Arbor Realty Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Arbor operates a Structured Business investing in commercial real estate loans and related assets, and an Agency Business that originates, sells, and services multifamily loans through government-sponsored and other programs. Comparisons below are with Q1 2018 unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable |
|---|---|---|
| Interest income | $71.3 million | $51.6 million |
| Interest expense | $41.9 million | $33.4 million |
| Net interest income | $29.4 million | $18.2 million |
| Net income | $30.0 million | $37.1 million |
| Net income attributable to common stockholders | $22.7 million | $26.2 million |
| Diluted earnings per common share | $0.26 | $0.42 |
| Diluted FFO per share / diluted AFFO per share | $0.26 / $0.33 | $0.42 / $0.25 |
| Total assets / total equity | $4.598 billion / $1.077 billion | $4.612 billion / $1.066 billion at December 31, 2018 |
| Cash and cash equivalents | $124.5 million | $160.1 million at December 31, 2018 |
| Restricted cash | $291.9 million | $180.6 million at December 31, 2018 |
| Debt obligations, carrying value | $3.299 billion | $3.315 billion at December 31, 2018 |
| Structured loan and investment portfolio | $3.407 billion; weighted average current pay rate 7.05% | $3.283 billion; 7.02% at December 31, 2018 |
| Agency servicing portfolio | $18.884 billion | $18.602 billion at December 31, 2018 |
Cash flow from operations was $268.4 million, investing activities used $138.4 million, and financing activities used $54.3 million. Operating cash flow primarily reflected Agency loan sales exceeding originations; it should not be read as recurring earnings. The company reported approximately $1.797 billion of available capacity under listed debt facilities, subject to facility terms and collateral requirements. Restricted cash, including CLO cash, is not generally available for unrestricted corporate use.
Material changes versus the prior comparable period
- Net interest income rose 61%, supported by a 25% increase in average core interest-earning assets and higher average yields. Interest expense also increased, principally with larger average borrowings.
- Common-stockholder net income fell 14% and diluted EPS declined from $0.42 to $0.26. The prior-year quarter included an $8.8 million income-tax benefit, compared with less than $0.1 million in Q1 2019; the diluted share count also increased.
- Other revenue declined 16%. MSR income fell 28% and gain on sales fell 10%; servicing revenue increased 42%. Other income moved from $2.9 million of income to a $2.1 million loss, mainly reflecting fair-value changes in Agency rate-lock commitments.
- Structured loan originations were $416.3 million versus $314.2 million; payoffs and paydowns were $279.5 million versus $190.6 million. Agency originations declined to $845.9 million from $1.048 billion, while loan sales increased to $1.102 billion from $1.062 billion.
- FFO per diluted share declined, while AFFO per diluted share increased. These are non-GAAP measures defined by the company and are not substitutes for GAAP earnings or cash flow.
- The company issued $90 million of 5.75% senior unsecured notes due 2024 and increased Structured financing capacity by $250 million. It declared a $0.27 common dividend for the quarter; on May 1, 2019, it declared a subsequent $0.28 dividend.
Outlook, risks, contingencies, and unusual items
- The filing gives no formal earnings or full-year financial guidance. Management said it did not anticipate a significant decline in origination volume or profitability while rates remained relatively low, but cautioned that rate, economic, and market developments could change that outlook.
- Key business risks include access to capital and financing, interest-rate changes, GSE policy and origination limits, competition, weaker commercial real estate values or rental growth, borrower credit deterioration, and the ability to deploy capital profitably. Fannie Mae and Freddie Mac each had a $35 billion multifamily origination cap under the 2019 Scorecard, subject to FHFA review.
- Credit exposures warrant attention: eight loans/investments were identified as higher risk, with $128.3 million carrying value before reserves and a 99% weighted average last-dollar LTV. The loan-loss allowance was $71.1 million. Six land-development loans with $120.9 million carrying value were scheduled to mature in September 2019; $61.4 million of allowance related to these loans, and interest accrual had been suspended since 2008. The filing says two loans with $2.5 million carrying value were nonperforming.
- Five borrowers accounted for 19% of total assets through 29 loans; New York and Texas represented 23% and 16% of the loan and investment portfolio, respectively. Unfunded loan commitments were $143.0 million. The maximum quantifiable Fannie Mae DUS loss-sharing liability was $2.49 billion, a stressed maximum rather than management’s estimate of expected loss.
- Debt maturities were $608.0 million for the remainder of 2019 and $1.12 billion in 2020. Management reported compliance with financial covenants at quarter-end; all CLO tests shown for April 2019 passed. A breach could divert CLO cash flows from the company to debt repayment.
- A long-running Extended Stay-related lawsuit seeks approximately $139 million in aggregate from multiple defendants, including affiliates. The company recorded no litigation loss accrual, stating it did not consider a loss probable or reasonably estimable. The filing also discloses related-party loans and a $30 million commitment for an 18% interest in AMAC III, sponsored and managed by the CEO and an immediate family member; $6 million had been funded.
- The company adopted lease accounting in Q1 and recognized a $20.1 million operating lease right-of-use asset and corresponding liability. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether portfolio growth and improved net interest income translate into sustainable common earnings after funding costs, compensation, and dilution.
- The composition, performance, and refinancing or repayment prospects of higher-risk and impaired loans, particularly the land-development exposures maturing in September 2019.
- How much reported cash and facility capacity is actually available after CLO restrictions, collateral needs, GSE liquidity requirements, and scheduled debt maturities.
- Whether Agency origination volumes, gain-on-sale margins, MSR valuations, and servicing revenue remain resilient under GSE policy and market changes.
- The status and potential exposure from the Extended Stay litigation, DUS loss sharing, unfunded commitments, and disclosed related-party transactions.
- Whether the $0.28 subsequent common dividend is supported by recurring cash generation; company-defined FFO and AFFO are supplemental measures, not GAAP cash flow or liquidity measures.