ARBOR REALTY TRUST INC quarterly report, Q1 FY2021

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Arbor Realty Trust, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021. Arbor is a mortgage 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. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.

Financial performance and position

  • Profit: Net income was $81.1 million, compared with a $68.4 million net loss in Q1 2020. Net income attributable to common stockholders was $69.5 million, or $0.55 per diluted share, versus a $59.3 million loss, or $0.54 per diluted share.
  • Distributable earnings: The company’s non-GAAP measure was $75.1 million, or $0.52 per diluted share, versus $40.5 million, or $0.31 per share, in the prior-year quarter. Arbor cautions that this measure is not cash flow or a measure of liquidity.
  • Interest income and expense: Interest income was $91.1 million (+3% year over year); interest expense was $42.2 million (−16%). Net interest income rose 27% to $49.0 million.
  • Other revenue: Total other revenue was $78.8 million versus $2.3 million. Loan-sale gains and fee-based services increased to $28.9 million from $14.3 million; MSR income rose to $36.9 million from $21.9 million; and net servicing revenue increased to $15.5 million from $13.3 million. Derivative losses narrowed to $3.2 million from $50.7 million.
  • Credit costs and expenses: The company recorded a $1.1 million net reversal of credit-loss provisions, compared with $54.4 million of expense in Q1 2020; loss-sharing provision fell to $1.7 million from $21.5 million. Employee compensation increased 25% to $43.0 million.
  • Cash flow: Operating activities provided $491.1 million, compared with $233.2 million used in Q1 2020. The 2021 figure benefited substantially from Agency loan sales exceeding originations. Investing activities used $871.3 million; financing activities provided $375.5 million. Cash, cash equivalents, and restricted cash totaled $532.3 million at quarter-end.
  • Balance sheet and debt: Total assets were $8.13 billion and total liabilities were $6.46 billion. Loans and investments, net, were $6.07 billion, up from $5.29 billion at year-end 2020; loans held for sale were $613.5 million, down from $986.9 million. Debt carrying amounts included $2.21 billion of credit facilities and repurchase agreements, $2.81 billion of CLOs, $663.4 million of senior unsecured notes, and $269.5 million of convertible notes. Total equity was $1.67 billion.
  • Portfolio and servicing: Structured loan and investment UPB reached $6.26 billion, up 14.4% from year-end; weighted-average current pay rate was 5.06%, down from 5.23%. Agency servicing UPB grew to $25.46 billion from $24.63 billion.

Changes versus the prior comparable quarter

  • The return to GAAP profitability reflected substantially lower credit-loss and loss-sharing provisions and less severe derivative losses than in Q1 2020, as well as higher net interest income, Agency loan-sale activity, MSR income, and equity-affiliate income.
  • Agency loan sales increased to $1.84 billion from $957.1 million, while Agency originations rose to $1.40 billion from $1.08 billion. Structured Business originations were $1.09 billion versus $856.2 million.
  • Income from equity affiliates increased to $22.3 million from $4.0 million, primarily reflecting the residential mortgage banking investment. The company also completed CLO XIV and unwound CLO IX during the quarter.
  • Common shares issued and outstanding increased to 133.7 million from 123.2 million at year-end, following a public offering and at-the-market sales that raised $158.4 million net.

Outlook, risks, and unusual items

  • Outlook: No formal earnings or revenue guidance is provided. Management said it believed existing funding sources and access to liquidity would meet current and anticipated needs, while warning that prolonged market disruption could constrain growth, particularly in the Structured Business. The board declared a $0.34 per-share common dividend for June 2021, following the $0.33 declared in Q1.
  • COVID-19 and credit: Management reported no significant business impact to date but said the pandemic’s duration and economic effects remain uncertain. Approved forbearances covered approximately 0.3% of the Fannie Mae DUS servicing portfolio and 5.3% of the Freddie Mac portfolio. Seven non-performing loans had $53.8 million of net carrying value; ten impaired loans had $106.3 million of related credit-loss allowance. The total loan allowance was $147.3 million.
  • Funding and interest-rate risk: Approximately $1.68 billion of Structured Business warehouse and repurchase debt was subject to mark-to-market provisions; the company noted that facility renewals may have less favorable terms. The filing estimates that a 25-basis-point LIBOR increase would reduce annual net interest income by $3.4 million, including interest on cash and restricted cash. A 100-basis-point increase in MSR discount rates would reduce estimated MSR fair value by $15.7 million.
  • Commitments and litigation: Unfunded loan commitments were $443.1 million. Fannie Mae DUS requirements called for a further $48.9 million of restricted liquidity funding over 48 months, assuming no portfolio changes. A long-running Extended Stay-related case continues; the company recorded no loss accrual, stating a loss was not considered probable and could not be reasonably estimated. The amended complaint’s stated aggregate claim against director designees remained approximately $139 million; potential liability against affiliated entities had declined.
  • Unusual and subsequent events: CLO XIV issued $655.5 million of investment-grade notes to third parties; CLO IX’s $356.2 million notes were redeemed, with $1.4 million of extinguishment loss recorded. In April, Arbor issued $175 million of 5.00% notes due 2026. Also after quarter-end, it used $12.4 million of offering proceeds to repurchase 800,000 shares from executives, ACM, and a family-related vehicle at the underwriters’ purchase price. The filing discloses multiple related-party loans, investments, and business relationships.

Important facts for investors to verify

  • How much of the earnings and distributable-earnings improvement is repeatable, given the large prior-year credit and derivative charges and the Q1 2021 equity-affiliate contribution.
  • Whether loan credit quality, forbearances, non-performing exposures, and the $147.3 million allowance remain appropriate as economic conditions and collateral values evolve.
  • Facility renewal terms, upcoming maturities, collateral or margin-call demands, and liquidity available after required borrower funding and restricted-liquidity obligations.
  • The sustainability of Agency production, loan-sale margins, servicing income, and MSR valuations, including exposure to prepayments and interest-rate changes.
  • The potential financial and governance implications of the Extended Stay litigation and disclosed related-party transactions, including the post-quarter insider share repurchase.