Business context and reporting period
Arbor Realty Trust, Inc. is an externally managed REIT investing primarily in multifamily and commercial real estate loans and related investments, with additional property operations. This unaudited Form 10-Q covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise stated.
Key financial metrics
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior period |
|---|---|---|
| Total revenue (interest income plus other revenue) | $35.7 million | $35.0 million |
| Net interest income | $13.3 million | $14.3 million |
| Net income | $16.9 million; $15.0 million attributable to common shareholders | $7.5 million; $5.9 million attributable to common shareholders |
| Diluted EPS | $0.30 | $0.12 |
| Operating cash flow | $2.3 million | $4.6 million |
| Cash and cash equivalents | $105.4 million | $50.4 million at December 31, 2014 |
| Total assets / liabilities / equity | $1.902 billion / $1.351 billion / $550.9 million | $1.880 billion / $1.345 billion / $535.5 million at December 31, 2014 |
| Loan and investment portfolio | $1.739 billion unpaid principal balance; $1.611 billion net carrying value | $1.587 billion unpaid principal balance; $1.459 billion net carrying value at December 31, 2014 |
Credit facilities and repurchase agreements totaled $398.0 million, with $114.0 million of reported availability. CLO debt was $500.3 million, CDO debt $87.7 million, senior unsecured notes $97.9 million, junior subordinated notes $160.0 million, and mortgage debt on owned real estate $27.2 million. The filing reports $26.8 million of restricted cash, which is not generally available for corporate purposes. The allowance for loan losses was $116.5 million; Q1 net provision was $1.0 million.
Portfolio weighted-average pay rate was 5.47%; including specified fees and costs, the reported current portfolio rate was 6.07%. Average core asset yield was 6.71%, while average financing cost on interest-bearing liabilities was 4.71%. Common dividends declared were $0.13 per share for Q1.
Material changes versus the prior comparable period
- Net income rose 126% and common EPS increased from $0.12 to $0.30, but results included significant nonrecurring gains and transaction effects. The $11.0 million gain on acceleration of deferred income, $4.3 million swap-termination loss, $4.0 million real estate sale gain, and $3.1 million equity-affiliate income materially affected results. Before these items, income was $3.1 million versus $7.4 million in Q1 2014.
- Interest income increased 9%, but interest expense rose 31%, reducing net interest income 7%. Management attributed higher expense in part to accelerated financing costs from debt-vehicle unwinds, 2014 unsecured-note issuance, and higher costs as CDO collateral ran off.
- The company unwound CDO I, CDO II, and CLO II, redeeming $344.9 million of notes, and completed CLO IV, issuing $219.0 million of notes. Credit facilities and repurchase agreements increased $217.6 million from year-end, while CDO debt decreased $243.7 million.
- Loan originations and acquisitions exceeded repayments; the portfolio’s unpaid principal balance increased about $151.5 million from year-end. Two real estate properties were sold for $18.8 million, producing a $4.0 million gain.
- Operating cash flow declined to $2.3 million. Investing used $148.7 million, chiefly reflecting loan funding and equity-affiliate investments; financing provided $201.5 million.
Outlook, risks, contingencies, and unusual items
No quantified earnings or portfolio guidance is provided. Management said existing funding sources should meet near-term and long-term liquidity needs, while noting that long-term requirements depend on continued access to debt and equity financing. The company expects approximately $6.5 million of income in Q2 2015 after a $116.0 million defaulted first mortgage acquired in Q1 was paid off in April; the related $87.0 million warehouse facility was also repaid.
Management cited risks from economic and commercial real estate weakness, borrower credit deterioration and collateral values, interest-rate movements, financing availability and cost, competition, and the ability to invest available cash. A $139.0 million aggregate claim is sought in litigation relating to Extended Stay; the company has made no loss accrual, stating a loss was not considered probable and could not be reasonably estimated. The filing also describes related-party transactions and potential conflicts involving the external manager and company officers.
All reported debt covenants were in compliance at March 31 and on the latest April determination dates. A covenant breach could divert CLO/CDO cash flows away from the company; management cautioned it might lack liquidity to cure a breach. Unfunded loan commitments were $18.2 million. The board declared a subsequent common dividend of $0.15 per share, payable June 1, 2015, up from $0.13. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the reported earnings increase is repeatable, given the debt-unwind gain, property-sale gain, swap loss, and new affiliate income?
- Portfolio credit quality and collateral recovery assumptions, including the $116.5 million allowance, $232.4 million of impaired-loan UPB, and higher-risk exposures.
- Availability and terms of financing, debt maturities, covenant headroom, and the effect of restricted cash on usable liquidity.
- Whether the April payoff and expected $6.5 million Q2 income were realized as anticipated.
- Developments in the Extended Stay litigation and related-party arrangements, including the external management relationship.