Arbor Realty Trust, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Arbor is a REIT with two businesses: a Structured Business investing in commercial real estate loans and related assets, and an Agency Business that originates, sells, and services multifamily loans through GSE, HUD, and conduit programs. The Agency Business generally retains servicing rights.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Interest income | $251.8 million | $156.2 million | +61% |
| Interest expense | $153.8 million | $90.1 million | +71% |
| Net interest income | $98.0 million | $66.1 million | +48% |
| Total other revenue | $233.1 million | $190.5 million | +22% |
| Net income | $148.1 million | $97.5 million | +52% |
| Net income attributable to common stockholders | $108.3 million | $65.8 million | +65% |
| Diluted earnings per common share | $1.50 | $1.12 | Up from $1.12 |
| FFO / diluted FFO per share | $143.7 million / $1.53 | $94.3 million / $1.17 | FFO +52% |
| Adjusted FFO / diluted AFFO per share | $113.1 million / $1.21 | $83.9 million / $1.04 | AFFO +35% |
Portfolio, earnings drivers, and margins. Structured loans and investments reached $3.28 billion unpaid principal balance (UPB), up 24% from $2.65 billion. The portfolio’s weighted-average pay rate was 7.02%, versus 6.28% at year-end 2017; 88% of the portfolio was floating-rate. For the year, average Structured Business asset yield was 6.97% and average funding cost was 5.20%, a 1.77 percentage-point spread before other costs. Agency originations were $5.12 billion and loan sales $4.92 billion; the sales margin was 1.42%, compared with 1.51%. Agency servicing UPB grew 15% to $18.60 billion. MSR income was $98.8 million and net servicing revenue was $46.0 million.
Balance sheet and liquidity. At December 31, 2018, total assets were $4.61 billion, total debt carrying value $3.31 billion, total equity $1.07 billion, cash and cash equivalents $160.1 million, and restricted cash $180.6 million. Loans and investments, net, were $3.20 billion; loans held for sale were $481.7 million; and MSRs were $273.8 million. Reported debt rose from $2.53 billion in 2017, reflecting portfolio growth and financing activity. Available capacity under the summarized debt facilities was $1.66 billion, subject to facility terms and covenants. Management said Agency adjusted net worth and operational liquidity exceeded requirements; $49 million of Agency restricted-liquidity and purchase/loss obligations was supported by letters of credit.
Cash flow. Operating activities used $37.7 million, primarily because Agency loan originations exceeded loan sales. Investing activities used $681.9 million, mainly from Structured loan funding net of repayments, loan reserves/holdbacks, and purchases of Freddie Mac SBL B-piece securities. Financing activities provided $816.5 million, led by debt issuance, facility activity, and equity proceeds. Cash, cash equivalents, and restricted cash increased $96.9 million to $340.7 million.
Material changes and notable items
- Net interest income increased with growth in average Structured assets and higher yields, while funding costs also rose as debt balances and LIBOR increased.
- Agency revenue benefited from higher MSR income and servicing revenue as commitment volume and the servicing portfolio expanded; loan-sale gains declined modestly despite higher sales volume.
- Loan-loss provision was $8.4 million, primarily reflecting a $12.3 million provision on six land-development loans. The allowance for loan losses ended at $71.1 million, up from $62.8 million.
- Six land-development loans with $121.4 million carrying value were extended to September 2019; cumulative loan-loss allowances against them were $61.4 million. They had no current pay rate, and accrual-rate interest was not being recognized because collection was considered doubtful.
- Arbor raised $546.5 million of capital, issued a $560 million CLO (including retained notes and equity), unwound CLO V, and repaid $50 million of related-party financing. It also issued $125 million of 5.625% senior notes and $264.5 million of 5.25% convertible notes, while redeeming or exchanging higher-cost debt. Total common shares issued and outstanding increased to 84.0 million from 61.7 million at year-end 2017.
- Common dividends declared totaled $1.13 per share, including a $0.15 special dividend paid partly in shares. The regular quarterly dividend was raised to $0.27 per share. The filing reports a subsequent February 2019 declaration of another $0.27 per share.
- A $10.2 million net litigation settlement related to a prior investment was recognized as a gain. A separate legacy Extended Stay-related case remained unresolved; no loss accrual was recorded because management considered a loss not probable and not reasonably estimable.
Outlook, risks, and contingencies
- Management described commercial real estate markets as strong, with rental growth showing signs of stabilizing. It said 2018 Federal Reserve rate increases had not significantly affected Arbor and did not then anticipate a significant decline in origination volume or profitability, while cautioning that future rate and market effects were uncertain. No earnings or revenue forecast was provided.
- FHFA set 2019 multifamily origination caps of $35 billion each for Fannie Mae and Freddie Mac, with specified exclusions and possible quarterly review. Reduced GSE activity could affect loan-sale gains, MSR creation, and servicing income.
- Key exposures include commercial property values and borrower repayment, credit losses, leverage and refinancing, funding availability and collateral calls, rising interest rates, LIBOR transition after 2021, and concentration in GSE/HUD programs. Fannie Mae DUS risk sharing creates contingent loss exposure; the allowance was $34.3 million, against $13.56 billion of serviced loans subject to risk sharing.
- Debt and CLO covenants can restrict cash distributions; all reported credit-facility covenants and CLO tests were in compliance at year-end, and CLO tests also passed at the January 2019 determination dates. Credit facilities and repurchase agreements had substantial 2019–2021 maturities, making renewals and refinancing important to monitor.
- Unfunded loan commitments were $130.9 million. The filing identifies $32.2 million of additional Fannie Mae restricted liquidity expected to be funded over 48 months, assuming no portfolio changes. No off-balance-sheet arrangements were reported.
- Related-party dealings include loans to entities with executive or affiliate interests and transactions involving ACM. The filing describes independent-director review procedures; investors should assess terms, approvals, and governance safeguards.
- CECL credit-loss accounting was expected to take effect for Arbor in 2020; management was evaluating its impact and noted it could increase recognized loan-loss estimates. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- How much of 2018 earnings and AFFO growth is recurring, versus MSR valuation/production income, the tax benefit from settling related-party financing, and the $10.2 million litigation gain.
- Performance, collateral valuations, extension terms, and recovery assumptions for the land-development loans and the adequacy of the $71.1 million loan-loss allowance.
- Debt maturities, refinancing progress, borrowing costs, covenant headroom, and the liquidity available after restricted cash and required Agency collateral.
- Fannie Mae and Freddie Mac production-cap effects, DUS loss-sharing exposure, and the sustainability and valuation sensitivity of the $18.60 billion servicing portfolio and $273.8 million MSR balance.
- Share dilution from public offerings, convertible debt, OP Units, and the stock-paid portion of the special dividend; compare per-share cash generation with the regular dividend.
- Developments in the Extended Stay-related litigation, related-party transactions and guarantees, the LIBOR-to-SOFR transition, and CECL implementation.