Business context and reporting period
Arbor Realty Trust, Inc. is an externally managed REIT investing primarily in multifamily and commercial real estate loans and related investments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $26.0 million | $29.7 million | $79.6 million | $80.1 million |
| Net interest income | $14.1 million | $17.3 million | $50.1 million | $45.9 million |
| Net income | $17.2 million | $65.3 million | $46.5 million | $86.1 million |
| Net income attributable to common stockholders | $15.3 million | $63.4 million | $40.9 million | $80.7 million |
| Diluted EPS | $0.30 | $1.26 | $0.80 | $1.60 |
| Operating cash flow | Not separately reported quarterly | $35.6 million | $24.8 million |
- At September 30, cash and cash equivalents were $115.6 million; restricted cash was $58.8 million. Total assets were $1.85 billion, total liabilities $1.28 billion, and total equity $565.7 million.
- Loans and investments were $1.60 billion unpaid principal balance and $1.51 billion net carrying value, after $83.4 million in loan-loss allowance. Portfolio weighted-average current pay rate was 5.67%; weighted-average funding cost including financing costs was 3.94%.
- Reported debt included $767.9 million of CLOs, $122.5 million of credit facilities and repurchase agreements, $160.3 million of junior subordinated notes, and $97.9 million of senior unsecured notes. The filing reported $344.0 million available under credit facilities and repurchase agreements. The company reported compliance with its financial covenants.
- Nine-month operating, investing, and financing cash flows were $35.6 million provided, $31.3 million used, and $60.9 million provided, respectively. Cash increased $65.2 million from year-end 2014.
- Common dividends declared were $0.43 per share for the first nine months; a further $0.15 dividend was declared in November 2015.
Material changes versus prior comparable periods
- Q3 net income attributable to common stockholders fell 76% year over year, while nine-month net income fell 49%. Comparisons are heavily affected by 2014 gains: the prior-year periods included a $77.1 million deferred gain related to the 450 West 33rd Street investment and, for nine months, an additional $7.9 million equity-interest sale gain, partly offset by a $19.0 million incentive management fee.
- Q3 2015 included an $8.2 million gain from accelerating previously deferred income on the unwind of CDO III, a $0.3 million swap-termination loss, and $6.4 million income from equity affiliates. Nine-month 2015 results included $19.2 million of deferred-income gain and $4.6 million of swap-termination losses.
- Q3 net interest income declined 18%, mainly reflecting lower average core interest-earning assets and yield. Nine-month net interest income increased 9%, supported by $7.9 million of net interest income from a defaulted first mortgage that was acquired and repaid during 2015; interest expense also rose 10%.
- The company issued CLO IV and CLO V notes totaling about $486.8 million, unwound all three legacy CDOs, and unwound CLO II. CLO liabilities increased $309.6 million from year-end while CDO liabilities were eliminated.
- Portfolio originations exceeded repayments and other reductions by $11.9 million. The allowance declined from $115.5 million at year-end, primarily after a $32.0 million charge-off of a fully reserved junior participation loan. Higher-risk loans totaled approximately $151.4 million before reserves, down from $189.4 million.
Outlook, risks, contingencies and unusual items
- No earnings or operating guidance is provided. Management said existing funding sources should meet short- and long-term liquidity needs, while noting long-term requirements depend on access to additional debt and equity financing.
- Management cited real estate values, borrower credit quality, capital-market access and financing costs as key uncertainties. A sustained downturn could increase delinquencies, modifications, foreclosures and losses, and reduce margins, originations, securitization capacity and distributions.
- CLO cash-flow payments depend on overcollateralization and interest-coverage tests. CLOs passed the reported tests in October 2015, but a breach could divert cash to debt repayment and restrict residual distributions; the company cautioned it might lack liquidity to cure a breach.
- Credit exposures include six impaired land-development loans with $116.4 million carrying value and $47.8 million cumulative reserves; interest accrual on these loans was suspended because collection was considered doubtful. Three loans totaling $22.9 million net carrying value were classified as non-performing.
- Two hotel properties classified as held for sale were sold after quarter-end; management expected combined fourth-quarter gains of approximately $3.6 million. An office building was acquired by deed in lieu of foreclosure, with purchase accounting still preliminary.
- Extended Stay-related litigation seeks approximately $139 million in aggregate from multiple defendants, including affiliates. The company made no loss accrual, stating a loss was not considered probable and could not be reasonably estimated.
- Related-party matters warrant attention: the Manager is controlled by affiliates of the chairman and CEO, and the company has outstanding loans and investments involving related parties. Discussions continued on a possible acquisition of the Manager’s lending platforms and management internalization, but no transaction was assured.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring, excluding deferred-gain releases, portfolio distributions, and the one-time first-mortgage payoff income.
- Current performance, collateral values, reserve adequacy and recovery prospects for impaired loans, especially the land-development exposures and the charged-off hotel participation.
- Available liquidity after restricted cash, unfunded loan commitments of $13.9 million, debt maturities, and any requirements to support or cure CLO covenant breaches.
- Terms and economic effect of CLO and warehouse financing, including refinancing availability, interest-rate exposure and potential cash-flow diversion.
- Developments in the Extended Stay litigation, the proposed Manager transaction, and related-party lending and management arrangements.