Arbor Realty Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Arbor is a REIT focused on commercial and multifamily real estate finance. Following its July 14 acquisition of its manager’s agency platform, it reports a Structured Business and an Agency Business.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $12.7 million | $14.1 million | $43.0 million | $50.1 million |
| Net income | $16.4 million | $17.2 million | $31.6 million | $46.5 million |
| Net income attributable to common stockholders | $10.9 million | $15.3 million | $22.3 million | $40.9 million |
| Diluted earnings per common share | $0.21 | $0.30 | $0.43 | $0.80 |
| Common dividends declared per share | $0.16 | $0.15 | $0.46 | $0.43 |
- Q3 Agency Business contributions included $9.7 million of fee-based services and loan-sale gains, $16.0 million of MSR income, and $5.9 million of net servicing revenue. Agency loan originations were $850.4 million in the quarter; the servicing portfolio totaled $12.6 billion at quarter-end.
- For the nine months, cash from operating activities was $149.0 million, cash used in investing activities was $207.9 million, and cash used in financing activities was $58.2 million. Cash and cash equivalents ended at $71.6 million, down from $188.7 million at year-end 2015. Restricted cash was $176.6 million and is not equivalent to unrestricted liquidity.
- At September 30, total assets were $2.65 billion, total liabilities $1.92 billion, and total equity $725.4 million. Loans and investments, net, were $1.66 billion; loans held for sale were $310.3 million; and capitalized mortgage servicing rights were $224.3 million.
- Reported debt carrying values included $431.1 million of credit facilities and repurchase agreements, $1.01 billion of CLOs, $94.3 million of senior unsecured notes, $157.7 million of junior subordinated notes, and $50.0 million of related-party financing. Credit facilities and repurchase agreements were primarily secured by loans and investments. Structured Business leverage on its loan and investment portfolio was 68%, versus 64% at year-end 2015.
- Management reported a 5.47% weighted-average current pay rate on the Structured Business portfolio and a 4.09% weighted-average funding rate including financing costs. Its reported sensitivity analysis estimated that a 25-basis-point LIBOR increase would raise net interest income by $0.6 million over 12 months; a 25-basis-point decrease was estimated to raise it by $0.6 million as well.
Changes versus comparable periods and unusual items
- Q3 net interest income declined 10% year over year, as higher interest expense more than offset increased interest income. Nine-month net interest income declined 14%.
- Common-stockholder income fell 29% in Q3 and 46% for the nine months. The prior-year periods included gains on acceleration of deferred income from CDO unwinds ($8.2 million in Q3 and $19.2 million for nine months); the 2015 nine-month period also included a $4.6 million loss on swap terminations.
- The acquisition added a new agency origination, sale, and servicing business and approximately 235 employees. The stated purchase price was $275.8 million; the company estimated the fair value of consideration at $292.5 million, including $154.8 million in OP units, $87.8 million cash, and $50.0 million seller financing. Acquired Agency Business revenue and pretax income from closing through September 30 were $34.5 million and $14.3 million, respectively.
- Acquisition-related legal and advisory expense was $6.4 million in Q3 and $10.3 million for the nine months. The company reported an $11.2 million impairment on a hotel property and $11.6 million in gains on real estate sales during the nine months.
- Non-GAAP FFO was $15.1 million for Q3 and $27.5 million for nine months; AFFO was $15.0 million and $33.9 million, respectively. Diluted AFFO per share was $0.21 for Q3 and $0.59 for nine months, compared with $0.36 and $0.98 in 2015. The company cautions that these measures are not cash flow or liquidity measures.
Outlook, risks, and contingencies
- No specific earnings or origination guidance was provided. Management said existing funding sources were expected to meet short- and long-term liquidity needs, while noting continued reliance on access to debt and equity financing.
- Management cited risks from financing-market access and cost, interest-rate changes, real estate values and rents, borrower credit quality, collateral impairments, GSE relationships and production limits, and competition. It noted that stabilization in multifamily rent growth could constrain originations and that deterioration in markets could increase modifications, delinquencies, and losses.
- Fannie Mae DUS loss-sharing obligations had a $31.1 million allowance. The maximum quantifiable guarantee exposure was $1.9 billion, which the company said was not representative of expected loss. The company expected to fund another $21.0 million of restricted liquidity over 48 months, assuming no portfolio changes.
- Six impaired land-development loans had a net carrying value of $120.2 million and cumulative reserves of $49.1 million; the company had suspended accrual of interest it considered doubtful. It reported four non-performing loans with net carrying value of $1.7 million, after related reserves.
- Debt and lease maturities totaled $1.81 billion in the maturity schedule, including $355.7 million due in the final three months of 2016 and $248.4 million in 2017. The filing also reported $32.3 million of unfunded loan commitments. One Structured Business credit facility had matured in October 2016 and was under renewal negotiations; certain Agency warehouse facilities were also under renewal discussions.
- All reported financial covenants were met at September 30. The four CLOs also passed their overcollateralization and interest-coverage tests; a breach could divert CLO cash flows away from the company’s residual interests.
- The filing describes Extended Stay-related litigation seeking approximately $139 million in aggregate from various defendants, including affiliates. Arbor recorded no loss accrual, stating that a loss was not considered probable and could not be reasonably estimated. It also highlights related-party conflicts, including the external manager relationship and loans to entities involving company officers.
- In October 2016, after quarter-end, Arbor issued $86.25 million of 6.50% convertible senior notes due 2019, receiving $82.8 million net proceeds. The board declared a $0.16 common dividend payable November 30, 2016.
Important facts for investors to verify
- How much of the new Agency Business’s reported income is recurring cash revenue versus non-cash MSR valuation income, and how sensitive MSR values are to prepayments and discount-rate assumptions.
- The performance, collateral values, and recovery prospects for the impaired land-development loans and other higher-risk exposures.
- Liquidity after accounting for restricted cash, required Fannie Mae collateral funding, upcoming facility maturities, unfunded commitments, and distributions.
- The final purchase-price allocation, integration results, and economics of the related-party seller financing and the option to internalize management.
- Developments in the Extended Stay litigation and any changes to the company’s assessment of potential loss.