Attached files

file filename
EX-31.2 - EX-31.2 - ARBOR REALTY TRUST INCa11-11251_1ex31d2.htm
EX-32.2 - EX-32.2 - ARBOR REALTY TRUST INCa11-11251_1ex32d2.htm
EX-31.1 - EX-31.1 - ARBOR REALTY TRUST INCa11-11251_1ex31d1.htm
EX-32.1 - EX-32.1 - ARBOR REALTY TRUST INCa11-11251_1ex32d1.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from              to              

 

Commission file number: 001-32136

 

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

20-0057959

(State or other jurisdiction of
incorporation)

(I.R.S. Employer
Identification No.)

 

 

333 Earle Ovington Boulevard, Suite 900
Uniondale, NY


11553

(Address of principal executive offices)

(Zip Code)

 

(516) 506-4200

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated filer  x

 

 

Non-accelerated filer  o

Smaller reporting company £

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, $0.01 par value per share: 25,443,140 outstanding (excluding 980,597 shares held in the treasury) as of May 6, 2011.

 

 

 



Table of Contents

 

ARBOR REALTY TRUST, INC.

 

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

2

Item 1. Financial Statements

2

Consolidated Balance Sheets at March 31, 2011 (Unaudited) and December 31, 2010

2

Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2011 and 2010

3

Consolidated Statement of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2011

4

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010

5

Notes to the Consolidated Financial Statements (Unaudited)

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Item 3. Quantitative and Qualitative Disclosures about Market Risk

65

Item 4. Controls and Procedures

68

PART II. OTHER INFORMATION

68

Item 1. Legal Proceedings

68

Item 1A. Risk Factors

68

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

68

Item 3. Defaults Upon Senior Securities

68

Item 4. Reserved

68

Item 5. Other Information

69

Item 6. Exhibits

70

Signatures

75

 



Table of Contents

 

CAUTIONARY STATEMENTS

 

 

The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in Arbor Realty Trust, Inc.  We urge you to carefully review and consider the various disclosures made by us in this report.

 

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically; adverse changes in the financing markets we access affecting our ability to finance our loan and investment portfolio; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in the markets; legislative/regulatory changes; completion of pending investments; the availability and cost of capital for future investments; competition within the finance and real estate industries; and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2010. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Arbor Realty Trust, Inc. and Subsidiaries — Significant Accounting Estimates and Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

 

i



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

67,144,569

 

$

101,124,564

 

Restricted cash (includes $52,398,315 and $21,085,664 from consolidated VIEs, respectively)

 

53,790,405

 

21,085,664

 

Loans and investments, net (includes $1,178,998,490 and $1,301,435,584 from consolidated VIEs, respectively)

 

1,316,952,848

 

1,414,225,388

 

Available-for-sale securities, at fair value (includes $2,000,000 and $1,000,000 from consolidated VIEs, respectively)

 

4,344,613

 

3,298,418

 

Investment in equity affiliates

 

65,789,451

 

65,838,885

 

Real estate owned, net (includes $135,232,574 and $2,707,479 from consolidated VIEs, respectively)

 

155,181,192

 

22,839,480

 

Real estate held-for-sale, net

 

41,440,000

 

41,440,000

 

Due from related party (includes $161,094 and $335,048 from consolidated VIEs, respectively)

 

2,149,376

 

335,048

 

Prepaid management fee — related party

 

19,047,949

 

19,047,949

 

Other assets (includes $11,945,878 and $13,645,594 from consolidated VIEs, respectively)

 

40,843,883

 

41,972,532

 

Total assets

 

$

1,766,684,286

 

$

1,731,207,928

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Repurchase agreements

 

$

746,997

 

$

990,997

 

Collateralized debt obligations (includes $1,062,704,339 and $1,070,852,555 from consolidated VIEs, respectively)

 

1,062,704,339

 

1,070,852,555

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

157,915,586

 

157,806,238

 

Notes payable

 

51,457,708

 

51,457,708

 

