Arbor Realty Trust, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Arbor is an externally managed REIT focused on multifamily and commercial real-estate loans, investments, and selected owned properties.
Financial performance and position
- Income: Interest income was $23.0 million, up 17% year over year; interest expense was $10.6 million, down 10%. Net interest income rose 57% to $12.35 million. Management attributed the increase to higher asset yields and modest portfolio growth, alongside lower borrowing costs and average debt.
- Earnings: Net income was $7.23 million versus $4.22 million. Net income attributable to common stockholders was $6.64 million, or $0.20 basic and $0.19 diluted per share, compared with $4.16 million, or $0.17 per share, in Q1 2012. Q1 2013 included a $3.76 million gain on extinguishment of debt; Q1 2012 included a $5.35 million gain and $3.75 million of discontinued-operation income, including a $3.49 million property-sale gain.
- Revenue and expenses: Property operating income was $8.90 million, down 1%; other income was $1.38 million versus $0.03 million. Total other expenses declined 17% to $19.08 million, principally because loan-loss provision fell to $2.50 million from $7.79 million. Employee and administrative expenses increased. The filing does not provide a single overall operating-margin figure.
- Cash flow: Operating cash flow was $1.86 million, compared with $0.15 million. Investing activities used $82.37 million, reflecting loan originations and investment purchases. Financing activities provided $129.29 million, substantially supported by equity issuance and a new CLO. Cash and cash equivalents rose to $77.96 million from $29.19 million; restricted cash was $72.07 million and is subject to use restrictions.
- Assets and equity: Total assets were $1.86 billion and total equity $363.39 million, up from $1.70 billion and $231.26 million, respectively, at year-end. Loans and investments, net, were $1.39 billion. Common shares outstanding increased to 43.07 million from 31.25 million, and the company issued $37.32 million of Series A preferred stock.
- Debt and liquidity: Debt included $750.38 million of CDOs, $264.50 million of CLOs, $158.89 million of junior subordinated notes, $49.40 million of repurchase agreements and credit facilities, $51.46 million of other notes payable, and a $53.75 million mortgage on owned real estate. The filing reports $140 million available under repurchase and credit facilities. Management said existing funding sources were expected to meet near- and long-term needs, while noting that longer-term needs depend on continued access to debt and equity financing.
- Portfolio and credit: The loan portfolio comprised 129 loans with $1.55 billion unpaid principal balance and a 4.98% weighted-average pay rate. The allowance for loan losses was $145.74 million, against $234.95 million of impaired loans before reserves. Six loans were classified as non-performing, with $44.71 million carrying value before related reserves; none were 90 days past due and still accruing interest. Net charge-offs were $18.46 million, or 1.2% of average loans, versus $3.56 million, or 0.2%, a year earlier.
Material changes versus Q1 2012
- Net interest income improved by $4.50 million as average asset yield rose to 5.63% from 4.82%; average borrowing cost declined to 3.38% from 3.54%.
- Loan-loss provision decreased by $5.29 million, although charge-offs increased to $18.46 million from $3.57 million.
- Common-stockholder income increased 60%, but the comparison includes prior-year discontinued-operation gains that did not recur. The 2013 result also benefited from a debt-extinguishment gain.
- Financing changed materially: the company issued $177 million of CLO notes and raised net proceeds from common and preferred offerings and its ATM program. Repurchase agreements and credit facilities declined to $49.40 million from $130.66 million, while CLO debt increased to $264.50 million from $87.50 million.
Outlook, risks, and unusual items
- No specific earnings or operating guidance was provided. Management cited potential investment opportunities and continued pursuit of capital-market financing, but gave no assurance that debt or equity markets would remain accessible.
- Key exposures include commercial real-estate values and borrower performance, credit losses, financing availability and cost, and interest-rate movements. A 0.25% LIBOR increase was estimated to reduce annual net income and cash flow by approximately $0.3 million; a 0.25% decrease was estimated to increase them by approximately $0.8 million, assuming balances remain unchanged.
- All reported debt covenants and CDO/CLO coverage tests were in compliance at quarter-end and at the April 2013 determination date. A breach could divert securitization cash flows away from Arbor; management cautioned that it might not have sufficient liquidity to cure a breach.
- Cash collateral posted for interest-rate swaps was $18.2 million. Additional collateral could be required if swap values decline. The company also had $8.8 million of unfunded loan commitments, with approximately $5.5 million of related restricted cash available for commitments financed by CDOs.
- Three Extended Stay-related lawsuits name company affiliates and others as defendants. The complaints seek, among other relief, at least $2.1 billion in damages plus punitive damages and return of more than $50 million. Arbor is defending the claims, has moved to dismiss, and recorded no loss accrual because it considers a loss not probable and not reasonably estimable.
- Arbor relies on its external manager, ACM, which has significant ties to the company’s leadership and other related parties. The filing describes related-party loans and other transactions. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- Management noted continuing uncertainty in the real-estate and financing markets. It reported no material changes to the risk factors in the 2012 Form 10-K. The hotel portfolio is seasonal, with most revenue earned in the first two calendar quarters.
Most important facts for investors to verify
- Whether impaired and non-performing loans, particularly the land-development loans totaling approximately $111.2 million that mature in July 2013, are ultimately repaid, extended, or require further reserves.
- Whether the new CLO and warehouse funding arrangements remain available on acceptable terms, and whether collateral, liquidity, or coverage tests approach breach thresholds.
- Whether equity issuance, share-count growth, preferred dividends, and the common dividend affect per-share returns and capital needs.
- The status and potential exposure of the Extended Stay litigation, for which no loss accrual was recorded.
- The assumptions underlying loan collateral valuations and fair values, which include significant management estimates and unobservable inputs.