Arbor Realty Trust, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited quarterly results, including the fourth quarter. Arbor is an externally managed REIT focused on multifamily and commercial real estate loans and investments.
Financial performance and position
- Revenue and net interest: Interest income was $80.0 million, up 8% from 2011; interest expense was $40.9 million, down 21%. Net interest income increased 76% to $39.1 million. Property operating income was $30.2 million; total other revenue was $31.5 million.
- Profit: Net income attributable to Arbor was $21.5 million, or $0.80 per basic share, compared with a $40.3 million loss, or $1.61 per share, in 2011. Results included a $30.5 million gain from repurchasing CDO debt at a discount and $5.3 million of income from discontinued operations. Before the debt-extinguishment gain, the company reported a $14.2 million loss from continuing operations.
- Cash flow: Operating activities provided $20.2 million; investing activities used $46.5 million; financing activities provided $0.3 million. Cash and cash equivalents declined $26.0 million to $29.2 million. Restricted cash was $42.5 million and is not generally available for unrestricted corporate use.
- Assets, debt and equity: Total assets were $1.70 billion and total equity was $231.3 million. Reported debt facilities totaled $1.24 billion, including $812.5 million of CDOs and $87.5 million of CLO debt. The company reported compliance with its financial and CDO/CLO covenants at year-end.
- Portfolio and credit: Loan and investment unpaid principal was $1.50 billion across 128 positions, with a 4.77% weighted-average current pay rate. The allowance for loan losses was $161.7 million against 20 impaired loans with $240.2 million of pre-reserve carrying value. The 2012 net provision was $22.9 million, down from $38.5 million in 2011.
- Liquidity and leverage: Average portfolio yield was 4.97%, average borrowing cost 3.23%, and average leverage was 78.8% (67.8% when junior subordinated notes were treated as equity). Management said existing sources should meet short- and long-term needs, while noting long-term requirements depend on access to debt and equity financing.
Changes versus 2011
- Net interest income rose $16.9 million as asset yields improved and borrowing costs declined; average debt also fell modestly.
- Net income improved from a substantial loss, but the comparison reflects debt-repurchase gains in both years. The 2012 gain was $30.5 million versus $10.9 million in 2011.
- Loan-loss provision declined, and there was no 2012 loss on loan sale or restructuring; however, charge-offs remained significant at $46.6 million.
- Loans and investments, net, increased 2% to $1.33 billion. Common shares outstanding increased to 31.25 million from 24.30 million, following two 2012 equity offerings that generated approximately $36.7 million net.
- Cash declined from $55.2 million. CDO balances decreased by $190.2 million, while Arbor added its first CLO, issuing $87.5 million of notes.
- Arbor resumed common dividends in 2012 after none in 2011: declared dividends totaled $0.285 per share for 2012. The $0.12 fourth-quarter dividend was declared in February 2013.
Outlook, risks and unusual items
- No specific earnings or investment-volume guidance is provided. Management described improving market access and growing investment opportunities but emphasized that the recovery and continued access to capital markets remain uncertain. Its stated leverage objective, including junior subordinated notes as equity, is generally 70%–80% of assets.
- After year-end, Arbor completed a second CLO in January 2013, issuing $177.0 million of investment-grade notes, and raised preferred and common equity. The filing describes the preferred offering as 8.25% in several places but as 9.0% in one note; the coupon should be verified against the security documents.
- Material risks include real-estate collateral deterioration, borrower defaults and extensions, refinancing and short-term funding risk, leverage and covenant tests, interest-rate and derivative exposure, and dependence on its external manager, ACM. Arbor had posted approximately $20.0 million of cash collateral for derivatives and could be required to post more.
- Credit remains concentrated: 23 loans to five borrowers represented about 31% of total assets; New York accounted for about 34% of portfolio principal. The allowance and collateral valuations rely on significant management estimates.
- Extended Stay-related litigation names affiliates and a subsidiary. The complaints seek at least $2.1 billion in damages plus punitive damages and return of more than $50 million. Arbor is defending the claims, has not accrued a loss, and says a loss is not probable or reasonably estimable.
- ACM receives a cost-reimbursement base management fee, which was $10.0 million in 2012 and is estimated at $10.8 million for 2013. The manager and Arbor executives have overlapping ownership and roles; related-party transactions and conflicts are subject to independent-director review.
- Fourth-quarter 2012 net loss attributable to Arbor was $0.3 million, or $0.01 per share, despite positive net interest income of $11.0 million. Full-year earnings were affected by debt gains and property-sale items, so reported net income is not solely indicative of recurring lending performance.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of non-performing loans: one passage cites three loans with $38.4 million unpaid principal, while another reports nine loans with approximately $60.0 million carrying value before reserves.
- Verify the preferred-stock coupon, given the 8.25% versus 9.0% inconsistency in the filing text, and confirm the terms and proceeds of the post-year-end offering.
- Assess loan-loss reserve adequacy, especially land and other higher-risk exposures, and track subsequent recoveries, charge-offs, modifications and extensions.
- Review 2013 debt maturities, refinancing needs, covenant headroom, and availability of unrestricted liquidity; distinguish restricted cash from cash available to the parent company.
- Evaluate how much of earnings and FFO depends on non-recurring debt-extinguishment gains, property operations, and discontinued-operation gains, and review dilution from equity issuance.
- Review the status and potential exposure of the Extended Stay litigation, derivative collateral requirements, and related-party governance safeguards.