Mortgage notes payable — real estate owned

 

76,101,004

 

20,750,000

 

Mortgage note payable — held-for-sale

 

41,440,000

 

41,440,000

 

Due to related party

 

983,212

 

17,436,986

 

Due to borrowers (includes $1,100,184 and $1,155,095 from consolidated VIEs, respectively)

 

4,362,887

 

2,559,388

 

Deferred revenue

 

77,123,133

 

77,123,133

 

Other liabilities (includes $30,160,325 and $34,940,192 from consolidated VIEs, respectively)

 

74,287,589

 

84,375,680

 

Total liabilities

 

1,547,122,455

 

1,524,792,685

 

Commitments and contingencies

 

 

 

Equity:

 

 

 

 

 

Arbor Realty Trust, Inc. stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value: 100,000,000 shares authorized; no shares issued or outstanding

 

 

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 26,423,737 shares issued, 25,443,140 shares outstanding at March 31, 2011 and 25,756,810 shares issued, 24,776,213 shares outstanding at December 31, 2010

 

264,237

 

257,568

 

Additional paid-in capital

 

454,654,595

 

450,686,382

 

Treasury stock, at cost — 980,597 shares

 

(10,669,585

)

(10,669,585

)

Accumulated deficit

 

(180,426,093

)

(180,689,667

)

Accumulated other comprehensive loss

 

(46,196,212

)

(55,169,317

)

Total Arbor Realty Trust, Inc. stockholders’ equity

 

217,626,942

 

204,415,381

 

Noncontrolling interest in consolidated entity

 

1,934,889

 

1,999,862

 

Total equity

 

219,561,831

 

206,415,243

 

Total liabilities and equity

 

$

1,766,684,286

 

$

1,731,207,928

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Interest income

 

$

18,007,567

 

$

24,218,425

 

Interest expense

 

13,040,949

 

18,087,260

 

Net interest income

 

4,966,618

 

6,131,165

 

Other revenue:

 

 

 

 

 

Property operating income

 

5,420,186

 

213,483

 

Other income

 

21,876

 

798,047

 

Total other revenue

 

5,442,062

 

1,011,530

 

Other expenses:

 

 

 

 

 

Employee compensation and benefits

 

2,088,054

 

1,904,953

 

Selling and administrative

 

1,197,825

 

1,277,995

 

Property operating expenses

 

3,801,221

 

358,430

 

Depreciation and amortization

 

432,465

 

12,168

 

Provision for loan losses (net of recoveries)

 

535,135

 

25,000,000

 

Loss on restructured loans

 

1,000,000

 

 

Management fee - related party

 

1,950,000

 

1,900,000

 

Total other expenses

 

11,004,700

 

30,453,546

 

Loss from continuing operations before gain on extinguishment of debt, gain on sale of securities, net, and income (loss) from equity affiliates

 

(596,020

)

(23,310,851

)

Gain on extinguishment of debt

 

892,500

 

46,498,479

 

Gain on sale of securities, net

 

 

3,303,480

 

Income (loss) from equity affiliates

 

24,365

 

(45,575

)

Income from continuing operations

 

320,845

 

26,445,533

 

Loss from discontinued operations

 

 

(18,023

)

Net income

 

320,845

 

26,427,510

 

Net income attributable to noncontrolling interest

 

53,696

 

53,717

 

Net income attributable to Arbor Realty Trust, Inc.

 

$

267,149

 

$

26,373,793

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income from continuing operations, net of noncontrolling interest

 

$

0.01

 

$

1.04

 

Loss from discontinued operations

 

 

 

Net income attributable to Arbor Realty Trust, Inc.

 

$

0.01

 

$

1.04

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income from continuing operations, net of noncontrolling interest

 

$

0.01

 

$

1.04

 

Loss from discontinued operations

 

 

 

Net income attributable to Arbor Realty Trust, Inc.

