Arbor Realty Trust, Inc. — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016. Arbor is an externally managed REIT focused primarily on multifamily and commercial real estate loans and investments. Unless otherwise noted, reported results exclude the agency mortgage business acquired from its manager after quarter-end.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $17.3 million | $22.6 million | $30.3 million | $35.9 million |
| Net income | $12.1 million | $12.4 million | $15.2 million | $29.3 million |
| Net income attributable to common stockholders | $10.2 million; $0.20/share | $10.5 million; $0.21/share | $11.4 million; $0.22/share | $25.5 million; $0.50/share |
| Operating cash flow | Not presented by quarter | $17.7 million | $19.5 million | |
| FFO / AFFO per diluted share | $0.21 / $0.23 | $0.24 / $0.26 | $0.24 / $0.37 | $0.48 / $0.61 |
- Q2 interest income was $28.0 million versus $26.3 million; interest expense rose to $13.2 million from $11.6 million. Average yield on core interest-earning assets was 6.76% versus 6.46%, while average funding cost was 4.24% versus 3.99%.
- Six-month total interest income was nearly flat at $53.8 million, but net interest income fell 16%. The reported prior-year comparison included $7.9 million of other interest income from a defaulted mortgage payoff, versus $2.5 million recognized in 2016 after escrow funds were released.
- Q2 results included an $11.0 million gain on sale of multifamily properties, $4.4 million of income from equity affiliates and an $11.2 million hotel-property impairment. For the first half, property-sale gains were $11.6 million and the impairment was $11.2 million. The 2015 first-half comparison also included an $11.0 million deferred-income gain and a $4.3 million swap-termination loss.
- At June 30, total assets were $1.92 billion, loans and investments net were $1.51 billion, and equity was $565.7 million. Cash and cash equivalents were $160.2 million; restricted cash was $158.7 million and is substantially associated with CLOs.
- Reported debt carrying values totaled approximately $1.27 billion: $259.2 million of credit facilities and repurchase agreements, $760.6 million of CLOs, $94.1 million of senior unsecured notes and $157.5 million of junior subordinated notes. Debt principal under facilities was $1.30 billion; $190.2 million of credit-facility commitments was available. The company reported compliance with debt covenants.
- Loans and investments before reserves were $1.61 billion, with a weighted-average current pay rate of 5.40% and allowance for loan losses of $83.8 million. The allowance declined from $86.8 million at year-end, including a $3.0 million charge-off following a discounted payoff.
Material changes versus comparable periods
- Common-stockholder net income declined 2% year over year in Q2 and 55% for the first half. Lower net interest income and property revenue, acquisition costs, and the hotel impairment weighed on results; property-sale gains and higher equity-affiliate income partly offset these items.
- Loans and investments net increased about $61.3 million from year-end. First-half originations were $388.4 million; full payoffs totaled $267.3 million and partial paydowns $32.8 million. Arbor extended 23 loans totaling $257.2 million.
- Credit facilities and repurchase agreements increased $122.9 million from year-end, largely to fund originations. Restricted cash rose $110.4 million, principally from CLO loan repayments awaiting distribution or reinvestment. The three remaining multifamily properties were sold for $41.0 million, generating an $11.0 million gain and repaying $27.1 million of property debt.
Outlook, risks and unusual items
- No numerical earnings or portfolio guidance was provided. Management said existing funding sources should meet near- and long-term liquidity needs, while noting that long-term requirements depend on continued access to debt and equity financing.
- On July 14, 2016, Arbor completed its acquisition of the manager’s agency platform for stated consideration of $276.0 million: $138.0 million in OP units, $88.0 million in cash and a $50.0 million seller-financing instrument. Based on the closing share price, estimated fair value of consideration was approximately $293.0 million. The business includes agency origination and servicing operations and approximately 235 employees; it was not included in the quarter’s reported results. Arbor also has a two-year option to acquire its existing management agreement and internalize management for $25.0 million, rising to $27.0 million in year two.
- The acquisition-related advisory costs were $3.9 million for the first half, with additional fees expected in Q3. A $0.16 common dividend was declared in August, a 7% increase from the prior quarter. A new $500 million shelf registration became effective in July.
- Credit risks include concentration in real estate and borrowers: five borrowers accounted for 21% of total assets. Six impaired land-development loans had $120.4 million carrying value, $49.1 million of cumulative reserves and no current pay interest; collection of accrued interest was considered doubtful. Total impaired loans had $196.7 million unpaid principal, and $22.9 million of fully reserved loans were classified as non-performing.
- Management cited real estate values, rent growth, borrower credit quality, interest rates and access to financing as significant risks. CLO covenant failure could divert cash flows to bond repayment and suspend residual payments. There were $36.8 million in unfunded loan commitments and approximate debt maturities of $146.2 million for the remainder of 2016 and $320.9 million in 2017.
- Extended Stay-related litigation seeks approximately $139 million in aggregate from various defendants, including affiliates. Arbor has not accrued a loss, stating it does not consider a loss probable and cannot reasonably estimate an amount. The filing also describes extensive related-party lending and management ties; the CEO and affiliates control a substantial interest in the manager.
Most important facts for investors to verify
- How the agency-platform acquisition performs, its integration and financing costs, and the dilution and voting implications of the 21.23 million OP units and paired special voting preferred stock.
- Whether the decline in net interest income and per-share FFO/AFFO stabilizes, given funding costs, loan repayments and the one-off nature of some prior-period income.
- Credit quality and recoverability of impaired and land-development loans, adequacy of reserves, borrower concentrations and the status of non-performing exposures.
- Liquidity available after accounting for restricted CLO cash, upcoming debt maturities, unfunded commitments and the ability to renew or replace financing facilities.
- Developments in the Extended Stay litigation, related-party transactions and the company’s continuing dependence on its external manager.