Arbor Realty Trust Inc. - 10-Q Summary (Period Ended Sept 30, 2008)
Business Context and Reporting Period
Arbor Realty Trust, Inc. (Arbor) is a Maryland corporation organized as a Real Estate Investment Trust (REIT) that invests in a diversified portfolio of multi-family and commercial real estate-related assets, primarily bridge loans, mezzanine loans, and preferred equity. The company is externally managed by Arbor Commercial Mortgage, LLC (ACM). This report covers the quarterly period ended September 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2008 |
|---|---|---|
| Total Revenue | $52.9 million | $160.2 million |
| Net Income | $2.6 million | $27.0 million |
| Diluted EPS | $0.10 | $1.27 |
| Total Assets | $2.77 billion (as of Sept 30, 2008) | |
| Total Liabilities | $2.31 billion (as of Sept 30, 2008) | |
| Stockholders' Equity | $459.0 million (as of Sept 30, 2008) | |
| Cash and Cash Equivalents | $22.9 million (as of Sept 30, 2008) | |
| Restricted Cash | $68.7 million (as of Sept 30, 2008) | |
| Loans and Investments, Net | $2.41 billion (as of Sept 30, 2008) | |
| Dividends Declared (9 Months) | $1.86 per share |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 25% for the three months and 24% for the nine months compared to the prior year periods. Interest income dropped significantly due to lower yields on assets (average yield decreased from 9.27% to 7.82% for the quarter) and reduced equity kicker income.
- Net Income Drop: Net income fell 88% for the quarter and 61% for the nine months year-over-year. This was driven by a $12.7 million other-than-temporary impairment (OTTI) charge on available-for-sale securities and an $8.0 million provision for loan losses.
- Expense Reductions: Interest expense decreased 29% for the quarter and 21% for the nine months, primarily due to lower LIBOR rates and a reduction in the average cost of borrowings. Management fees decreased significantly due to lower profitability triggering a reduction in incentive compensation.
- Portfolio Composition: The loan and investment portfolio balance decreased slightly to $2.41 billion from $2.59 billion at year-end 2007. The company recorded $46.6 million in Real Estate Owned (REO) following a foreclosure on an office property.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- OTTI Charge: A $12.7 million charge was recorded for available-for-sale securities (CBRE Realty Finance, Inc. stock) deemed other-than-temporarily impaired due to market conditions.
- Loan Loss Provisions: An $8.0 million provision for loan losses was recorded for the nine months, relating to six impaired loans with an aggregate carrying value of $137.6 million.
- Equity Affiliate Losses: Losses from equity affiliates totaled $2.2 million for the nine months, contrasting with $29.2 million in income for the same period in 2007.
- Liquidity and Financing: The company faces challenges in the structured finance markets, specifically regarding Collateralized Debt Obligations (CDOs). Investor demand for CRE CDOs has been curtailed, potentially limiting the company's ability to utilize this financing source. The company has $198.3 million in available capacity across its debt facilities.
- Market Risks: Significant risks include disruptions in debt and secondary mortgage markets, reduced liquidity, and increased risk premiums. The company notes that a 1.0% decrease in LIBOR would increase annual net income by approximately $4.3 million, while a 1.0% increase would decrease it by $1.4 million, due to interest rate floors and hedging strategies.
- Management Commentary: Management believes existing sources of funds are adequate for short-term and long-term needs but acknowledges that the ability to meet long-term requirements is subject to obtaining additional debt and equity financing in a difficult market environment.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used to determine the $12.7 million other-than-temporary impairment on available-for-sale securities.
- Credit Quality: Review the specific details of the six impaired loans ($137.6 million aggregate carrying value) and the adequacy of the $6.5 million allowance for loan losses.
- CDO Market Access: Assess the company's ability to refinance or extend its CDO facilities given the stated disruption in investor demand for commercial real estate CDOs.
- REO Performance: Monitor the performance and exit strategy for the $46.6 million Real Estate Owned asset acquired via foreclosure.
- Dividend Coverage: Confirm that the $1.86 per share dividend declared for the nine months is sustainable given the significant decline in net income and Funds From Operations (FFO).