ARBOR REALTY TRUST INC annual report, FY2015

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Arbor Realty Trust, Inc. — FY 2015 Form 10-K

Business context and reporting period. This annual filing covers the year ended December 31, 2015; it is not a standalone fourth-quarter report. Arbor is an externally managed REIT focused on multifamily and commercial real estate finance, principally bridge loans, with mezzanine loans, junior participations, preferred equity and some owned properties. Its portfolio totaled $1.55 billion across 128 loans and investments at year-end, including 70.1% multifamily assets. The largest geographic exposure was New York at 33.9%.

Financial performance and condition

  • Revenue and earnings: Interest income was $106.8 million, essentially flat year over year; net interest income was $64.9 million, up 10%. Net income was $53.4 million, down 43%, and net income attributable to common stockholders was $45.9 million, down 47%. Diluted EPS was $0.90 versus $1.70 in 2014.
  • Underlying comparability: 2014 included a $58.1 million noncash net gain from the 450 West 33rd Street transaction. Excluding that gain, 2014 FFO was $34.0 million, or $0.68 per diluted share, versus 2015 FFO of $43.9 million, or $0.86 per diluted share. AFFO was $55.1 million, or $1.08 per diluted share, versus adjusted 2014 AFFO of $37.3 million, or $0.74 per diluted share. FFO and AFFO are non-GAAP measures and are not cash-flow or liquidity measures.
  • Yield, funding cost and leverage: Average core asset yield was 6.67%, compared with 6.47% in 2014; average cost of interest-bearing liabilities was 4.25%, versus 3.99%. Average leverage was 73.6% of assets, or 62.5% when junior subordinated notes were treated as equity. The filing’s portfolio yield and funding-cost measures use different calculations; they should not be read as directly interchangeable.
  • Credit quality: The allowance for loan losses was $86.8 million against nine impaired loans with $189.2 million carrying value before reserves, down from an allowance of $115.5 million. The company recorded $6.5 million of provisions and $2.0 million of recoveries, for a $4.5 million net provision. A fully reserved $32.0 million junior participation loan was charged off. Six land-development loans had $118.1 million carrying value and $49.1 million in cumulative reserves.
  • Cash flow and liquidity: Operating cash flow was $36.3 million; investing cash flow was $24.7 million; financing cash flow was $77.2 million. Cash and cash equivalents rose to $188.7 million from $50.4 million; restricted cash was $48.3 million. Total assets were $1.83 billion, total equity $565.1 million and balance-sheet debt $1.17 billion. The company reported $304.2 million available under credit facilities and repurchase agreements. Debt principal maturities included $150.0 million in 2016 and $365.1 million in 2017, including CLO obligations and other listed contractual items.
  • Dividends: Common dividends declared totaled $0.58 per share for 2015, compared with $0.52 in 2014. A $0.15-per-share fourth-quarter dividend was declared in February 2016.
  • Fourth-quarter results: Q4 2015 net income was $6.9 million and income attributable to common stockholders was $5.0 million, or $0.10 per share. Q4 2014 figures were $6.9 million, $5.0 million and $0.10 per share, respectively.

Material changes and unusual items

  • Originated 70 loans totaling $828.2 million; reported loan payoffs/paydowns exceeded originations, and the year-end portfolio was $1.55 billion versus $1.59 billion a year earlier.
  • Unwound the three legacy CDOs and CLO II, and completed CLO IV and CLO V, issuing a combined $486.8 million of investment-grade notes. CDO/CLO unwinds generated a $19.2 million deferred-income gain and a $4.6 million swap-termination loss, among related financing costs.
  • Sold four owned properties for $41.1 million and recognized $7.8 million in gains. Property operating income fell 15%, partly reflecting property sales; property operating expenses fell 17%.
  • Invested $19.3 million in a residential mortgage banking venture and related mortgage purchases; income from equity affiliates rose to $12.3 million.
  • Cash from operating activities increased $5.6 million year over year, mainly reflecting distributions from an equity investment. Investing cash flow fell from $145.0 million in 2014, when security and property sales contributed materially.

Outlook, risks and contingencies

  • Management said commercial real estate markets continued to improve, while noting uncertainty from global market instability and other economic and political factors. It expected existing funding sources to meet short- and long-term needs, but stated continued access to debt and equity markets is not assured. No specific earnings or dividend guidance was provided.
  • On February 25, 2016, Arbor agreed to acquire its Manager’s agency platform for $250 million, payable 50% in cash and 50% in 19.23 million operating-partnership units, subject to purchase-price adjustments. Up to $50 million of seller financing may be used. The transaction required government, GSE, stockholder and other approvals and was expected to close in Q3 2016, with no assurance of completion. Arbor also obtained a discretionary two-year option to acquire the existing management contract for $25 million.
  • Key risks include real estate collateral deterioration and borrower defaults; refinancing, funding and liquidity access; leverage and CLO cash-flow diversion if coverage or overcollateralization tests fail; interest-rate and hedge risk; loan extensions and repayments; and geographic, borrower and property-type concentrations. The company had $5.0 million posted as derivative collateral at year-end.
  • Debt facilities required minimum liquidity of $20 million and other financial tests; the company reported compliance at December 31, 2015. CLOs also passed their reported tests at year-end and the latest determination dates in early 2016.
  • The filing describes Extended Stay-related litigation seeking approximately $139 million in aggregate from director designees, with portions also sought from company affiliates. Arbor had not accrued a loss, stating it did not consider a loss probable and could not reasonably estimate an amount.
  • Related-party and governance risks are notable: the company depends on its external Manager, whose senior personnel and owners overlap with Arbor’s leadership and directors. The filing details loans and investments involving affiliated parties. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.

Important facts for investors to verify

  • Whether the $250 million agency-platform acquisition closed, its final consideration and any effect of issuing 19.23 million operating-partnership units.
  • Subsequent changes in the $86.8 million loan-loss allowance, especially the land-development exposures, collateral values and recoveries.
  • Refinancing or repayment of 2016–2017 maturities, available borrowing capacity, covenant compliance and CLO test headroom.
  • Portfolio performance and concentration, including New York exposure, borrower concentration and the 5.63% weighted-average pay rate.
  • Whether cash flows and recurring earnings support common dividends; distinguish reported earnings and FFO/AFFO from cash available for distribution.
  • Developments in the Extended Stay litigation and related-party transactions, including the Manager relationship and any management internalization decision.