Arbor Realty Trust, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Arbor is a commercial real estate lender and mortgage servicer, operating through its Structured Business and Agency Business. Unless otherwise noted, financial figures below are in U.S. dollars.
Business context and operating activity
- The Structured Business primarily originates and invests in multifamily and single-family rental bridge loans. The Agency Business originates, sells and services loans through Fannie Mae, Freddie Mac and HUD programs.
- Structured loan originations were $255.9 million, below $640.0 million of loan runoff; the portfolio’s unpaid principal balance fell 3% from year-end to $12.25 billion.
- Agency originations were $846.3 million and loan sales were $1.09 billion. The fee-based servicing portfolio grew about 1% to $31.38 billion.
- During the quarter, Arbor modified 39 loans totaling $1.76 billion. Borrowers were required to contribute additional capital; 23 loans totaling $1.07 billion received temporary interest-rate relief through pay-and-accrual arrangements.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Interest income | $321.3 million | $327.9 million | Down 2% |
| Interest expense | $217.7 million | $219.4 million | Down 1% |
| Net interest income | $103.6 million | $108.6 million | Down 5% |
| Total other revenue | $57.0 million | $73.1 million | Down 22% |
| Net income | $73.2 million | $102.2 million | Down 28% |
| Net income attributable to common stockholders | $57.9 million | $84.3 million | Down 31% |
| Diluted earnings per common share | $0.31 | $0.46 | Down $0.15 |
| Distributable earnings per diluted share (non-GAAP) | $0.47 | $0.62 | Down $0.15 |
Common dividends declared were $0.43 per share, compared with $0.40 a year earlier. Distributable earnings is a company-defined non-GAAP measure and is not a measure of operating cash flow or liquidity.
- Net interest income declined mainly because the average Structured Business loan balance was lower as runoff exceeded originations, partly offset by higher yields. Structured Business average core asset yield rose to 9.44% from 8.94%; average funding cost rose to 7.50% from 6.69%.
- Lower mortgage servicing rights income ($10.2 million versus $18.5 million) and a $5.3 million derivative loss, compared with a $4.2 million gain, contributed to lower revenue. Servicing revenue, net increased to $31.5 million from $29.6 million.
- Income from equity affiliates fell to $1.4 million from $14.3 million; the prior-year quarter included a $11.0 million equity participation receipt and a $4.7 million Lexford distribution.
- Provision for credit losses was $19.1 million, compared with $22.5 million. The 2024 provision primarily reflected specifically impaired multifamily loans and the commercial real estate market outlook. Employee compensation and benefits increased 12% to $47.7 million.
Balance sheet, cash flow and liquidity
- Total assets were $15.10 billion at March 31, down from $15.74 billion at December 31, 2023. Loans and investments, net, were $12.00 billion, compared with $12.38 billion.
- Cash and cash equivalents were $908.0 million and restricted cash was $546.6 million, compared with $929.0 million and $608.2 million, respectively, at year-end. Cash, cash equivalents and restricted cash totaled $1.45 billion at quarter-end.
- Recorded debt obligations totaled approximately $11.37 billion: credit and repurchase facilities of $2.91 billion, securitized debt of $6.69 billion, senior unsecured notes of $1.34 billion, convertible notes of $284 million and junior subordinated notes of $144 million. The filing reports $11.11 billion of Structured Business debt outstanding.
- Q1 operating cash flow was $260.0 million, investing cash flow was $331.6 million and financing cash outflow was $674.1 million. Financing outflows included $246.1 million of securitization paydowns and $98.7 million of distributions.
- Management reported approximately $800 million in cash and approximately $600 million available under CLO vehicles at April 30, 2024, in addition to other liquidity sources. It stated that existing sources and access to additional liquidity were expected to meet liquidity needs.
- At March 31, total debt maturities were $1.89 billion for the remainder of 2024 and $3.41 billion in 2025; the schedule includes securitized debt and other debt obligations. The $90 million 5.75% senior notes matured and were redeemed in April 2024.
Portfolio quality, changes and material risks
- The allowance for credit losses on loans and investments increased to $211.9 million from $195.7 million. Non-performing loans rose to 21 loans with $406.1 million net carrying value, versus 16 loans and $235.6 million at year-end. Their reported unpaid principal balance was $464.8 million, all more than 90 days past due.
- Separately, 12 multifamily bridge loans totaling $489.4 million were 60 days or less past due and on non-accrual at quarter-end, down from 24 loans totaling $956.9 million at year-end. Arbor attributed much of the decrease to modifications that brought loans current, partly offset by newly late or partial payments.
- Unfunded loan commitments increased to $1.59 billion from $1.31 billion. Arbor is obligated to fund them when borrowers satisfy contractual conditions. The filing cites higher rates, inflation, unemployment assumptions and declining real estate values among factors in its credit-loss estimates.
- Multifamily loans were 87% of the structured portfolio. Texas and Florida represented 23% and 17% of portfolio balances, respectively. Loans to 31 borrowers represented 11% of total assets.
- Management said higher rates can support net interest income because most structured loans are floating-rate while a greater portion of debt is fixed-rate. Conversely, high rates and declining property values may impair borrower debt-service capacity, reduce originations and increase delinquencies, defaults, modifications and losses.
- Management expected the Federal Reserve might begin reducing rates during 2024, but cautioned rates could remain higher for longer. No company earnings or dividend guidance was provided in the supplied filing text.
- Repurchase facilities include margin-call provisions; $1.56 billion of such debt was subject to margin calls tied to changes in interest spreads. Management cautioned that facilities may not renew or extend on equally favorable terms. CLOs were in covenant compliance, though a future breach could divert cash flows from the affected CLO to debt repayment.
- Fannie Mae DUS loss-sharing obligations were $72.8 million. The maximum quantifiable guarantee liability was $4.02 billion, which the company cautions is not representative of expected actual losses. Arbor reported compliance with financial covenants and agency capital and liquidity requirements at quarter-end.
- The filing reports no material litigation and no material changes to the risk factors in the 2023 Form 10-K. It identifies related-party transactions, including loans and investments involving entities connected to executives and their affiliates.
Important facts for investors to verify
- Whether non-performing and other non-accrual loans stabilize or continue to grow, and how modified loans perform after temporary rate relief and maturity extensions.
- Whether the $211.9 million credit-loss allowance and the assumptions behind it remain adequate as property values, borrower payment performance and the economic outlook evolve.
- How Arbor will fund its $1.59 billion of unfunded commitments and address the 2024–2025 debt maturities, including any facility renewals, refinancing costs or margin calls.
- Whether distributable earnings can support the $0.43 common dividend; compare the non-GAAP measure with GAAP earnings, cash flows and realized credit losses.
- The effect of interest-rate movements and GSE production limits on net interest income, Agency originations, servicing income and the value of mortgage servicing rights.