 

$

0.01

 

$

1.04

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

Basic

 

24,961,471

 

25,387,410

 

Diluted

 

25,785,629

 

25,387,410

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2011

(Unaudited)

 

 

 

Comprehensive
Income (1)

 

Common
Stock
Shares

 

Common
Stock
Par
Value

 

Additional
Paid-in
Capital

 

Treasury
Stock

Shares

 

Treasury
Stock

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Loss

 

Total Arbor
Realty Trust,
Inc.
Stockholders’
Equity

 

Non-
controlling
Interest

 

Total

 

Balance — January 1, 2011

 

 

 

25,756,810

 

$

257,568

 

$

450,686,382

 

(980,597

)

$

(10,669,585

)

$

(180,689,667

)

$

(55,169,317

)

$

204,415,381

 

$

1,999,862

 

$

206,415,243

 

Issuance of common stock for management fee

 

 

 

666,927

 

6,669

 

3,968,213

 

 

 

 

 

 

 

 

 

3,974,882

 

 

 

3,974,882

 

Distributions — preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,575

)

 

 

(3,575

)

 

 

(3,575

)

Net income

 

$

320,845

 

 

 

 

 

 

 

 

 

 

 

267,149

 

 

 

267,149

 

53,696

 

320,845

 

Distribution to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(118,669

)

(118,669

)

Unrealized gain on securities available-for-sale

 

1,058,789

 

 

 

 

 

 

 

 

 

 

 

 

 

1,058,789

 

1,058,789

 

 

 

1,058,789

 

Unrealized gain on derivative financial instruments

 

623,350

 

 

 

 

 

 

 

 

 

 

 

 

 

623,350

 

623,350

 

 

 

623,350

 

Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings

 

7,290,966

 

 

 

 

 

 

 

 

 

 

 

 

 

7,290,966

 

7,290,966

 

 

 

7,290,966

 

Balance — March 31, 2011

 

$

9,293,950

 

26,423,737

 

$

264,237

 

$

454,654,595

 

(980,597

)

$

(10,669,585

)

$

(180,426,093

)

$

(46,196,212

)

$

217,626,942

 

$

1,934,889

 

$

219,561,831

 

 


(1) Comprehensive income for the three months ended March 31, 2010 was $4,922,962.

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

320,845

 

$

26,427,510

 

Adjustments to reconcile net income to net cash (used in) / provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

432,465

 

43,739

 

Gain on extinguishment of debt

 

(892,500

)

(46,498,479

)

Gain on sale of securities

 

 

(3,303,480

)

Provision for loan losses (net of recoveries)

 

535,135

 

25,000,000

 

Loss on restructured loans

 

1,000,000

 

 

Amortization and accretion of interest and fees

 

1,943,909

 

2,476,256

 

Change in fair value of non-qualifying swaps

 

278,533

 

219,358

 

(Income) loss from equity affiliates

 

(24,365

)

45,575

 

Changes in operating assets and liabilities:

 

 

 

 

 

Other assets

 

302,608

 

1,331,135

 

Distributions of operations from equity affiliates

 

24,365

 

21,837

 

Other liabilities

 

(3,235,343

)

(1,558,908

)

Deferred fees

 

300,340

 

 

Due from/to related party

 

(14,293,220

)

6,342,130

 

Net cash (used in) / provided by operating activities

 

$

(13,307,228

)

$

10,546,673

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(26,607,473

)

(892,989

)

Payoffs and paydowns of loans and investments

 

42,353,408

 

56,006,658

 

Deposits received relating to loan held-for-sale

 

 

1,000,000

 

Due to borrowers and reserves

 

(54,911

)

3,173,281

 

Change in restricted cash

 

(1,050,000

)

 

Purchase of securities

 

 

(4,481,719

)

Principal collection on securities

 

 

99,499

 

Proceeds from sale of available-for-sale securities

 

 

14,370,469

 

Proceeds (outflows) from investments in real estate owned, net

 

1,447,675

 

(12,806

)

Contributions to equity affiliates

 

 

(358,746

)

Distributions from equity affiliates

 

49,434

 

436,101

 

