Arbor Realty Trust, Inc. — Q3 2014 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2014. Arbor is an externally managed REIT focused primarily on multifamily and commercial real estate bridge loans, mezzanine loans, participation interests, preferred equity, and owned real estate.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $29.7 million | $25.7 million | $80.1 million | $73.1 million |
| Net interest income | $17.3 million | $15.1 million | $45.9 million | $41.4 million |
| Total other revenue | $9.0 million | $7.3 million | $28.2 million | $26.4 million |
| Net income attributable to common stockholders | $63.4 million | $3.7 million | $80.7 million | $13.3 million |
| Diluted earnings per common share | $1.26 | $0.08 | $1.60 | $0.33 |
| Common dividends declared per share | $0.13 | $0.13 | $0.39 | $0.37 |
- One-time gain: Q3 included a $77.1 million gain from release of a guarantee related to the 450 West 33rd Street investment, offset by a $19.0 million prepaid incentive management fee: $58.1 million net. Management reported Q3 FFO of $65.5 million, or $1.30 per diluted share; excluding that net gain, FFO was $7.4 million, or $0.15 per diluted share. Nine-month FFO was $87.2 million, or $1.73 per diluted share; excluding the net gain, it was $29.1 million, or $0.58 per diluted share. FFO is a non-GAAP measure.
- Balance sheet at September 30: Total assets were $1.917 billion, liabilities $1.383 billion, and equity $534.2 million. Cash and cash equivalents were $72.9 million; restricted cash was $143.8 million. Net loans and investments were $1.527 billion, against an allowance for loan losses of $116.4 million.
- Portfolio and credit: Loan and investment unpaid principal was $1.656 billion across 143 positions; weighted-average pay rate was 5.41%. The allowance declined from $122.3 million at year-end 2013. Two loans totaling $40.3 million carrying value were classified non-performing; impaired loans had $116.4 million of reserves. Seven land-development loans had $114.3 million unpaid principal, including $45.3 million of cumulative reserves; accrual interest on certain impaired loans was suspended.
- Debt and liquidity: Debt-facility carrying value was $1.248 billion, including $371.7 million of CDOs, $545.8 million of CLOs, and $97.9 million of senior unsecured notes. The filing reported $178.7 million available under credit facilities. The $97.9 million notes carry a 7.375% coupon and mature in 2021. Aggregate contractual debt maturities were approximately $308.3 million in 2015 and $290.2 million in 2016. CDOs and CLOs are generally non-recourse and secured by their own collateral pools.
- Cash flow, nine months: Operating activities provided $24.8 million; investing activities provided $54.8 million; financing activities used $67.1 million. Cash increased $12.5 million to $72.9 million. Restricted cash is separately reported and is not generally freely available for corporate use.
- Other metrics: Q3 average yield on core interest-earning assets was 6.99%, versus 5.62% a year earlier; average cost of interest-bearing liabilities was 3.97%, versus 3.10%. GAAP book value per common share was $8.81 versus $7.53 at year-end 2013; adjusted book value was $9.14 versus $9.22.
Material changes versus the prior comparable period
- Q3 net interest income increased 15% year over year, as interest income rose 15%; higher asset yields and fee income more than offset lower average core interest-earning assets. Interest expense rose 16%, reflecting higher financing costs, including new unsecured notes and CDO runoff.
- Nine-month net interest income increased 11%. Net loan-loss provision fell to $0.6 million from $4.1 million, mainly reflecting $7.2 million in recoveries during 2014.
- Reported earnings increased sharply primarily because of the 450 West 33rd Street gain; without the related $58.1 million net gain, underlying reported FFO was substantially lower than headline results suggest.
- Debt mix shifted: CDO balances decreased $267.9 million as collateral loans ran off, while CLO debt increased $281.3 million following the third CLO issuance. Credit facilities and repurchase agreements declined $87.8 million.
- Arbor issued Series C preferred stock and senior unsecured notes, sold 1.0 million common shares through its ATM program, and paid $2.6 million to cancel 1.0 million warrants.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or origination guidance was provided. Management said it believed existing funding sources were adequate for short- and long-term needs, while noting long-term requirements depend on continued access to debt and equity financing.
- Management cited uncertainty in economic, real estate, and capital markets; interest-rate movements; collateral values and borrower credit; financing availability and cost; and the ability to invest cash and maintain portfolio quality. A downturn could raise delinquencies, modifications, losses, and pressure on distributions.
- All stated debt covenants and CDO/CLO overcollateralization and interest-coverage tests were in compliance at September 30 and the latest October 2014 determination dates. A future breach could divert vehicle cash flows away from Arbor; the company cautioned it might lack liquidity to cure a breach.
- A bankruptcy litigation trust’s amended complaint seeks $139.0 million in aggregate from company affiliates and director designees in litigation related to Extended Stay. Arbor said it would defend the claims and recorded no loss accrual because a loss was not considered probable or reasonably estimable.
- Related-party exposures merit attention: Arbor is managed by ACM, which is controlled largely by CEO Ivan Kaufman and affiliates; the filing also describes loans and investments involving entities affiliated with company officers. Discussions about a possible acquisition of ACM platforms and internalization resumed, but no transaction was assured and terms were unknown.
- Three multifamily properties with $26.4 million carrying value were classified as held for sale; one was sold in October 2014 for $11.5 million, with an approximately $0.5 million gain. The company also reported $6.2 million of unfunded loan commitments, matched by restricted cash for commitments financed through CDO/CLO vehicles.
Key facts for investors to verify
- How much recurring earnings and cash generation support the dividend after excluding the $58.1 million net 450 West 33rd Street gain?
- Whether portfolio credit quality, the $116.4 million loan-loss allowance, impaired land-development exposures, and borrower concentrations remain stable.
- How Arbor will refinance or repay 2015–2016 maturities and maintain access to funding, given facility covenants and the restricted nature of substantial cash balances.
- The status and potential financial impact of the $139.0 million Extended Stay litigation claims, and any outcome of renewed discussions with ACM concerning a possible transaction.
- Whether reported loan yields, funding costs, and asset payoffs support future net interest income and distributions as portfolio and financing mix change.