portfolio, operating changes and capital activity

  • The Structured loan and investment portfolio grew to $3.93 billion from $3.28 billion at year-end 2018, as originations exceeded payoffs and other reductions. Q2 Structured originations were $1.01 billion; Agency originations were $1.29 billion and Agency loan sales were $923.0 million.
  • The servicing portfolio increased to $19.46 billion from $18.60 billion at year-end. Its weighted-average servicing fee declined to 43.6 basis points from 45.2 basis points.
  • The portfolio’s weighted-average current pay rate was 6.64%, down from 7.02% at year-end; its weighted-average funding rate including financing costs was 4.96%, down from 5.24%. Management attributed interest-income growth to a larger portfolio, higher average yields and certain acceleration, default interest and fee income.
  • In May, Arbor issued 9.2 million common shares at $12.58 per share for net proceeds of $115.6 million. It used part of the proceeds to repurchase 920,000 shares from its CEO and ACM at the same price paid by the underwriters. In March, it issued $90 million of 5.75% senior unsecured notes due 2024.
  • In June, the company issued $533 million of third-party investment-grade CLO XI notes and retained below-investment-grade notes and an equity interest. It also unwound CLO VI, redeeming $250.3 million of notes.
  • The board declared a $0.29 common dividend on July 31, payable September 3, following a Q2 declaration of $0.28. The filing provides no formal earnings or revenue guidance.

Outlook, risks and contingencies

  • Management said it did not anticipate a significant decline in origination volume or profitability while interest rates remained relatively low, but cautioned that rate changes, policy developments, capital-market access and broader economic conditions could affect results.
  • Key business risks include real estate value or rent-growth declines, deterioration in borrower credit, loan modifications and delinquencies, and reduced access to financing. The GSEs are significant multifamily capital providers; changes to their production caps or Arbor’s agency status could adversely affect origination and servicing economics.
  • Eight loans and investments were identified as higher risk, with carrying value before reserves of $128.2 million and weighted-average last-dollar LTV of 99%. Separately, six impaired land-development loans had $120.9 million carrying value, $61.4 million in cumulative reserves and September 2019 scheduled maturities. Collection and project risks include construction financing, costs, demand and litigation.
  • The Fannie Mae DUS allowance for loss-sharing obligations was $34.4 million. The maximum quantifiable guarantee liability was $2.59 billion, a worst-case measure rather than management’s estimate of likely losses. Arbor expected to fund an additional $33.2 million of restricted liquidity over 48 months, assuming no portfolio changes.
  • Arbor disclosed an Extended Stay-related lawsuit seeking approximately $139 million in aggregate from multiple defendants, including affiliates. It recorded no litigation accrual because management did not consider a loss probable or reasonably estimable. It also disclosed related-party loans, investments and guarantees, including its $30 million AMAC III commitment, of which $6 million was funded at quarter-end.
  • MSRs had a reported fair value of $317.7 million versus a carrying value of $276.6 million. A 100-basis-point increase in the MSR discount rate would reduce estimated fair value by $10.4 million, while a decrease would increase it by $11.0 million. Management stated that disclosure controls were effective and that there were no material changes to reported risk factors.

Investor facts to verify

  • Whether the September 2019 land-loan maturities were repaid, extended or otherwise resolved, and whether collateral values or reserves changed.
  • Availability and terms of refinancing for the substantial 2019–2020 maturities, and the amount of cash and facility capacity actually unrestricted and accessible.
  • Subsequent portfolio credit performance, delinquency trends, higher-risk exposures and CLO covenant headroom.
  • The effect of common-share issuance and convertible securities on per-share earnings, and the sustainability of dividends relative to cash generation and REIT distribution requirements.
  • Developments in the Extended Stay litigation, DUS loss-sharing exposure, GSE requirements and material related-party transactions.