Business context and reporting period
Arbor Realty Trust, Inc. filed its Form 10-K for the fiscal year ended December 31, 2011. The company is an externally managed mortgage REIT focused on multifamily and commercial real estate finance, including bridge and mezzanine loans, junior participations and preferred equity. Annual results are summarized below; fourth-quarter figures are noted where relevant.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Interest income | $73.9 million | $95.5 million |
| Net interest income | $22.2 million | $32.5 million |
| Net income (loss) attributable to Arbor | $(40.3) million | $112.9 million |
| Basic and diluted EPS | $(1.61) | $4.44 basic; $4.39 diluted |
| Cash from operating activities | $(0.4) million | $20.4 million |
| Cash and cash equivalents at year-end | $55.2 million | $101.1 million |
- 2011 total revenue was approximately $98.2 million, including $24.2 million of property operating income from real estate acquired during the year. Net interest income fell 32%, as interest income declined faster than interest expense.
- Net loss from continuing operations was $37.3 million. The 2010 comparison included $229.3 million of gains on debt extinguishment, versus $10.9 million in 2011; 2010 also included a $7.0 million securities impairment.
- Portfolio yield averaged 4.60% in 2011 against a 3.97% average funding cost. Year-end portfolio unpaid principal was $1.50 billion across 119 loans and investments; net loans and investments on the balance sheet were $1.30 billion.
- Loan-loss provision, net of recoveries, was $38.5 million, down from $82.8 million. The year-end allowance was $185.4 million on 24 loans with approximately $285.0 million of carrying value before reserves. Twelve loans were classified as non-performing, with $15.3 million net carrying value after $42.6 million of reserves.
- Year-end total assets were $1.78 billion, total liabilities $1.60 billion and total equity $173.1 million. Debt facilities totaled $1.32 billion: $1.00 billion of CDOs, $158.3 million of junior subordinated notes, $85.5 million of notes payable and $76.1 million of repurchase/credit facilities. Separate mortgage debt on real estate was $115.9 million.
- Restricted cash was $67.3 million, primarily held within CDO structures or for specified purposes and not generally available as unrestricted liquidity. The company reported $20.0 million in unfunded loan commitments.
- Investing cash outflow was $40.3 million and financing cash outflow was $5.1 million. Cash declined $45.9 million during the year.
Material changes versus the prior comparable period
- Net loss attributable to Arbor replaced 2010 net income, largely reflecting the absence of 2010’s unusually large debt-retirement gains, alongside lower net interest income and continued credit costs.
- Interest income declined 23%, reflecting a smaller average portfolio and lower asset yields; management cited non-performing loans, lower rates on modified or refinanced loans, and lower average LIBOR. Average funding cost fell to 3.97% from 4.22%.
- Loan originations rose to $206.5 million from $24.7 million. The company also acquired multifamily and hotel portfolios through bankruptcy and creditor-trust transactions; real estate owned increased to $128.4 million from $22.8 million.
- The allowance for loan losses declined from $205.5 million to $185.4 million, partly reflecting charge-offs, recoveries and transfers of collateral into real estate owned—not solely improved credit performance.
- Cash and cash equivalents fell by $45.9 million, while restricted cash rose by $46.2 million. CDO debt declined by $68.2 million, while repurchase/credit facilities increased to $76.1 million from $1.0 million.
- No common-stock dividend was declared for 2011; the board had also elected not to pay common distributions for 2009 and 2010. The company repurchased 1.5 million shares for $5.7 million during 2011.
Outlook, risks, contingencies and unusual items
- Management reported improved liquidity availability in 2011 and a new $50 million warehouse facility, but characterized the broader commercial real estate and financing-market recovery as uncertain. It emphasized capital preservation, active asset management and workouts, liquidity generation, and selective new originations. No quantified earnings or dividend guidance was provided.
- All three CDOs passed their overcollateralization and interest-coverage tests at the January 2012 determination date. A breach could divert cash flows to senior bondholders and restrict residual cash available to Arbor. The CDO replenishment periods had all ended by January 2012, so repayments generally amortize debt rather than fund replacement loans.
- Liquidity and refinancing remain key risks: $26.1 million of repo debt had a rolling monthly term, the $50 million warehouse facility matured in July 2013, and contractual debt principal was concentrated in coming years. The warehouse facility also required $50 million of compensating balances and minimum liquidity of $20 million. Management said it believed existing sources were adequate, while noting long-term needs depend on additional financing access.
- Interest-rate swaps had a $45.9 million fair-value liability; the company had posted $21.9 million of cash collateral. Further market-value declines could require additional collateral. Management estimated a 25-basis-point LIBOR increase would raise annual net income and cash flows by about $0.3 million, assuming balances stayed constant.
- Five land-development loans totaling $105.8 million matured in March 2012 and had $43.7 million of cumulative reserves; management said they were not classified as non-performing because the borrower was complying with loan terms, although collection of accrued interest had been suspended.
- Three Extended Stay-related lawsuits name subsidiaries, affiliates and individuals as defendants. The complaints seek at least $2.1 billion in damages, plus punitive damages, and return of more than $50 million allegedly received by preferred-unit holders. The company moved to dismiss and recorded no loss accrual, stating a loss was not considered probable and could not be reasonably estimated.
- Related-party and governance risks include ACM’s role as external manager, its approximately 22% voting interest, and overlapping ownership and management with Arbor. 2011 transactions included loans involving properties purchased from ACM or affiliates and a restructuring involving a management company affiliated with the CEO. The filing describes independent-director review procedures.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s and the auditor’s control assessments excluded the newly acquired multifamily and hotel portfolios.
Important facts for investors to verify
- Whether the $185.4 million loan-loss allowance adequately reflects collateral values, particularly for the impaired land-development loans and other higher-risk exposures.
- Repayment, extension or workout outcomes for the $105.8 million of March 2012 land-loan maturities and other near-term debt and facility maturities.
- Unrestricted liquidity after accounting for restricted cash, CDO cash-flow waterfalls, derivative collateral needs, the warehouse facility’s compensating-balance requirement and unfunded commitments.
- Actual operating performance and cash requirements of the acquired multifamily and hotel properties, including occupancy (79% and 46%, respectively, at year-end) and the effect of seasonality in hotel income.
- Developments in the Extended Stay litigation, related-party transactions and ACM management arrangements, including any potential financial exposure or changes in governance.
- Whether future taxable income, REIT distribution requirements and junior subordinated note terms permit a return to common dividends; the filing reports no common dividend for 2011.