Arbor Realty Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Arbor is an externally managed REIT focused primarily on multifamily and commercial real estate loans and investments, with additional income from owned properties.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Total revenue (interest income, property operating income and other income) | $34.4 million | $32.7 million; up about 5% |
| Net interest income | $14.3 million | $12.3 million; up 16% |
| Net income | $7.5 million | $7.2 million; up 3% |
| Net income attributable to common stockholders | $5.9 million; diluted EPS $0.12 | $6.6 million; diluted EPS $0.19 |
| FFO, a non-GAAP measure | $8.0 million; diluted FFO per share $0.16 | $8.3 million; $0.24 per share |
| Cash from operating activities | $4.6 million | $1.9 million |
| Cash and cash equivalents at quarter-end | $32.7 million | $60.4 million at December 31, 2013 |
| Total assets / total liabilities / total equity | $1.90 billion / $1.43 billion / $467.9 million | Assets $1.88 billion / liabilities $1.44 billion / equity $437.6 million at year-end |
- Loans and investments were $1.575 billion net of unearned revenue and reserves; unpaid principal was $1.707 billion. The allowance for loan losses was $116.7 million, down from $122.3 million at year-end.
- Average yield on core interest-earning assets increased to 6.23% from 5.63%; average financing cost rose to 3.68% from 3.38%. Net interest income benefited from higher asset yields and lower average interest-bearing liabilities.
- Cash declined by $27.7 million during the quarter. Restricted cash was $97.2 million, much of it held within CDO structures and not available for general cash needs.
- Debt facilities totaled $1.209 billion carrying value, including $248.2 million of repurchase agreements and credit facilities, $519.8 million of CDOs, $264.5 million of CLOs and $159.4 million of junior subordinated notes. Mortgage notes added $53.8 million. Available credit facility capacity was reported at $9.8 million.
- Common dividends declared were $0.13 per share, compared with $0.12 a year earlier. The company issued $21.6 million net from Series C preferred stock and $6.5 million net from 1.0 million ATM common shares.
Material changes versus comparable periods
- Net income rose modestly, but common-stockholder income declined 12% and diluted EPS fell to $0.12 from $0.19. Preferred dividends increased to $1.6 million from $0.5 million, and weighted-average common shares rose to 49.8 million from 34.2 million.
- Net interest income increased 16%, mainly reflecting improved yields on core assets. The decline in average interest-bearing liabilities was partly offset by a higher average funding cost.
- Q1 2013 included a $3.8 million gain from extinguishing CDO debt; there was no comparable gain in 2014. Q1 2014 also included a $0.5 million gain on sale of available-for-sale securities.
- Net loan-loss provision fell to $0.1 million from $2.5 million, reflecting $0.9 million of reserve recoveries in 2014. The company recorded a $0.3 million real estate impairment in 2014.
- Loans and investments increased $51.1 million from year-end. Arbor originated 18 loans totaling $274.9 million and received full repayment of 12 loans totaling $224.5 million.
- Arbor sold most of its RMBS securities for $33.9 million and repaid related financing. CDO balances fell $119.9 million, primarily from scheduled runoff; warehouse and credit facility balances increased $89.1 million.
Outlook, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management said it believed existing funding sources would meet short- and long-term liquidity needs, while noting that longer-term needs depend on continued access to debt and equity financing. Management described commercial real estate markets as improving but uncertain.
- Post-quarter financing: Arbor completed its third CLO in April 2014, backed initially by about $307.3 million face value of loans and including issuance proceeds intended partly for additional loan purchases. The filing describes approximately $375 million of real estate-related assets and cash. It also reports April amendments that increased capacity on two warehouse facilities and repayment of temporary or other facility balances.
- Credit exposure: Five borrowers represented approximately 26% of total assets. New York properties represented 31% of the loan and investment portfolio. Fourteen loans with $201.4 million carrying value before reserves had impairment reserves; four loans with net carrying value of about $10.2 million were classified as non-performing.
- Land-development exposure: Seven loans with $111.6 million unpaid principal mature in September 2014 and are secured by a land development project. The company had suspended accrual of interest on these impaired loans and had cumulative reserves of $43.7 million. Management cited construction financing, cost, demand and litigation risks associated with the project.
- Funding and rate risks: All CDOs had passed their replenishment dates, so related loan repayment proceeds were generally restricted and used to repay CDO investors. Breaches of CDO/CLO coverage tests could divert residual cash flows; all tests were reported passing as of the latest April 2014 determination dates. Derivative collateral posted was $13.1 million, and further adverse market-value changes could require additional cash.
- Maturities and liquidity: Contractual debt obligations were concentrated in 2014 and 2015; the filing lists approximately $333.4 million of debt maturities in 2014, excluding projected interest. The company reported compliance with debt covenants at March 31, 2014. Some debt facilities require minimum liquidity of $20 million, compared with $32.7 million of unrestricted cash on the balance sheet.
- Litigation: An amended Extended Stay-related complaint seeks $139 million in aggregate from director designees and company affiliates. Arbor is seeking dismissal, intends to defend the claims and recorded no loss accrual because management concluded a loss was not probable and could not be reasonably estimated.
- Related parties and governance: Arbor depends on its external manager, ACM, which has significant overlapping ownership and management ties. A $15 million participation in a newly originated $70.1 million bridge loan was financed with junior participations to ACM. The filing also describes other affiliate-related transactions and a potential, uncertain transaction to acquire manager platforms and internalize management.
- Property operations: Multifamily portfolio occupancy was approximately 86%; hotel occupancy was 58%, versus 61% a year earlier. Hotel average daily rate and revenue per available room increased year over year.
Important facts for investors to verify
- Whether the third CLO and warehouse-facility amendments improve funding flexibility without increasing refinancing or covenant risk.
- The repayment, extension or resolution of the seven land-development loans maturing in September 2014, and any change to their reserve or accrual status.
- Subsequent performance of impaired and non-performing loans, collateral values, and the adequacy of the $116.7 million loan-loss allowance.
- Cash availability after accounting for restricted balances, facility requirements, dividends, collateral calls and near-term debt maturities.
- Common-share issuance and dilution, preferred dividend obligations, and the effect of the lower per-share earnings and FFO measures.
- Developments in the Extended Stay litigation and any material change in the ability to estimate or accrue a potential loss.
- Terms, conflicts, financing and potential dilution related to any transaction with ACM or its affiliates.