Business context and reporting period
Arbor Realty Trust, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The REIT operates a Structured Business, investing mainly in multifamily and commercial real estate loans and investments, and an Agency Business, originating, selling and servicing multifamily loans through government-sponsored and other programs.
Key financial results and position
Unless otherwise noted, amounts are in millions of dollars. Year-over-year comparisons are for the corresponding 2020 and 2019 periods.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $41.8 | $33.9 | $80.3 | $63.3 |
| Net income (loss) attributable to common stockholders | $44.1 | $28.9 | $(15.2) | $51.6 |
| Basic earnings (loss) per share | $0.40 | $0.32 | $(0.14) | $0.59 |
| Core earnings, non-GAAP | $60.4 | $38.6 | $101.1 | $74.7 |
| Diluted core earnings per share, non-GAAP | $0.46 | $0.34 | $0.77 | $0.67 |
- Q2 total other revenue was $66.7 million, including $32.4 million of MSR income, $26.4 million of gains on sales and fee-based services, and a $7.4 million net derivative loss. Q2 provision for credit losses was $12.7 million.
- For the first half, the $15.2 million common-stockholder loss reflected $67.1 million of credit-loss provision, $23.9 million of loss-sharing provision and $58.1 million of derivative losses, partly offset by $24.4 million of equity-affiliate income. Equity-affiliate income included $23.8 million from a residential mortgage banking joint venture.
- Operating cash flow was $533.7 million in the first half, investing cash outflow was $727.9 million, and financing cash inflow was $162.7 million. Cash, cash equivalents and restricted cash ended at $479.0 million, versus $510.6 million at year-end 2019.
- At June 30, total assets were $6.39 billion, total liabilities $5.13 billion and total equity $1.26 billion. Cash and cash equivalents were $384.2 million; restricted cash was $94.8 million.
- Loans and investments, net, were $4.80 billion, against a $152.8 million allowance for credit losses. The allowance for Fannie Mae loss-sharing obligations was $73.2 million. Six loans totaling $43.9 million net of reserves were classified as non-performing.
- Debt obligations totaled $4.82 billion on the balance sheet: $1.24 billion in credit facilities and repurchase agreements, $2.51 billion in CLOs, $661.8 million in senior unsecured notes, $265.2 million in convertible notes and $141.3 million in junior subordinated notes. The filing reports approximately $450 million of cash and available liquidity. Debt maturities include $802.1 million in the second half of 2020 and $1.82 billion in 2022.
- For the Structured Business, first-half average yields on interest-earning assets and average funding costs were 6.02% and 3.67%, respectively; the filing does not present a consolidated profit margin.
Material changes versus comparable periods
- Q2 common-stockholder income rose 52% year over year, supported by higher net interest income, agency loan-sale revenue and MSR income, as well as higher equity-affiliate income. First-half common-stockholder results moved from $51.6 million income to a $15.2 million loss.
- First-half net interest income increased 27%, to $80.3 million. Lower borrowing costs and growth in average earning assets contributed; lower asset yields partly offset the benefit.
- Agency loan sales were $1.99 billion in Q2, versus $923.0 million a year earlier. The quarter included the company’s first $727.2 million Private Label securitization. The servicing portfolio grew to $21.58 billion from $20.06 billion at year-end 2019.
- The Structured loan and investment portfolio grew to $4.98 billion from $4.28 billion at year-end. First-half originations were $1.16 billion, compared with $1.43 billion in 2019.
- The company adopted CECL on January 1, 2020, recording a $28.6 million cumulative-effect reduction to equity. Subsequent credit-loss and loss-sharing provisions reflected the changed economic outlook, which management primarily attributed to COVID-19.
- Debt financing changed materially: Arbor issued $345.8 million of senior unsecured notes, completed CLO XIII, unwound CLO VIII and repaid its $70.0 million debt fund. Credit facilities and repurchase agreements declined by $442.7 million from year-end, while CLO obligations and senior unsecured notes increased.
Outlook, risks and unusual items
- Management said the extent and duration of COVID-19 effects remained uncertain and expected the pandemic to negatively affect financial performance for the rest of 2020. Potential effects include borrower delinquencies and defaults, lower collateral values, loan modifications, funding constraints and reduced cash available for distributions.
- Management expected Structured Business growth to remain limited until capital-market liquidity improves; it said the Agency Business requires comparatively less capital and expected liquidity constraints to have less effect on its growth. It also noted possible additional economic stress in the third quarter.
- Forbearance requests covered approximately 0.4% of the $15.67 billion Fannie Mae DUS portfolio and 6.1% of the $4.56 billion Freddie Mac portfolio. Arbor launched a $2.0 million tenant rental-assistance program. It may be required to advance principal and interest on some Fannie Mae-serviced loans before reimbursement.
- Management cited possible refinancing at less favorable terms for warehouse and repurchase facilities. A $125 million facility, scheduled to mature in August 2020 after an extension, was under renewal negotiations. Certain repurchase facilities are subject to margin calls; debt secured by securities had been reduced to approximately $42 million in July 2020.
- Credit quality warrants attention: the allowance for credit losses rose to $152.8 million, and the number of non-performing loans increased to six from three at year-end. Separately, six land-development loans totaling $120.7 million were extended to September 2020 and had a cumulative allowance of $71.4 million. Multifamily loans represented 80% of the Structured portfolio.
- Other exposures include $150.9 million of unfunded loan commitments, Fannie Mae DUS loss-sharing obligations, and a longstanding Extended Stay-related lawsuit seeking approximately $139 million in aggregate. The company said it had not accrued a litigation loss because a loss was not considered probable or reasonably estimable.
- Arbor reported compliance with financial and CLO covenants at June 30. The board declared a $0.31-per-share common dividend on July 29, payable August 31, up from $0.30 per share declared for each of the first two quarters.
Important facts for investors to verify
- How COVID-19 affects loan delinquencies, forbearance, modifications, collateral values and future credit-loss and Fannie Mae loss-sharing reserves.
- Whether upcoming warehouse and repurchase maturities are renewed, and the resulting borrowing capacity, pricing, advance rates, collateral requirements and margin-call exposure.
- The collectability and performance of non-performing and impaired loans, including the land-development exposures, and the assumptions behind CECL estimates.
- Whether the $21.58 billion servicing portfolio and agency origination volumes sustain recurring revenue, and whether servicing advances create material liquidity demands.
- The sustainability of core earnings and the common dividend: core earnings is a company-defined non-GAAP measure, and the filing cautions it is not a measure of operating cash flow or liquidity.
- The timing and variability of equity-affiliate income, particularly the residential mortgage banking joint venture, which contributed $23.8 million in the first half.