Arbor Realty Trust Inc. Reports Operating Results (10-Q)
Arbor Realty Trust Inc. has a market cap of $139 million; its shares were traded at around $5.45 with and P/S ratio of 1.1. ABR is in the portfolios of Steven Cohen of SAC Capital Advisors.
Highlight of Business Operations: This environment has undoubtedly had a significant impact on our business, our borrowers and real estate values throughout all asset classes and geographic locations. Declining real estate values may continue to minimize our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy continues to weaken. Declining real estate values may also significantly increase the likelihood that we will continue to incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders. In addition, our investments are also subject to the risks described above with respect to commercial real estate loans and mortgage-backed securities and similar risks, including risks of delinquency and foreclosure, the dependence upon the successful operation of, and net income from, real property, risks generally related to interests in real property, and risks that may be presented by the type and use of a particular commercial property. During the first, second and third quarters of fiscal year 2010 we recorded $25.0 million, $25.6 million and $15.2 million, respectively, of new provisions for loan losses due to declining collateral values, a $0.8 million recovery from one fully reserved loan in the second quarter of 2010 and a recovery of $3.8 million from two loans in the third quarter of 2010, and $0.8 million and $5.4 million of losses on restructured loans in the second and third quarters of 2010, respectively. During the first, second, third and fourth quarters of fiscal year 2009, respectively, we recorded $67.5 million, $23.0 million, $51.0 million and $99.8 million of new provisions for loan losses due to declining collateral values and $9.0 million, $23.8 million, $0.3 million and $24.5 million of losses on restructured loans. We have made, and continue to make modifications and extensions to loans when it is economically feasible to do so. In some cases, modification is a more viable alternative to foreclosure proceedings when a borrower can not comply with loan terms. In doing so, lower borrower interest rates, combined with non-performing loans, will lower our net interest margins when comparing interest income to our costs of financing. These trends may persist with a prolonged economic recession and we feel if they do, there will be continued modifications and delinquencies in the foreseeable future, which will result in reduced net interest margins and additional losses throughout our sector.
During the nine months ended September 30, 2010 we entered into two new interest rate swaps that qualify as cash flow hedges with a notional value of approximately $7.5 million. In addition, the notional value on one interest rate swap amortized down by approximately $22.0 million and four interest rate swaps matured with a combined notional of approximately $22.5 million. During the nine months ended September 30, 2009 we entered into one new interest rate swap that qualifies as a cash flow hedge with a notional value of approximately $45.1 million and paid $1.7 million, which will be amortized into interest expense over the life of the swap, which is approximately 6.25 years. During the nine months ended September 30, 2009, we terminated seven interest rate swaps related to our restructured trust preferred securities, with a combined notional value of $185.0 million, for a loss of $8.7 million recorded to loss on termination of swaps. Refer to the section titled Liquidity and Capital Resources Junior Subordinated Notes below. During the nine months ended September 30, 2009, we also terminated an interest rate swap with a notional value of approximately $33.1 million and a $33.5 million portion of an interest rate swap with a total notional value of approximately $67.0 million, and the notional values on two basis swaps and one interest rate swap were amortized down by approximately $239.7 million. The loss on termination will be amortized to expense over the original life of the hedging instrument if it is determined that the hedged item is still more likely than not to occur. The fair value of our qualifying hedge portfolio has decreased by approximately $17.6 million from December 31, 2009 as a result of, changes in the projected LIBOR rates and credit spreads of both parties, combined with swap amortization and maturities.
During the quarter ended September 30, 2010, we originated one loan totaling $5.5 million, $4.0 million of which was initially funded, and made a $2.1 million equity investment in the same entity, as well as received full satisfaction of three bridge loans totaling $34.4 million, which included $11.5 million of charge-offs against loan loss reserves and $1.6 million of losses on restructuring. We also received partial repayment on five loans totaling $20.6 million, which included a $7.4 million charge-off against loan loss reserves and $3.8 million of losses on restructuring, and we charged off a fully reserved mezzanine loan of $26.8 million. We also refinanced and/or modified five loans totaling $119.0 million and eight loans totaling approximately $234.7 million were extended during the quarter, of which four loans totaling approximately $87.4 million were in accordance with the extension option of the corresponding loan agreement.
Securities available-for-sale increased $0.6 million, to $1.1 million at September 30, 2010 compared to $0.5 million at December 31, 2009. In March 2010 we sold two investment grade CMBS investments with a combined amortized cost of $11.1 million for approximately $14.4 million. Accordingly, because this was considered a change of intent to hold the securities, we reclassified all of our held-to-maturity securities to available-for-sale with a net unrealized loss of $18.6 million recorded to accumulated other comprehensive loss in the first quarter of 2010, which was later realized in the second quarter of 2010. We also had purchased one investment grade CMBS investment with a face value of $4.5 million during the first quarter of 2010. In June 2010, we sold three investment grade CDO bonds, with an aggregate face value of $44.7 million and an amortized cost of $40.4 million, for $29.9 million, and two investment grade CMBS investments, with an aggregate face value of $6.5 million and an amortized cost of $6.3 million, for $6.5 million, and recorded a net realized loss on sale of securities of $10.3 million in our Consolidated Statement of Operations. In February 2010, we also exchanged two investment grade CDO bonds with a total face value of $25.0 million and fair value of $0.4 million in retiring our own junior subordinated notes, which were reclassified from held-to-maturity to available-for-sale in December 2009. An other-than-temporary impairment of $9.8 million was recognized upon the reclassification from held-to-maturity to available-for-sale during the fourth quarter of 2009. Accounting principles generally accepted in the United States (GAAP) requires that all securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. During the second quarter of 2010, the change in fair value of our remaining CDO bond security of $7.0 million as well as a loss in the fair market value of our equity securities of less than $0.1 million, were considered other-than-temporary impairments and were recorded as impairment charges to the Consolidated Statement of Operations. In addition, an unrealized gain as of September 30, 2010 of less than $0.1 million related to the securities was recorded in accumulated other comprehensive income in the Consolidated Balance sheet. See Notes 4 and 5 of the Notes to the Consolidated Financial Statements set forth in Item 1 hereof for a further description of these transactions.
Real estate owned increased $14.9 million to $23.1 million at September 30, 2010 compared to $8.2 million at December 31, 2009. In the second quarter of 2010, we acquired a property secured by a $5.6 million junior participating loan by deed-in-lieu of foreclosure and as a result, we recorded $20.8 million on our Consolidated Balance Sheet as real estate owned, at fair value, and assumed the $20.8 million senior interest in a first mortgage loan. In the third quarter of 2010, we agreed to sell one of our real estate owned investments to a third party. As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a value of $5.5 million and property operating income and expense for current and prior periods were reclassified to discontinued operations. The Company sold the property to the third party and received proceeds of approximately $6.8 million in October 2010. See Note 7 of the Notes to the Consolidated Financial Statements set forth in Item 1 hereof for a further description of these transactions.
Other liabilities increased $2.7 million, or 3%, to $99.7 million at September 30, 2010 compared to $97.0 million at December 31, 2009. The increase was primarily due to a $17.2 million increase in accrued interest payable primarily due to the decrease in value of our interest rate swaps and the timing of reset dates, the receipt of $4.1 million in reseRead the The complete Report