ARBOR REALTY TRUST INC quarterly report, Q1 FY2022

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Business context and reporting period

Arbor Realty Trust, Inc. is a mortgage REIT and commercial real estate lender. Its Structured Business originates and invests in bridge, mezzanine and other real estate loans; its Agency Business originates, sells and services multifamily loans through government-sponsored and other programs. This unaudited Form 10-Q covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021.

Financial results and position

  • Interest and earnings: Interest income rose 83% to $166.7 million, while interest expense rose 96% to $82.6 million. Net interest income increased 72% to $84.1 million. Net income was $79.9 million versus $81.1 million; income attributable to common stockholders fell 8% to $64.1 million. Basic and diluted EPS were $0.42 and $0.40, respectively, compared with $0.55 for both measures a year earlier.
  • Other revenue and expenses: Total other revenue declined 25% to $58.9 million. Lower loan-sale and MSR income was partly offset by higher servicing revenue and a $17.4 million derivative gain, versus a $3.2 million derivative loss in Q1 2021. Income from equity affiliates fell 68% to $7.2 million. Total other expenses increased 8% to $60.8 million, including a $2.4 million credit-loss provision.
  • Portfolio and assets: Total assets were $16.31 billion, up from $15.07 billion. Structured loans and investments reached $14.17 billion, up 17% from year-end, with a 4.38% weighted-average current pay rate. Structured originations were $2.83 billion, compared with $1.09 billion in Q1 2021; payoffs and paydowns were $666.6 million. The servicing portfolio was approximately flat at $26.96 billion.
  • Cash flow and liquidity: Operating cash flow was $836.8 million, investing cash outflow was $2.02 billion, and financing cash inflow was $1.16 billion. Cash, cash equivalents and restricted cash totaled $867.9 million at quarter-end, including $517.1 million restricted. Management cited approximately $800 million of cash and available liquidity. Operating cash flow was materially influenced by Agency loan sales exceeding originations.
  • Debt and capital: Total liabilities were $13.54 billion; debt obligations were approximately $13.09 billion, including $7.10 billion of CLOs and $4.30 billion of credit and repurchase facilities. Structured Business debt financing the portfolio was $12.86 billion. The company issued $137.8 million of common stock and $77.6 million of Series F preferred stock during the quarter. Total equity was $2.77 billion.
  • Margins and distributions: Structured Business average asset yield was 4.60% and average financing cost was 2.65% for the quarter; these are segment measures, not a company-wide net interest margin. The declared common dividend was $0.37 per share for Q1, versus $0.33 a year earlier. Distributable earnings, a non-GAAP measure, were $92.9 million and diluted distributable earnings per share were $0.55, versus $75.1 million and $0.52, respectively.

Material changes versus the prior comparable period

  • Strong growth in Structured Business assets and net interest income lifted pre-tax income before specified items to $82.3 million from $71.5 million. Higher funding expense partly offset that growth.
  • Agency gain on sales fell to $1.7 million from $28.9 million, and MSR income fell to $15.3 million from $36.9 million. Management attributed the declines to lower GSE loan sales and commitments and lower sales and MSR margins. Servicing revenue increased to $21.1 million from $15.5 million.
  • Common-stockholder income and EPS declined despite higher net interest income, reflecting lower affiliate income, lower Agency-related revenue and increased preferred dividends. Preferred dividends rose to $9.1 million from $1.9 million.
  • Portfolio growth was funded in part through CLO activity and equity issuance. The company closed CLO 18 and unwound CLO 10; CLO liabilities increased to $7.10 billion from $5.89 billion.
  • Adoption of ASU 2020-06 increased the convertible notes’ carrying value by $2.5 million and reduced Q1 2022 diluted EPS by $0.02, primarily from the if-converted share assumption.

Outlook, commentary, risks and unusual items

  • Outlook: The filing gives no numerical earnings or revenue guidance. Management expected interest rates to continue rising in 2022 and said higher rates could benefit net interest income because most structured loans are floating-rate while a greater portion of debt is fixed-rate. Its sensitivity analysis estimated a 12-month net interest income increase of $2.6 million for a 50-basis-point increase and $8.5 million for a 100-basis-point increase, excluding potential effects beyond the stated assumptions.
  • Offsetting risks: Higher rates and inflation may reduce property values, impair borrower debt-service capacity, increase credit losses, constrain loan originations and raise funding costs. Management also cited uncertain COVID-19 effects, capital-market access and liquidity, competition, GSE program changes, and refinancing or extension risk for credit facilities. The company had $1.30 billion available under Structured Business credit and repurchase commitments and said it expected to extend or renew facilities, but gave no assurance of favorable terms.
  • Credit and concentration: Allowance for loan credit losses was $116.4 million, up from $113.2 million at year-end; the provision increase was primarily associated with portfolio growth. Four loans with net carrying value of $20.1 million were classified as non-performing. Borrowers across 41 loans represented 11% of total assets; Texas and Florida represented 20% and 13% of the loan portfolio, respectively. Unfunded loan commitments were $1.13 billion.
  • Liquidity and covenants: The company reported compliance with financial covenants and CLO tests at quarter-end and CLO tests in April 2022. Fannie Mae DUS requirements were met; the company expected to fund a further $43.8 million of restricted liquidity over 48 months, assuming no portfolio changes. Debt obligations due during the remaining nine months of 2022 were $2.21 billion, including lease payments.
  • Contingencies and related parties: A long-running Extended Stay-related lawsuit remains active. The company stated it had not accrued a loss because a loss was not considered probable and could not be reasonably estimated; the amended complaint seeks approximately $139 million in aggregate, with potential exposure for affiliated entities reduced by prior dismissals. The filing also describes loans, investments and other dealings involving affiliates and entities associated with the CEO and other insiders.
  • Other notable items: The common dividend was subsequently raised to $0.38 per share, declared May 4, 2022. The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.

Important facts for investors to verify

  1. Whether Structured Business growth and floating-rate asset yields continue to outpace funding-cost increases as rates rise.
  2. The sustainability of earnings and the $0.55 diluted distributable earnings per share, including the distinction between this non-GAAP measure and GAAP EPS.
  3. Agency origination, loan-sale margins, MSR production and prepayment-related servicing revenue after the Q1 declines in sales and MSR income.
  4. Credit trends, collateral values, non-performing loans, the allowance for credit losses and the ability to fund $1.13 billion of unfunded commitments.
  5. Facility renewals and the near-term debt maturity schedule, as well as available liquidity after restricted cash, collateral requirements and distributions.
  6. Potential outcomes of the Extended Stay litigation and the company’s related-party transactions and governance safeguards.