Net cash provided by investing activities

 

$

16,138,133

 

$

69,339,748

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Payoffs and paydowns of notes payable and repurchase agreements

 

(244,000

)

(46,189,390

)

Payoff of junior subordinated notes to subsidiary trust issuing preferred securities

 

 

(10,500,122

)

Payoffs and paydowns of collateralized debt obligations

 

(7,072,005

)

(17,875,590

)

Change in restricted cash

 

(31,312,651

)

(13,043,440

)

Payments on swaps to hedge counterparties

 

(5,690,000

)

(4,900,000

)

Receipts on swaps from hedge counterparties

 

7,630,000

 

4,150,000

 

Distributions paid to noncontrolling interest

 

(118,669

)

(54,655

)

Distributions paid on preferred stock of private REIT

 

(3,575

)

(3,575

)

Net cash used in financing activities

 

$

(36,810,900

)

$

(88,416,772

)

Net decrease in cash and cash equivalents

 

$

(33,979,995

)

$

(8,530,351

)

Cash and cash equivalents at beginning of period

 

101,124,564

 

64,624,275

 

Cash and cash equivalents at end of period

 

$

67,144,569

 

$

56,093,924

 

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

10,336,575

 

$

18,159,065

 

Cash used for taxes

 

$

288,062

 

$

14,379

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Loans transferred to real estate owned, net

 

$

83,099,540

 

$

 

Assumption of mortgage note payable — real estate owned

 

$

55,351,004

 

$

 

Issuance of common stock for management incentive fee

 

$

3,974,882

 

$

 

Extinguishment of trust preferred securities

 

$

 

$

102,110,610

 

Re-issuance of CDO debt

 

$

 

$

42,304,391

 

Accrual of interest on reissued collateralized debt obligations

 

$

 

$

22,941,851

 

Available-for-sale securities exchanged

 

$

 

$

400,000

 

Investments transferred to available-for-sale securities, at fair value

 

$

 

$

35,814,344

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Note 1 —Description of Business/Form of Ownership

 

Arbor Realty Trust, Inc. (the “Company”) is a Maryland corporation that was formed in June 2003 to invest in a diversified portfolio of multi-family and commercial real estate related assets, primarily consisting of bridge loans, mezzanine loans, junior participating interests in first mortgage loans, and preferred and direct equity.  The Company may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.  The Company conducts substantially all of its operations through its operating partnership, Arbor Realty Limited Partnership (“ARLP”), and ARLP’s wholly-owned subsidiaries.  The Company is externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM”).

 

The Company is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.  A REIT is generally not subject to federal income tax on its REIT—taxable income that it distributes to its stockholders, provided that it distributes at least 90% of its REIT—taxable income and meets certain other requirements.  Certain assets of the Company that produce non-qualifying income are owned by its taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.

 

The Company’s charter provides for the issuance of up to 500 million shares of common stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share.  The Company was incorporated in June 2003 and was initially capitalized through the sale of 67 shares of common stock for $1,005.

 

On July 1, 2003, ACM contributed $213.1 million of structured finance assets and $169.2 million of borrowings supported by $43.9 million of equity in exchange for a commensurate equity ownership in ARLP.  In addition, certain employees of ACM were transferred to ARLP.  At that time, these assets, liabilities and employees represented a substantial portion of ACM’s structured finance business.  The Company is externally managed and advised by ACM and pays ACM a management fee in accordance with a management agreement.  ACM also sources originations, provides underwriting services and services all structured finance assets on behalf of ARLP, and its wholly owned subsidiaries.

 

On July 1, 2003, the Company completed a private equity offering of 1,610,000 units (including an overallotment option), each consisting of five shares of common stock and one warrant to purchase one share of common stock at $75.00 per unit.  The Company sold 8,050,000 shares of common stock in the offering.  Gross proceeds from the private equity offering totaled $120.2 million.  Gross proceeds from the private equity offering combined with the concurrent equity contribution by ACM totaled approximately $164.1 million in equity capital.  The Company paid and accrued offering expenses of $10.1 million resulting in Arbor Realty Trust, Inc. stockholders’ equity and noncontrolling interest of $154.0 million as a result of the private placement.

