Arbor Realty Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results. Arbor operates a Structured Business investing in commercial real estate loans and related assets, and an Agency Business originating, selling, and servicing multifamily loans.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $59.3m | $34.5m | $110.9m | $68.0m |
| Net interest income | $21.4m | $14.1m | $39.6m | $28.1m |
| Total other revenue | $46.9m | $44.7m | $100.1m | $91.1m |
| Net income | $24.6m | $18.3m | $61.7m | $42.3m |
| Net income attributable to common stockholders | $17.2m | $11.9m | $43.4m | $27.5m |
| Diluted earnings per common share | $0.25 | $0.21 | $0.66 | $0.50 |
| Dividends declared per common share | $0.25 | $0.18 | $0.46 | $0.35 |
- At June 30, total assets were $4.20bn, up from $3.63bn at year-end 2017; total equity was $943.5m. Loans and investments, net, were $3.06bn, versus $2.58bn.
- Total debt carrying value was approximately $3.07bn, compared with $2.53bn at December 31, 2017. Cash and cash equivalents were $107.0m and restricted cash was $173.7m.
- For the first six months, operating cash flow was $18.6m, investing cash outflow was $518.1m, and financing cash inflow was $536.3m. Cash, cash equivalents, and restricted cash totaled $280.7m at period-end.
- Structured portfolio current pay rate was 6.76%; including certain fees and costs, the rate was 7.40%. Funding cost including financing costs was 4.93%. Structured portfolio leverage was 71%.
- Supplemental diluted AFFO per share was $0.29 for Q2, versus $0.22 a year earlier; six-month AFFO per share was $0.55 in both periods. The company cautions that FFO and AFFO are non-GAAP measures and are not measures of liquidity or cash available for distributions.
Material changes versus comparable periods
- Q2 common-stockholder income increased 44%; six-month common-stockholder income increased 57%. Management attributed higher interest income mainly to growth in Structured Business earning assets and higher yields, including the effect of higher LIBOR.
- Interest expense rose faster than interest income: 86% in Q2 and 79% for the six months, reflecting increased borrowings, higher funding costs, and accelerated financing-cost charges associated with debt transactions.
- Agency loan sales declined 15% in Q2 and 19% for the six months. Q2 gain-on-sale revenue fell 17%; servicing revenue rose 64% in Q2 and 79% year to date, helped by servicing-portfolio growth to $17.11bn from $15.02bn a year earlier.
- Structured originations exceeded runoff: the portfolio grew 13% in Q2 to $3.13bn. Six-month originations were $921.1m, compared with $583.9m.
- Employee compensation and benefits increased 23% in Q2 and 35% year to date, reflecting costs of internalized management and business growth. Related-party management fees were no longer recorded following internalization in 2017.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said it did not anticipate a significant decline in origination volume or profitability from interest-rate increases to date, but noted uncertainty about future rate moves and their effects.
- Key exposures include access to capital and financing, interest-rate changes, collateral values and borrower credit quality, competition, and possible tighter GSE origination limits. Fannie Mae and Freddie Mac’s 2018 multifamily caps were set at $35bn each; reduced GSE production could hurt origination gains, MSR income, and servicing revenue.
- Six impaired land-development loans totaling $120.9m were due in September 2018, had no current pay rate, and carried cumulative loan-loss allowances of $50.7m. Management cited construction financing, cost, project demand, and litigation risks. Eight higher-risk loans and investments had a pre-reserve carrying value of $128.2m.
- The company recorded a $2.0m impairment on a vacant office building. A $31.6m settlement of a non-performing hotel preferred-equity investment produced a $2.5m reserve recovery; a further $0.9m recovery related to a written-off office participation.
- Fannie Mae DUS loss-sharing allowance was $31.4m; the stated maximum quantifiable guarantee liability was $2.30bn, which the company says is not representative of expected loss. It also expected to fund $28.4m of additional restricted liquidity over the next 48 months, assuming no portfolio runoff or defaults.
- Extended Stay-related litigation seeks approximately $139m in aggregate from multiple defendants, including affiliates. Arbor made no loss accrual, stating a loss was not considered probable and could not be reasonably estimated. The filing also describes related-party transactions and Lexford “bad boy” guarantees; review their terms and potential exposure.
- Subsequent to quarter-end, Arbor issued $245m of 5.25% convertible notes and used proceeds in exchanges of substantially all of its 6.50% and 5.375% convertible notes for cash and 6.8m common shares. It also received approximately $11m from a litigation settlement, to be recognized in Q3. The board declared a $0.25 common dividend payable August 31, 2018.
- All reported credit-facility and CLO covenants were in compliance at June 30; CLO tests also passed at the July determination dates. The company reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether portfolio growth and higher asset yields can continue to outpace rising funding costs and preserve net interest income.
- Near-term refinancing and maturity needs, including $441.6m of debt maturities for the remainder of 2018 and the Agency facility temporarily extended to August 2018 while amendments were under negotiation.
- Performance, collateral values, and resolution of the September 2018 land-development loans, alongside reserve adequacy and higher-risk portfolio trends.
- Cash available for corporate needs after restricted-cash requirements, future DUS collateral funding, dividends, and unfunded loan commitments of $73.3m.
- Effects of the post-quarter convertible-note exchanges and related share issuance on debt costs, dilution, and per-share results.