Arbor Realty Trust, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 13, 2015. Arbor is an externally managed REIT focused on multifamily and commercial real estate bridge and mezzanine loans, junior participations, preferred equity, and related investments. Figures below are in U.S. dollars.
Financial performance and position
| Metric | FY 2014 / year-end | Comparison |
|---|---|---|
| Interest income | $106.7 million | Up 8% from $99.0 million |
| Interest expense | $47.9 million | Up 14% from $42.1 million |
| Net interest income | $58.8 million | Up 3% from $57.0 million |
| Net income | $93.0 million | Versus $21.3 million |
| Net income attributable to common stockholders | $85.8 million; diluted EPS $1.70 | Versus $16.7 million; diluted EPS $0.39 |
| FFO / AFFO | $92.1 million / $95.4 million; diluted per share $1.83 / $1.89 | Excluding the 450 West 33rd Street non-cash net gain, FFO was $34.0 million ($0.68/share) and AFFO was $37.3 million ($0.74/share) |
| Cash from operating activities | $30.8 million | Up $8.3 million year over year |
| Loan and investment portfolio | $1.59 billion unpaid principal; $1.46 billion net carrying value | Net carrying value was $1.52 billion at year-end 2013 |
| Total assets / total debt | $1.88 billion / $1.26 billion | Assets were broadly unchanged; debt declined from $1.28 billion |
| Total equity | $535.5 million; GAAP common book value $8.84/share | Total equity was $437.6 million; common book value $7.53/share |
| Cash / restricted cash | $50.4 million / $218.1 million | Restricted cash rose $163.1 million, primarily from loan payoff timing in CDOs and CLOs |
| Common dividend | $0.52 per share declared for 2014 | $0.50 in 2013; Q4 dividend was $0.13/share |
Core asset yield averaged 6.47% and average funding cost 3.99%, a 2.48 percentage-point difference; the corresponding 2013 rates were 5.65% and 3.22%. Average borrowings were $1.20 billion, and average leverage was 73.0% of average assets, or 62.4% when junior subordinated notes were treated as equity. Management reported 2014 FFO return on average net investment of 13.2%.
Cash flows were $145.0 million provided by investing activities and $185.7 million used in financing activities. Payoffs and paydowns exceeded originations, while financing cash outflows included debt repayments and $33.1 million of common and preferred distributions. At year-end, debt facilities had $69.6 million of stated availability; the company reported compliance with debt covenants.
Material changes versus the prior year
- Common-stockholder net income increased substantially, but the result was dominated by a $58.1 million non-cash net gain tied to termination of the 450 West 33rd Street debt guarantee. The transaction recognized a previously deferred $77.1 million gain and a $19.0 million prepaid incentive management fee. Excluding this non-cash net gain, basic and diluted EPS would each have been $0.55.
- Net interest income rose only 3%: higher core asset yields and fee income were partly offset by a smaller average core portfolio and higher funding costs. Average interest-bearing liabilities fell 8%, but their average cost increased from 3.22% to 3.99%.
- New loan originations increased to $900.7 million from $591.5 million. Payoffs and paydowns were $972.3 million, leaving the portfolio smaller; multifamily loans represented about 73% of unpaid principal.
- The allowance for loan losses declined to $115.5 million from $122.3 million. The company recorded $9.0 million of new provisions, $9.3 million of reserve recoveries, and $6.5 million of charge-offs, producing a $0.3 million net recovery in the income statement.
- Arbor issued $97.9 million principal amount of 7.375% senior unsecured notes due 2021, raised $21.6 million net from Series C preferred stock and $6.5 million net from ATM common-stock sales, and completed a $375 million CLO transaction that issued $281.3 million of investment-grade notes. It redeemed $87.5 million of CLO I notes and sold most RMBS securities.
Outlook, risks, contingencies, and unusual items
- Management said existing funding sources were expected to meet short- and long-term liquidity needs, while noting continued dependence on debt and equity markets and lender willingness. The filing provides no specific earnings or origination guidance.
- Subsequent to year-end, Arbor unwound CDO I and CDO II, redeeming $167.9 million of notes using a new $150 million warehouse facility, existing facilities, and CDO cash. It reported approximately $30 million of cash equity released, expected a $4.3 million loss on terminated swaps, and recorded a first-quarter 2015 gain from reducing estimated interest by $11 million.
- Interest-rate, refinancing, collateral-value, credit, and funding risks are material. A significant portion of assets and borrowings is variable-rate and LIBOR-based; the company had posted $9.6 million of cash collateral related to derivatives at year-end. CDO/CLO covenant breaches can redirect cash flows away from Arbor, although the vehicles were in compliance at year-end and on the latest January 2015 determination dates.
- Credit exposure merits attention: 10 impaired loans had $221.6 million aggregate carrying value before $115.5 million of reserves. Three loans were reported as non-performing, with approximately $7.0 million net carrying value. Six land-development loans had $117.0 million unpaid principal; four accrued interest at a 9.60% average rate, but accrual recognition was suspended because collection was considered doubtful, and related reserves totaled $46.5 million.
- Portfolio concentration includes multifamily at 72.9% of unpaid principal, New York at 27.9%, and 31 loans to five borrowers representing approximately 23% of total assets. Management also identified a higher-risk loan pool of $189.4 million with a 94% weighted average last-dollar LTV.
- An Extended Stay-related lawsuit seeks $139 million in aggregate from director designees and company affiliates. Arbor intends to defend the claims and recorded no loss accrual, stating a loss was not considered probable and could not be reasonably estimated. The filing says there was no other material litigation known.
- Related-party, external-manager, and governance conflicts are significant: the company relies on its Manager, whose chief executive also leads Arbor and holds substantial influence. Related-party lending and investment transactions are disclosed; independent-director approval policies apply to specified conflicts. The company also disclosed a $10 million management-agreement termination fee.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2014.
Important facts for investors to verify
- Reconcile reported GAAP earnings and FFO/AFFO to recurring operating performance, especially the $58.1 million non-cash transaction gain and related-party fee.
- Review reserve adequacy, collateral valuations, recoveries, non-performing loans, and the land-development exposures, including any subsequent changes in borrower performance.
- Check liquidity after the 2015 CDO unwinds, warehouse borrowing, restricted-cash release, derivative termination costs, and the near-term maturities and renewals of financing facilities.
- Assess the sustainability of the $0.13 quarterly common dividend against recurring cash generation, debt covenants, capital needs, and REIT distribution requirements.
- Examine loan and borrower concentrations, LTV assumptions, interest-rate hedging and collateral-call exposure, and the status and potential costs of the Extended Stay litigation.
- Review related-party transactions, management fees and incentives, and any developments in the potential transaction with the Manager; the filing does not establish that such a transaction will occur.