ARBOR REALTY TRUST INC quarterly report, Q2 FY2021

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Arbor Realty Trust, Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. Arbor operates a Structured Business investing primarily in multifamily and other real estate loans and an Agency Business that originates, sells, and services multifamily loans. Financial statements are unaudited.

Financial performance and position

  • Q2 earnings: Net income was $84.3 million and net income attributable to common stockholders was $69.1 million, or $0.51 per diluted share, versus $54.1 million and $44.1 million, or $0.40 per diluted share, in Q2 2020.
  • First-half earnings: Common-stockholder net income was $138.6 million, or $1.06 per diluted share, compared with a $15.2 million loss, or $0.14 per share, in first-half 2020. Results benefited from lower credit-loss provisions and derivative losses than in the prior-year period.
  • Revenue and net interest: Q2 net interest income rose 41% to $58.8 million; total other revenue increased 22% to $81.2 million. First-half net interest income was $107.7 million, up 34%, and other revenue was $160.0 million, up 132%.
  • Agency activity and margins: Q2 loan sales were $1.48 billion and gain-on-sale and fee revenue was $40.9 million. Sales margin increased to 2.76% from 1.32%, mainly on stronger Private Label margins, despite 26% lower sales volume. Servicing portfolio UPB grew to $26.0 billion.
  • Cash flow: First-half operating cash flow was $727.6 million, investing cash outflow was $2.01 billion, and financing cash inflow was $1.21 billion. Cash, cash equivalents, and restricted cash declined $72.3 million to $464.7 million; unrestricted cash was $215.7 million.
  • Portfolio and balance sheet: Loans and investments, net, reached $7.21 billion, up from $5.29 billion at year-end 2020. Total assets were $9.06 billion and equity was $1.96 billion. The Structured loan portfolio had a 4.85% weighted-average current pay rate versus 5.23% at year-end; 87% was multifamily.
  • Credit quality: The loan allowance declined to $138.4 million from $148.3 million. Eight non-performing loans had $77.5 million aggregate net carrying value, compared with seven loans and $53.8 million at year-end. The filing reports $524.7 million of unfunded loan commitments.
  • Debt and liquidity: Debt carrying value totaled approximately $6.75 billion, including $3.48 billion of CLOs and $2.02 billion of credit and repurchase facilities. Management cited approximately $400 million in cash and available liquidity and $3.53 billion of total undrawn facility capacity. Management said it believed funding sources and access to liquidity would meet expected needs.
  • Distributions: The Q2 declared common dividend was $0.34 per share; the Board subsequently declared $0.35 per share payable in August 2021. Diluted distributable earnings were $0.45 per share in Q2, unchanged from Q2 2020, and $0.97 for the first half versus $0.77.

Material changes versus comparable periods

  • Q2 common-stockholder earnings rose 57%; first-half results moved from a loss to profit. Growth reflected higher Structured Business net interest income, stronger Agency sale margins, and credit-loss reserve reversals, partly offset by higher compensation and operating expenses.
  • The Structured loan and investment portfolio expanded as originations exceeded payoffs. First-half Structured originations were $2.93 billion versus $1.16 billion in 2020.
  • First-half Agency loan sales increased 13% to $3.32 billion, while the servicing portfolio increased from $24.63 billion at year-end to $26.04 billion.
  • Arbor issued $175 million of 5.00% senior notes due 2026, completed CLO XIV and XV, and unwound CLO IX. CLO carrying debt increased $966.8 million from year-end.
  • Arbor raised $328.0 million from common-stock issuance and $222.6 million net from Series D preferred stock, using $93.3 million of preferred proceeds to redeem Series A, B, and C shares. Common shares outstanding increased to 141.7 million from 123.2 million at year-end.

Outlook, risks, and unusual items

  • Outlook: The filing gives no specific earnings or origination guidance. Management said COVID-19 had not significantly affected the business to date but that its duration and effects remained uncertain. Management viewed liquidity as adequate, while noting that prolonged market disruption could constrain Structured Business growth.
  • Interest-rate risk: Most debt is variable-rate. The filing estimates that a 25-basis-point LIBOR increase would reduce annual net interest income by about $7.9 million, including the effect of cash and restricted cash; a 10-basis-point increase would reduce it by about $1.7 million. Loan LIBOR floors partly offset rate declines but may limit asset-income increases when rates rise. A 100-basis-point higher MSR discount rate would reduce MSR fair value by $16.2 million.
  • Credit and funding risks: Deteriorating property values, borrower defaults, loan modifications, funding costs, facility renewals, and margin calls could adversely affect results and liquidity. Management noted warehouse and repurchase renewals could have less favorable terms. Approximately 75% of Structured Business debt reportedly lacked mark-to-market provisions.
  • Agency exposure: Approved forbearances covered approximately 0.3% of the Fannie Mae DUS portfolio and 2.4% of the Freddie Mac portfolio. Arbor estimated it would need to fund an additional $47.7 million of Fannie Mae restricted liquidity over 48 months, assuming no relevant paydowns, prepayments, or defaults.
  • Contingencies: An Extended Stay-related lawsuit continues against affiliates and others. The filing says remaining possible liability against director designees is approximately $139 million; Arbor made no accrual, stating loss was not considered probable and could not be reasonably estimated. Fannie Mae DUS guarantees had a maximum quantifiable exposure of $3.61 billion, which the company says is not representative of expected loss.
  • Unusual items and governance: A hotel-loan workout generated a $7.5 million credit-loss reserve reversal and $3.5 million of interest income. The filing also discloses multiple related-party loans, investments, and transactions, and CEO incentive compensation arrangements. All reported financial covenants were in compliance at June 30, 2021; the CLO tests also passed at the July determination dates.

Important facts for investors to verify

  • Whether portfolio growth, credit performance, and the lower allowance remain sustainable, particularly given rising non-performing loan carrying values and unfunded commitments.
  • Whether the higher Agency sales margin and servicing portfolio translate into recurring earnings as loan volumes and MSR valuation assumptions change.
  • Facility renewal terms, debt maturities, collateral requirements, and liquidity available after required funding and distributions.
  • Actual losses, if any, from DUS risk-sharing, the Extended Stay litigation, and other contingencies; the filing does not provide a clear expected loss for these exposures.
  • How much reported GAAP earnings depend on reserve reversals, equity-affiliate income, MSR-related accounting, and other non-cash or variable items; distributable earnings is a company-defined non-GAAP measure and is not a measure of cash flow or liquidity.