Arbor Realty Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also presents fourth-quarter results. Arbor is an externally managed mortgage REIT focused primarily on multifamily and commercial real estate loans and investments.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $99.0 million | $80.0 million |
| Interest expense | $42.1 million | $40.9 million |
| Net interest income | $57.0 million | $39.1 million |
| Income from continuing operations | $21.7 million | $16.7 million |
| Net income attributable to common stockholders | $16.7 million; $0.39 diluted EPS | $21.5 million; $0.79 diluted EPS |
| Funds from operations (FFO), diluted | $25.0 million; $0.58 per share | $23.5 million; $0.87 per share |
| Operating cash flow | $22.5 million | $20.2 million |
| Total assets | $1.877 billion | $1.702 billion |
| Total debt | $1.279 billion | $1.295 billion |
| Cash and cash equivalents | $60.4 million | $29.2 million |
- Average core interest-earning asset yield rose to 5.65% from 4.97%; average funding cost was 3.22% versus 3.23%. Management reported average leverage of 74.6%, or 64.5% when junior subordinated notes were treated as equity.
- At year-end, loans and investments totaled $1.66 billion unpaid principal across 144 positions; net carrying value was $1.524 billion after $122.3 million of allowance for loan losses. The allowance covered 15 loans with $207.5 million aggregate pre-reserve carrying value.
- Restricted cash was $55.0 million. Repurchase agreements and credit facilities had $85.8 million of reported availability. Cash flows were $22.5 million from operations, $(200.1) million from investing, and $208.8 million from financing.
- Fourth-quarter net income was $4.8 million and net income attributable to common stockholders was $3.4 million, or $0.07 per share, versus a $0.2 million net loss and $0.01 loss per share in fourth-quarter 2012.
Changes versus the prior year
- Interest income increased 24% and net interest income increased 46%, reflecting larger average core earning assets and improved yields; interest expense rose 3%.
- Common-stockholder net income fell 22% despite higher continuing-operations income. Preferred dividends of $4.5 million and a lower gain on debt extinguishment ($4.9 million versus $30.5 million) contributed to the decline.
- Net loan-loss provision fell to $4.3 million from $22.9 million. The year-end allowance declined by $39.4 million, primarily reflecting $43.7 million of charge-offs and $2.2 million of reserve recoveries.
- The portfolio grew: net loans and investments rose to $1.524 billion from $1.326 billion, while total assets increased 10%. Common shares outstanding grew materially following equity offerings.
- Arbor originated 67 loans totaling $591.5 million, compared with $274.5 million of originations reported for 2012. It raised about $197.2 million through common and preferred offerings and completed a second CLO, issuing $177 million of notes.
Outlook, risks and unusual items
- Management said commercial real estate markets and access to capital improved in 2013, but recovery remained uncertain. It expected to continue pursuing equity, debt and securitization financing; no specific earnings or growth guidance was provided.
- Management considered existing funding sources adequate for current and anticipated liquidity needs, while noting that long-term requirements depend on continued access to debt and equity financing. About $531.4 million of debt maturities were identified for 2014; warehouse facilities and other borrowings carry covenants and refinancing risks.
- All reported financial covenants were met at year-end, and all CDO/CLO overcollateralization and interest-coverage tests passed at the January 2014 determination date. A breach could divert securitization cash flows from Arbor and constrain liquidity.
- Credit risks include subordinated and preferred-equity exposures, transitional properties and land-development loans. Five land-development loans had $111.3 million unpaid principal, no current pay rate, and $43.7 million cumulative reserves; interest accrual had been suspended. New York represented 35.9% of portfolio unpaid principal, and five borrowers accounted for about 30% of total assets. One borrower group generated approximately 11% of 2013 revenue.
- Interest-rate swaps required $14.2 million of posted cash collateral at year-end; further adverse market-value movements could require additional cash. The filing estimates that a 0.25% LIBOR increase would reduce annual net income and cash flows by approximately $0.2 million and $0.4 million, respectively, assuming balances stayed unchanged.
- An amended Extended Stay litigation complaint seeks $139 million in aggregate from director designees and company affiliates. Arbor is contesting the claims and recorded no accrual, stating a loss was not considered probable or reasonably estimable.
- A special committee was evaluating a possible transaction with ACM involving acquisition of its Fannie Mae, DUS, FHA and CMBS platforms and internalization of Arbor’s management. Outcome, terms and timing were uncertain; approximately $1.4 million in advisory fees had been incurred. ACM-related transactions and overlapping leadership present conflicts of interest.
- Arbor reclassified $34.0 million of RMBS from held-to-maturity to available-for-sale in fourth-quarter 2013 as it planned to redeploy capital to lending; it sold most of the RMBS in early 2014. A $1.0 million real-estate impairment was recorded, and discontinued operations reported a $0.4 million loss.
- Common dividends declared for 2013 totaled $0.50 per share; the board declared a $0.13 fourth-quarter dividend in February 2014. The company stated it was compliant with REIT requirements. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Review credit quality behind the $122.3 million allowance, charge-offs and the $111.3 million land-development exposure, including collateral values and maturity/refinancing plans.
- Assess the 2014 maturity schedule, renewal prospects for short-term facilities, covenant headroom and the amount of cash that is restricted or pledged.
- Reconcile improved net interest income and FFO with lower diluted per-share results, preferred dividends and the substantial increase in common shares outstanding.
- Monitor CDO/CLO test cushions, swap collateral requirements and the implications of further interest-rate or property-value changes.
- Track the Extended Stay litigation and the potential ACM transaction, including related-party safeguards, costs, financing and possible dilution.