Arbor Realty Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Arbor is a REIT and commercial real estate lender, with Structured loan origination and investment and Agency loan origination and servicing businesses.
Financial performance and position
- Quarterly results: Interest income was $259.8 million, up 107% year over year; interest expense rose 189% to $160.5 million. Net interest income increased 42% to $99.3 million. Other revenue fell 50% to $35.0 million.
- Net income was $79.1 million versus $86.1 million; net income attributable to common stockholders was $62.7 million, down 14%. Diluted EPS was $0.36 versus $0.51. Distributable earnings, a non-GAAP measure, were $105.1 million, or $0.56 per diluted share, versus $75.7 million, or $0.47.
- Nine-month results: Net interest income rose 56% to $277.7 million, while other revenue declined 37% to $144.4 million. Net income attributable to common stockholders fell 7% to $196.7 million; diluted EPS was $1.18 versus $1.56. Distributable earnings were $291.7 million, or $1.63 per diluted share, versus $219.6 million, or $1.44.
- Portfolio and balance sheet: Loans and investments, net, reached $14.79 billion at September 30, up from $11.98 billion at year-end 2021. Total assets were $17.76 billion and equity was $2.95 billion. The structured portfolio’s weighted-average current pay rate rose to 6.90% from 4.26%; related debt’s weighted-average funding cost rose to 5.07% from 2.33% (excluding financing costs).
- Debt and liquidity: Credit and repurchase facilities totaled $4.63 billion and CLO debt was $7.97 billion; total debt obligations were approximately $14.38 billion. Cash and cash equivalents were $389.7 million, with $922.5 million of restricted cash. Management reported approximately $500 million of cash and $375 million of replenishable CLO cash available as of October 31. About 70% of structured debt was described as lacking mark-to-market provisions; certain repurchase facilities remain subject to margin calls. The company reported covenant compliance.
- Cash flows, nine months: Operating activities provided $811.1 million; investing activities used $2.82 billion; financing activities provided $2.43 billion. Stockholder and OP Unit distributions totaled $234.2 million. Cash, cash equivalents and restricted cash ended at $1.31 billion.
Changes versus comparable periods
- Higher rates and substantial loan-portfolio growth lifted interest income, but higher funding balances and borrowing costs drove interest expense up faster. Management said most structured loans are floating-rate while a greater share of debt is fixed-rate, supporting near-term net interest income from rate increases; its disclosed sensitivity estimate was approximately $11.0 million of additional annual net interest income for a 50-basis-point increase and $22.0 million for 100 basis points.
- Agency revenue was weaker: for the quarter, MSR income declined 40% and gain-on-sale revenue fell 12%; for the nine months, they fell 45% and 62%, respectively. Lower sales margins and loan commitment volume contributed. Servicing revenue increased, partly from higher interest earned on escrow balances.
- Common earnings and EPS declined despite higher net interest income, reflecting lower Agency/MSR revenue, higher credit-loss provisions and, for the quarter, derivative and other-income losses. Preferred dividends also increased following Series E and F issuance.
- The structured loan portfolio expanded, funded in part through new CLO issuance and equity and debt offerings. Common shares outstanding increased to 171.5 million from 151.4 million at year-end 2021. The quarterly common dividend was $0.39; after quarter-end the board declared $0.40 per share.
Outlook, risks and unusual items
- No formal earnings or portfolio guidance is provided. Management expected interest rates to continue rising through the remainder of 2022 and said rate increases could benefit net interest income, while also potentially weakening property values, borrower debt-service capacity, originations and credit performance. Management cautioned that economic, inflationary and COVID-related effects remained uncertain.
- Credit risks include a $122.3 million allowance for credit losses, up from $113.2 million at year-end; the company cited rising rates and inflation in its reserve assumptions. Four loans were classified as non-performing, with aggregate net carrying value of $19.1 million. Unfunded loan commitments were $1.25 billion. Multifamily represented 92% of the portfolio; Texas and Florida represented 21% and 13%, respectively.
- Agency DUS loss-sharing obligations were $53.5 million. The stated maximum quantifiable Fannie Mae guarantee exposure was $3.42 billion, which the filing says is not representative of expected actual loss. The company anticipated funding a further $37.6 million of restricted liquidity over 48 months, assuming no portfolio paydowns, prepayments or defaults.
- In August, Arbor issued $287.5 million of 7.50% convertible notes due 2025 and used part of the proceeds to repurchase 4.75% convertible notes. In October, it issued $150 million of 8.50% senior notes due 2027 and used part of the proceeds to repurchase 5.625% notes due 2023. These post-quarter transactions increase the importance of monitoring refinancing costs and maturities.
- The filing describes longstanding litigation related to Extended Stay. Arbor recorded no loss accrual, stating a loss was not considered probable and could not be reasonably estimated; possible liability against director designees remained approximately $139 million. The filing also reports loans and investments involving related parties, including entities connected to the CEO and other executives.
- Management identified no material changes to the risk factors in the 2021 Annual Report. It reported effective disclosure controls and no material litigation other than the matter described above.
Important facts for investors to verify
- Whether floating-rate asset yields continue to outpace higher financing costs, and how rate increases affect borrower performance, collateral values and credit-loss reserves.
- Agency origination volumes, gain-on-sale margins, MSR valuations and servicing revenue, including sensitivity of MSR fair value to discount rates.
- Availability and renewal terms of warehouse and repurchase facilities, margin-call exposure, debt maturities, and the effect of new higher-coupon notes on funding costs.
- Liquidity available after restricted cash, required DUS collateral and the $1.25 billion of unfunded loan commitments; CLO covenant performance and headroom.
- Portfolio credit quality, especially the land-development exposures, non-performing loans, multifamily concentration and Texas/Florida exposure.
- Coverage of declared dividends by GAAP earnings and distributable earnings, noting that the company says distributable earnings is not a measure of operating cash flow or liquidity.
- Developments in the Extended Stay litigation and related-party lending, investment and governance disclosures.