 

In April 2004, the Company sold 6,750,000 shares of its common stock in a public offering at a price of $20.00 per share, for net proceeds of approximately $124.4 million after deducting the underwriting discount and other estimated offering expenses.  The Company used the proceeds to pay down indebtedness.  In May 2004, the underwriters exercised a portion of their over-allotment option, which resulted in the issuance of 524,200 additional shares.  The Company received net proceeds of approximately $9.8 million after deducting the underwriting discount.  In October 2004, ARLP received proceeds of approximately $9.4 million from the exercise of warrants for 629,345 operating partnership units.  Additionally, in 2004 and 2005, the Company issued 973,354 and 282,776 shares of common stock, respectively, from the exercise of warrants under its Warrant Agreement dated July 1, 2003, the (“Warrant Agreement”) and received net proceeds of $12.9 million and $4.2 million, respectively.

 

In June 2007, the Company completed a public offering in which it sold 2,700,000 shares of its common stock registered for $27.65 per share, and received net proceeds of approximately $73.6 million after deducting the underwriting discount and the other estimated offering expenses.  The Company used the proceeds to pay down debt and finance its loan and investment portfolio.

 

In June 2008, the Company’s external manager exercised its right to redeem its approximate 3.8 million operating partnership units in the Company’s operating partnership for shares of the Company’s common stock on a

 

7



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

one-for-one basis.  In addition, the special voting preferred shares paired with each operating partnership unit, pursuant to a pairing agreement, were redeemed simultaneously and cancelled by the Company.

 

In June 2010, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “1933 Act”) with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act.  On June 23, 2010, the SEC declared this shelf registration statement effective.

 

The Company had 25,443,140 shares of common stock outstanding at March 31, 2011 and 24,776,213 shares of common stock outstanding at December 31, 2010.

 

Note 2 — Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with the FASB Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the United States (“GAAP”), for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although management believes that the disclosures presented herein are adequate to prevent the accompanying unaudited consolidated interim financial statements presented from being misleading.

 

The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, partnerships or other joint ventures in which the Company owns a voting interest of greater than 50 percent, and Variable Interest Entities (“VIEs”) of which the Company is the primary beneficiary.  VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  Updated accounting guidance requires the Company to present a) assets of a consolidated VIE that can be used only to settle obligations of the consolidated VIE, and b) liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary.  As a result of this guidance, the Company has separately disclosed parenthetically the assets and liabilities of its three collateralized debt obligation (“CDO”) subsidiaries on its Consolidated Balance Sheets.  Entities in which the Company owns a voting interest of 20 percent to 50 percent are accounted for primarily under the equity method.

 

In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  All significant inter-company transactions and balances have been eliminated in consolidation.  Certain prior year amounts have been reclassified to conform to current period presentation.  One of the Company’s real estate investments was reclassified from real estate owned to real estate held-for-sale at September 30, 2010, and subsequently sold in October 2010, which resulted in a reclassification from property operating income and expenses to discontinued operations for all prior period presentations.

 

The preparation of consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Further, in connection with preparation of the consolidated interim financial statements, the Company evaluated events subsequent to the balance sheet date of March 31, 2011 through the issuance of the Consolidated Financial Statements.

 

8



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2011.  The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Cash and Cash Equivalents

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  The Company places its cash and cash equivalents in high quality financial institutions.  The consolidated account balances at each institution periodically exceed Federal Deposit Insurance Corporation (FDIC) insurance coverage and the Company believes that this risk is not significant.

