ARBOR REALTY TRUST INC quarterly report, Q2 FY2023

Business context and reporting period

Arbor Realty Trust, Inc. is a mortgage REIT and direct lender operating through its Structured Business, which primarily originates and invests in commercial real estate bridge loans, and its Agency Business, which originates, sells and services multifamily loans for government-sponsored and other programs. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless noted.

Financial and operating performance

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net interest income	$108.5 million	$94.3 million	$217.1 million	$178.4 million
Net income	$93.3 million	$88.1 million	$195.6 million	$168.0 million
Net income attributable to common stockholders	$76.2 million	$69.9 million	$160.5 million	$134.0 million
Diluted earnings per common share	$0.41	$0.41	$0.87	$0.82
Dividends declared per common share	$0.42	$0.38	$0.82	$0.75

Q2 interest income increased 67% to $335.7 million, while interest expense rose 112% to $227.2 million. Net interest income increased 15%. For the first half, net interest income rose 22% as higher asset yields more than offset higher funding costs.
Q2 other revenue was $65.2 million, up 29%. Servicing revenue, net, rose 56% to $32.3 million, mainly reflecting higher interest earned on escrow balances; derivative results were a $7.4 million loss versus an $8.6 million gain a year earlier.
Q2 provisions included $13.9 million for credit losses and $7.7 million for loss sharing, compared with $5.1 million of credit-loss provision and a $1.9 million loss-sharing recovery in Q2 2022. First-half credit-loss provision was $36.4 million.
Six-month operating cash flow was $101.6 million, compared with $764.5 million in 2022. Investing activities provided $1.03 billion, while financing activities used $1.13 billion. Cash, cash equivalents and restricted cash totaled $1.24 billion at June 30.
At June 30, total assets were $16.16 billion and total equity was $3.16 billion. Cash and cash equivalents were $846.4 million; restricted cash was $396.9 million. Loans and investments, net, were $13.27 billion.
Reported debt carrying value totaled approximately $12.50 billion: $3.58 billion in credit and repurchase facilities, $7.17 billion in securitized debt, $1.33 billion in senior unsecured notes, $281.7 million in convertible notes and $143.5 million in junior subordinated notes. Debt maturities listed for the remainder of 2023 and 2024 were $1.91 billion and $2.64 billion, respectively.

Changes versus the prior comparable period

Common-stockholder net income increased 9% in Q2 and 20% in the first half; diluted Q2 EPS was unchanged, reflecting a larger weighted-average share count. First-half diluted EPS rose from $0.82 to $0.87.
The structured loan portfolio’s gross unpaid principal balance fell to $13.49 billion from $14.46 billion at year-end 2022, as first-half runoff exceeded originations. Q2 structured originations were $209.0 million versus $2.05 billion in Q2 2022; runoff was $685.2 million.
The portfolio’s weighted-average current pay rate increased to 8.76% from 8.17% at year-end. Management reported the weighted-average funding rate, including financing costs, rose to 7.25% from 6.50%.
The allowance for credit losses on loans and investments increased to $169.1 million from $132.6 million at year-end. Seven loans with aggregate net carrying value of $112.3 million were classified as non-performing, compared with four loans at $2.6 million at year-end.
The Agency servicing portfolio grew to $29.45 billion from $28.00 billion at year-end. Delinquent servicing loans (60 or more days past due) increased to $343.9 million from $38.7 million.
Cash and cash equivalents rose to $846.4 million from $534.4 million, while restricted cash fell to $396.9 million from $713.8 million. Total liabilities decreased to $13.00 billion from $13.97 billion.

Outlook, risks and unusual items

Management said higher rates were supporting net interest income because most structured loans are floating-rate and a larger portion of debt is fixed-rate. Its sensitivity analysis estimated that a 100-basis-point rate increase would add $21.8 million to annual net interest income before the separately discussed effect of cash, restricted cash and escrow balances.
Management also cautioned that higher rates, inflation, tighter credit and capital markets, bank-sector disruption and geopolitical uncertainty could pressure property values, borrower debt-service capacity, originations, funding access, liquidity and distributions. It noted that tighter markets could constrain Structured Business growth, while the Agency Business generally requires less capital.
Management reported approximately $1.00 billion of cash and $265 million of replenishable CLO cash availability at July 25, 2023, and said existing funding sources should meet anticipated needs. It also disclosed $1.86 billion of credit and repurchase debt subject to margin calls and $965.7 million of unfunded loan commitments at June 30.
Credit estimates reflect management’s forecast of higher rates, unemployment and inflation and continued pressure on real estate values. The filing reports impaired loans, increased non-performing balances and concentrated exposures: Texas and Florida represented 23% and 16% of the loan portfolio, respectively; multifamily represented about 90%.
Arbor unwound CLO 13 in June, repaying its remaining notes primarily through refinancing and recording a $1.2 million debt-extinguishment loss. It also repurchased 3.55 million common shares for $37.4 million during the first half and issued 7.54 million shares through its at-the-market program for net proceeds of $109.7 million.
The Extended Stay litigation was settled and discontinued with prejudice in June 2023; Arbor’s agreed contribution was up to $7.4 million and had been accrued at year-end 2022. The filing states there was no other material litigation and no material change to previously disclosed risk factors.
After quarter-end, the board declared a $0.43 per-share common dividend payable August 31, 2023. Management provided no specific earnings or full-year financial guidance in the supplied filing text.

Important facts for investors to verify

Whether increased credit-loss and loss-sharing provisions, non-performing loans and servicing delinquencies indicate broader deterioration in collateral or borrower performance.
The timing and refinancing capacity for the listed 2023–2024 debt maturities, including facilities with margin-call provisions, and the availability of CLO and other liquidity under stressed conditions.
Whether loan runoff continues to exceed Structured Business originations, and how portfolio yields and funding costs evolve as interest rates and credit conditions change.
The sustainability of distributable earnings and dividends: first-half diluted distributable earnings were $1.19 per share, a company-defined non-GAAP measure that is not a measure of operating cash flow or liquidity.
The assumptions underlying credit-loss reserves, collateral valuations and the significant fair-value estimates for loans, securities and mortgage servicing rights.
The terms, credit performance and governance of related-party loans and investments described in the filing, including transactions involving executives or their affiliates.