Business context and reporting period
Arbor Realty Trust, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The externally managed REIT invests mainly in multifamily and commercial real estate loans and related investments, and also owns multifamily and hotel properties.
Financial performance and position
| Metric | Second quarter 2015 | Six months 2015 |
|---|---|---|
| Interest income | $26.3 million | $53.5 million |
| Other interest income, net | $7.9 million | $7.9 million |
| Net interest income, as reported | $22.6 million | $35.9 million |
| Net income | $12.4 million | $29.3 million |
| Net income attributable to common stockholders | $10.5 million; $0.21 per share | $25.5 million; $0.50 per share |
| Common dividend declared per share | $0.15 | $0.28 total |
| Operating cash flow | $19.5 million for the six months |
At June 30, total assets were $1.83 billion, including net loans and investments of $1.47 billion. Total liabilities were $1.28 billion and equity was $556.2 million. Cash and cash equivalents were $130.1 million; restricted cash was $76.3 million. The company reported $117.3 million available under credit facilities and repurchase agreements. Six-month investing cash flow was $0.7 million and financing cash flow was $59.5 million.
Major debt balances included $322.7 million in credit facilities and repurchase agreements, $500.3 million in CLOs, $79.3 million in CDOs, $97.9 million in senior unsecured notes, and $160.1 million in junior subordinated notes. These balances exclude the separately reported $27.2 million mortgage note on real estate owned. Debt covenants were reported in compliance.
The loan portfolio’s weighted average current pay rate was 5.65%; including certain fees and costs, it was 6.28%. Average funding cost was 3.44%, or 3.86% including financing costs. For the quarter, reported net interest income includes the $7.9 million payoff-related interest income; the filing’s average-balance table reports $14.7 million of net interest income excluding that separately presented amount.
Material changes versus prior comparable periods
- Quarterly net income attributable to common stockholders fell 8% from $11.5 million in Q2 2014. Higher net interest income and equity-affiliate income were outweighed by the prior-year $7.9 million gain on sale of an equity interest, which did not recur.
- For the six months, common-stockholder net income rose 47% from $17.3 million. The comparison includes 2015 one-time items: an $11.0 million gain on acceleration of deferred income, a $4.3 million loss on swap termination, and a $4.0 million real estate sale gain. 2014 included a $7.9 million equity-interest sale gain.
- Six-month operating cash flow increased from $13.5 million to $19.5 million, primarily reflecting interest income from the payoff of a defaulted $116.0 million mortgage acquired in March and repaid in April. Cash rose from $50.4 million at year-end to $130.1 million, while restricted cash fell from $218.1 million to $76.3 million, substantially reflecting financing-vehicle unwinds.
- Loans and investments, net, increased modestly to $1.47 billion from $1.46 billion. The allowance for loan losses rose $2.1 million to $117.6 million. Provision for loan losses was $2.1 million in the first half, versus net recoveries of $0.7 million in 2014.
- Credit-facility and repurchase-agreement balances increased $142.4 million, CLO balances increased $42.0 million, and CDO balances decreased $252.1 million, reflecting new CLO IV issuance and unwinds of CLO II and CDO I/II.
Outlook, risks, contingencies and unusual items
No quantified earnings or revenue guidance was provided. Management said existing funding sources were expected to meet short- and long-term liquidity needs, while noting that long-term requirements depend on continued access to debt and equity financing. It cited improving commercial real estate values and borrower repayment access, but warned of uncertainty from market conditions, financing availability and costs, interest rates, real estate values, collateral quality, and borrower credit performance.
In July 2015, Arbor completed the unwind of its remaining CDO III, redeeming $71.1 million of notes. Management expected an $8.2 million deferred-income gain and $0.5 million of related costs in Q3 2015. The $150 million warehouse facility was temporarily increased to $175 million through year-end 2015. A hotel property with a carrying value of $11.2 million was classified as held for sale; a sale was expected in late 2015.
Credit exposure includes $192.0 million of higher-risk loans before reserves, with a weighted-average last-dollar LTV of 95%. Ten impaired loans had a carrying value of $224.4 million before reserves and a $117.6 million allowance; three loans with net carrying value of $6.5 million were classified as non-performing. Six impaired land-development loans had $114.8 million carrying value and $47.6 million of cumulative reserves; collection of contractual accrual interest was considered doubtful. The company also disclosed $16.0 million of unfunded loan commitments, including $4.4 million of restricted cash available for certain commitments.
A long-running lawsuit relating to Extended Stay sought approximately $139 million in aggregate from multiple defendants, including company affiliates. Arbor had not accrued a loss, stating loss was not considered probable and could not be reasonably estimated. The company is externally managed, with significant related-party transactions and overlapping leadership; the management agreement includes a $10 million termination fee. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Separate recurring portfolio earnings from the $7.9 million mortgage payoff income and the first-half debt-unwind and property-sale items; assess the sustainability of reported earnings and AFFO.
- Review allowance adequacy, the land-development exposures, higher-risk loan trends, and the concentration of borrower and geographic exposures.
- Confirm liquidity, facility availability and refinancing needs against debt maturities, unfunded commitments, and any covenant or collateral changes after quarter-end.
- Track execution and proceeds from the proposed hotel sale and the expected Q3 CDO III accounting effects.
- Assess the Extended Stay litigation, related-party lending and investments, and the company’s dependence on its external manager.