 

Restricted Cash

 

At March 31, 2011 and December 31, 2010, the Company had restricted cash of $53.8 million and $21.1 million, respectively.  Restricted cash primarily represents proceeds from loan repayments on deposit with the trustees for the Company’s CDOs, which will be used to purchase replacement loans as collateral for the CDOs, unfunded loan commitments, principal repayments for the CDOs and interest payments received from loans in the CDOs, which are remitted quarterly to the bond holders and the Company in the month following the quarter.  See Note 7 — “Debt Obligations.”  One of the Company’s recently acquired real estate owned assets also has a restricted cash balance of $1.4 million due to a first mortgage escrow requirement.  See Note 6 — “Real Estate Owned and Held-For-Sale.”

 

Loans, Investments and Securities

 

At the time of purchase, the Company designates a security as held-to-maturity, available-for-sale, or trading depending on the Company’s ability and intent to hold it to maturity.  The Company does not have any securities designated as trading or held-to-maturity as of March 31, 2011.  Securities available-for-sale are reported at fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive loss.  Unrealized losses that are determined to be other-than-temporary are recognized in earnings up to their credit component.  The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions.  The process may include, but is not limited to, assessment of recent market events and prospects for near-term recovery, assessment of cash flows, internal review of the underlying assets securing the investments, credit of the issuer and the rating of the security, as well as the Company’s ability and intent to hold the investment to maturity.  Management closely monitors market conditions on which it bases such decisions.

 

The Company also assesses certain of its securities, other than those of high credit quality, to determine whether significant changes in estimated cash flows or unrealized losses on these securities, if any, reflect a decline in value which is other-than-temporary and, accordingly, should be written down to their fair value against earnings.  On a quarterly basis, the Company reviews these changes in estimated cash flows, which could occur due to actual prepayment and credit loss experience, to determine if an other-than-temporary impairment is deemed to have occurred.  The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions and is not necessarily intended to indicate a permanent decline in value.  The Company calculates a revised yield based on the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and the revised yield is then applied prospectively to recognize interest income.

 

Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired.  The Company invests in preferred equity interests that, in some cases, allow the Company to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing.  At the inception of each such investment, management must determine whether such investment should be accounted for as a loan, joint venture or as real estate.  To date, management has determined that all such investments are properly accounted for and reported as loans.

 

9



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

From time to time the Company may enter into an agreement to sell a loan.  These loans are considered held-for-sale and are valued at the lower of the loan’s carrying amount or fair value less costs to sell.  For the sale of loans, recognition occurs when ownership passes to the buyer.

 

Impaired Loans, Allowance for Loan Losses and Loss on Restructured Loans

 

The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.  The Company evaluates each loan in its portfolio on a quarterly basis.  The Company’s loans are individually specific and unique as it relates to product type, geographic location, and collateral type, as well as to the rights and remedies and the position in the capital structure the Company’s loans and investments have in relation to the underlying collateral.  The Company evaluates all of this information as well as general market trends related to specific classes of assets, collateral type and geographic locations, when determining the appropriate assumptions such as capitalization and market discount rates, as well as the borrower’s operating income and cash flows, in estimating the value of the underlying collateral when determining if a loan is impaired.  Included in the evaluation of the capitalization and market discount rates, the Company considers not only assumptions specific to the collateral but also considers geographical and industry trends that could impact the collateral’s value.

 

If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained at a level that is believed to be adequate by management to absorb probable losses.  The Company had an allowance for loan losses of $163.9 million relating to 27 loans with an aggregate carrying value, before reserves, of approximately $382.1 million at March 31, 2011 and $205.5 million in allowance for loan losses relating to 30 loans with an aggregate carrying value, before reserves, of approximately $530.6 million at December 31, 2010.  In addition, the Company recorded a cash recovery of $0.2 million in the first quarter of 2011 for a fully reserved loan.

 

Loss on restructured loans are recorded when the Company has granted a concession to the borrower in the form of principal forgiveness related to the payoff or the substitution or addition of a new debtor for the original borrower or when the Company incurs costs on behalf of the borrower related to the modification, payoff or the substitution or addition of a new debtor for the original borrower.  When a loan is restructured, the Company records its investment at net realizable value, taking into account the cost of all concessions at the date of restructuring.  The reduction in the recorded investment is recorded as a charge to the Statement of Operations in the period in which the loan is restructured.  The Company recorded a loss on restructured loans of $1.0 million for the three months ended March 31, 2011 as a result of the execution of a forbearance agreement on a loan modified in the subsequent quarter.  The Company did not record a loss on restructured loans for the three months ended March 31, 2010.

