Arbor Realty Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; financial statements are unaudited. Arbor operates a Structured Business investing in commercial real estate loans and related assets, and an Agency Business originating, selling and servicing multifamily loans. The Agency Business was acquired in July 2016; management was internalized effective May 31, 2017.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $18.3 million | $12.7 million | $46.4 million | $43.0 million |
| Total other revenue | $48.0 million | $34.9 million | $139.1 million | $44.9 million |
| Net income | $24.0 million | $16.4 million | $66.2 million | $31.6 million |
| Net income attributable to common stockholders | $16.4 million | $10.9 million | $44.0 million | $22.3 million |
| Diluted EPS | $0.26 | $0.21 | $0.77 | $0.43 |
| Common dividend declared per share | $0.18 | $0.16 | $0.53 | $0.46 |
- Revenue and earnings: Q3 common-stockholder income rose 51%; nine-month income rose 97%. Agency loan sales were $1.05 billion in Q3 and $3.62 billion year to date. The 2016 comparison includes only part of the acquired Agency Business, limiting comparability.
- Margins and yields: Structured portfolio weighted-average current pay rate was 6.04% at quarter-end, versus 5.71% at year-end 2016; including certain fees and costs it was 6.84%, versus 6.39%. Q3 Agency sales margin was 1.63% of loan sales, compared with 1.76%; MSR income was 2.04% of loan commitment volume, compared with 2.23%.
- Cash flow: Nine-month operating cash flow was $387.9 million, investing cash flow was negative $350.8 million, and financing cash flow was negative $91.0 million. Operating cash flow benefited substantially from Agency loan sales exceeding originations and their timing; it should not be read as recurring earnings or freely available liquidity.
- Liquidity and assets: At September 30, cash and cash equivalents were $84.8 million, restricted cash $137.1 million, and total assets $3.06 billion. Restricted cash is largely subject to CLO and other collateral requirements.
- Debt and equity: Debt obligations totaled $2.01 billion carrying value, versus $2.02 billion at December 31, 2016. CLO debt increased to $1.07 billion from $728.4 million, while credit facilities and repurchase agreements declined to $562.3 million from $906.6 million. Total equity was $845.7 million. The company reported $1.12 billion of availability under listed debt commitments, subject to facility terms and collateral.
Material changes and unusual items
- Completed CLO VII and CLO VIII, issuing $561.9 million of notes in total; unwound CLO IV and repaid $219.0 million of notes, recording $1.1 million of financing-fee expense.
- Repurchased junior subordinated notes at a discount, producing a $7.1 million gain on debt extinguishment.
- Issued 9.5 million common shares for net proceeds of $76.2 million; $25 million funded management internalization. Common shares outstanding were 61.7 million at October 27, 2017.
- Recorded a $2.0 million loan-loss provision on a preferred equity investment; nine-month net reserve recoveries were $0.5 million. A hotel property impairment of $2.7 million was recorded in the first half of 2017.
- Recorded a $16.2 million income tax provision for the first nine months, versus $0.3 million a year earlier, mainly reflecting Agency Business growth and use of net operating loss carryforwards in 2016.
- Corrected a purchase-price allocation omission, increasing goodwill and other liabilities by $4.9 million, with no effect on reported operating results.
Outlook, risks and contingencies
- Management reported that the 2017 Federal Reserve rate increases had not significantly affected results and did not expect a significant near-term decline in origination volume or profitability. No formal earnings guidance was provided.
- Management highlighted capital-market access, interest rates, real estate values and rents, borrower credit quality, competition, and potential changes to GSE programs or origination limits as key uncertainties. A decline in GSE originations could reduce loan-sale gains, MSR income and servicing revenue.
- Five loans totaling $32.6 million net carrying value were classified as non-performing. Six land-development loans totaling $120.5 million were extended to September 2018 and had $49.1 million of cumulative reserves. The filing identifies construction financing, costs, demand and litigation as risks for the project.
- Fannie Mae DUS guarantees had a maximum quantifiable liability of $2.23 billion; the filing states this is a theoretical maximum, not an estimate of expected loss. An additional $27.4 million of restricted liquidity was expected to be funded over 48 months, assuming no changes in the at-risk portfolio.
- Unfunded loan commitments were $68.1 million. The company reported compliance with financial, CLO and agency requirements at quarter-end. A breach of CLO tests could divert cash flows from the affected CLO to bondholders.
- Extended Stay-related litigation seeks approximately $139 million in aggregate from multiple defendants, including affiliates. Arbor recorded no accrual, stating a loss was not considered probable and could not be reasonably estimated.
- After quarter-end, the board declared a $0.19 common dividend per share, payable November 30, 2017. Management noted REIT distribution requirements constrain retained earnings.
Important facts for investors to verify
- Whether Agency origination and servicing growth, margins and MSR valuations are sustainable, given partial-period comparison effects and sensitivity to prepayments and discount rates.
- Credit quality and collateral support for impaired, non-performing and land-development loans, including the adequacy of the $83.3 million total loan-loss allowance.
- Actual available liquidity after excluding restricted cash, meeting future collateral requirements, funding commitments and addressing debt maturities.
- Exposure to GSE loss-sharing guarantees, CLO covenant triggers, related-party transactions and the unresolved Extended Stay litigation.
- Dividend coverage against recurring cash generation; management cautions that FFO and AFFO are non-GAAP measures and do not represent operating cash flow or guarantee distribution capacity.