Arbor Realty Trust, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Arbor is a commercial real estate lender and REIT, operating through Structured Loan Origination and Investment and Agency Loan Origination and Servicing businesses. Amounts below are rounded; financial statement amounts are in U.S. dollars.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Change / context |
|---|---|---|---|
| Interest income | $201.3 million | $105.1 million | Up 91%, mainly reflecting growth in the Structured portfolio. |
| Interest expense | $107.1 million | $46.4 million | Up 131%, from higher borrowing balances and rates. |
| Net interest income | $94.3 million | $58.8 million | Up 60%. |
| Total other revenue | $50.4 million | $81.2 million | Down 38%; lower loan-sale and MSR income outweighed higher servicing revenue and derivative gains. |
| Net income | $88.1 million | $84.3 million | Up 5%. |
| Net income attributable to common stockholders | $69.9 million | $69.1 million | Up 1%. |
| Diluted EPS | $0.41 | $0.51 | Down 20%; the 2022 share count was higher, including the effect of convertible-note dilution under newly adopted accounting guidance. |
| Distributable earnings per diluted share | $0.52 | $0.45 | Non-GAAP measure; company-defined and not equivalent to cash flow. |
| Common dividend declared per share | $0.38 | $0.34 | Quarterly dividend subsequently raised to $0.39, declared July 27, 2022. |
For the six months, net interest income rose to $178.4 million from $107.7 million, while common-stockholder net income declined to $134.0 million from $138.6 million and diluted EPS fell to $0.82 from $1.06. Distributable earnings per diluted share increased to $1.06 from $0.97.
Portfolio and funding: Structured loans and investments had $15.03 billion in unpaid principal at June 30, up from $12.16 billion at year-end and 6% during Q2. The portfolio’s weighted-average current pay rate was 5.49%, versus 4.26% at December 31; weighted-average funding cost was 3.75% excluding financing costs and 4.00% including them, versus 2.33% and 2.61%, respectively. The Agency servicing portfolio was $26.77 billion, broadly flat since year-end.
Balance sheet and liquidity: Total assets were $17.58 billion and total equity $2.91 billion. Cash and cash equivalents were $342.0 million; restricted cash was $788.0 million, bringing cash and restricted cash to $1.13 billion. Management reported approximately $1.00 billion in cash and available liquidity. Debt obligations totaled $14.28 billion at principal amount, including $8.01 billion of CLO notes, $4.56 billion of credit and repurchase facilities, and unsecured and subordinated debt. Structured Business leverage through credit and repurchase facilities was 77% of the financed portfolio.
Cash flow, six months: Operating activities provided $764.5 million; investing activities used $2.84 billion, largely reflecting Structured loan funding; financing activities provided $2.32 billion, primarily from CLO issuance and equity proceeds. Cash, cash equivalents and restricted cash increased $238.7 million to $1.13 billion. The filing’s MD&A gives a different operating cash flow figure ($780.7 million); investors should reconcile this difference to the cash flow statement.
Material changes versus comparable periods
- Structured Business growth drove substantially higher interest income and net interest income, but interest expense also increased sharply as debt balances and benchmark rates rose.
- Q2 Agency loan sales were down 30% year over year and sales margin fell from 2.76% to 1.60%; no Private Label securitization occurred in Q2 2022. MSR income declined 33%, while servicing revenue increased 35%, primarily from prepayment penalties.
- Six-month Agency sales margin decreased from 2.10% to 1.35%, and loan-sale volume fell 21%. MSR income declined 48% over the six-month comparison.
- The allowance for credit losses on loans and investments increased to $121.3 million from $113.2 million at year-end. The company cited portfolio growth, rising rates, inflation and higher unemployment forecasts, partly offset by property values and other market factors.
- Common shares outstanding increased to 168.5 million from 151.4 million at year-end, reflecting equity issuance. The company raised $268.1 million net from common stock sales and $77.1 million net from Series F preferred issuance in the first half.
Outlook, risks and unusual items
- Outlook: No specific earnings or financial guidance was provided. Management expected interest rates to continue rising during the remainder of 2022 and said higher rates could benefit net interest income because most Structured loans float while a greater portion of debt is fixed-rate. The filing’s sensitivity analysis estimated a $9.1 million increase in 12-month net interest income for a 50-basis-point rate increase and $19.9 million for 100 basis points, before certain other balance effects.
- Countervailing rate and market risks: Higher rates may reduce property values, constrain borrower debt-service capacity, weaken loan originations and increase defaults or credit losses. Capital-market disruption could limit Structured Business growth or increase funding costs. A 100-basis-point increase in MSR discount rates would reduce estimated MSR fair value by $16.8 million.
- Credit and concentration: Four loans with net carrying value of $20.1 million were classified as non-performing, versus three loans at year-end. Five borrowers accounted for 11% of total assets; Texas and Florida represented 20% and 13% of the loan and investment portfolio. Unfunded loan commitments were $1.22 billion, up from $975.2 million.
- Debt and covenant exposure: CLOs and unsecured debt comprised most structured debt without mark-to-market provisions; credit and repurchase facilities remain subject to collateral and, in some cases, margin-call provisions. The company reported compliance with financial covenants and all CLO coverage tests at June 30 and the latest July determination dates. A breach could divert CLO cash flows to debt repayment and restrict residual distributions.
- Unusual items: The company sold a $110.5 million land-development loan position for $102.2 million, recording a $9.2 million loss and releasing $66.3 million of capital; up to $2.8 million may be recoverable depending on future performance. It also recorded $4.1 million of impairment on certain loans held for sale and a $2.0 million Q2 unrealized impairment on bridge loans sold in July. In July, four additional bridge loans with $296.9 million aggregate UPB were sold at par less fees and costs.
- Commitments and contingencies: Fannie Mae DUS risk-sharing obligations had a maximum quantifiable liability of $3.47 billion, which the company cautions is not an estimate of likely loss. It expects to fund an additional $37.7 million of restricted liquidity over 48 months, assuming no portfolio changes. A long-running Extended Stay-related lawsuit remains pending; the company recorded no loss accrual, stating a loss was not probable and not reasonably estimable. No other material litigation was reported.
- Related parties: The filing describes multiple loans, investments and business relationships involving affiliates, executives, the CEO’s family and entities associated with them. It also reports $0.7 million reimbursed for executive aircraft use in the first half of 2022.
- Accounting and controls: Adoption of ASU 2020-06 increased the convertible debt carrying value and changed diluted EPS calculations; management estimated a $0.02 per-share reduction to Q2 and six-month diluted EPS. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $764.5 million operating cash flow in the cash flow statement with the $780.7 million cited in MD&A, and distinguish unrestricted cash from restricted CLO and other balances.
- Assess whether the rapid Structured portfolio and debt growth, floating-rate exposure, funding costs and $1.22 billion of unfunded commitments remain manageable under higher rates and weaker real estate conditions.
- Track credit migration, non-performing loans, land-development exposures, allowance adequacy and the concentration of borrowers and geographic markets.
- Monitor Agency origination and securitization volumes, sales margins, MSR valuations, prepayment income and GSE program requirements.
- Review upcoming debt maturities, facility renewals and margin-call terms, CLO covenant headroom, and the company’s capacity to sustain distributions while meeting REIT and liquidity requirements.
- Evaluate the potential effects of the Extended Stay litigation and the disclosed related-party arrangements; the filing does not quantify a probable litigation loss.