 

Real Estate Owned and Held-For-Sale

 

Real estate owned, shown net of accumulated depreciation, is comprised of real property acquired by foreclosure or through partial or full settlement of mortgage debt.   The real estate acquired is recorded at the estimated fair value at the time of acquisition.

 

Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans are expensed as incurred and costs subsequently incurred to extend the life or improve the assets subsequent to foreclosure are capitalized.

 

The Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases, intangibles for the value of the above or below market leases at fair value and to any other identified intangible assets or liabilities.  The Company finalizes its purchase price allocation on these assets within one year of the acquisition date.  The Company amortizes the value allocated to the in-place leases over the remaining lease term.  The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

 

10



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Real estate assets, including assets acquired by foreclosure or through partial or full settlement of mortgage debt, that are operated for the production of income are depreciated using the straight-line method over their estimated useful lives. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.

 

The Company’s properties are individually reviewed for impairment each quarter, if events or circumstances change indicating that the carrying amount of the assets may not be recoverable.  The Company recognizes impairment if the undiscounted estimated cash flows to be generated by the assets are less than the carrying amount of those assets.  Measurement of impairment is based upon the estimated fair value of the asset.  Upon evaluating a property, many factors are considered, including estimated current and expected operating cash flows from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business.  Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property.  If future evaluations result in a diminution in the value of the property, the reduction will be recognized as an impairment charge at that time.

 

Real estate is classified as held-for-sale when management commits to a plan of sale, the asset is available for immediate sale, there is an active program to locate a buyer, and it is probable the sale will be completed within one year.  Properties classified as held-for-sale are not depreciated and the results of their operations are shown in discontinued operations.  Real estate assets that are expected to be disposed of are valued, on an individual asset basis, at the lower of their carrying amount or their fair value less costs to sell.

 

The Company recognizes sales of real estate properties upon closing.  Payments received from purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognized upon closing using the full accrual method when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale.  Profit may be deferred in whole or in part until collectability of the sales price is reasonably assured and the earnings process is complete.

 

Revenue Recognition

 

Interest income — Interest income is recognized on the accrual basis as it is earned from loans, investments, and securities.  In certain instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, and/or deferred interest upon maturity.  In some cases interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security.  This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment.  Income recognition is suspended for loans when, in the opinion of management, a full recovery of all contractual principal is not probable.  Income recognition is resumed when the loan becomes contractually current and performance is resumed.  The Company records interest income on certain impaired loans to the extent cash is received, in which a loan loss reserve has been recorded, as the borrower continues to make interest payments.  The Company recorded loan loss reserves related to these loans as it was deemed that full recovery of principal and interest was not probable.  Several of the loans provide for accrual of interest at specified rates, which differ from current payment terms.  Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower.  If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt.  The Company currently has no loans in its portfolio accruing such interest.  Therefore, interest income is recorded on all of the Company’s loans and investments only to the extent that the current pay rate is received.  Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers.  These equity kickers have the potential to generate additional revenues to the Company as a result of excess cash flow distributions and/or as appreciated properties are sold or refinanced.  The Company did not record interest income from such investments for the three month periods ended March 31, 2011 and 2010, respectively.

 

11



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Property operating income — Property operating income represents income associated with the operations of commercial real estate properties recorded as real estate owned.  The Company recognizes revenue for these activities when the fees are fixed or determinable, or evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.  For the three months ended March 31, 2011 and 2010, the Company recorded approximately $5.4 million and $0.2 million, respectively, of property operating income relating to its real estate owned.  As of March 31, 2011, the Company had four real estate owned properties including a portfolio of multifamily assets that was purchased by the Company out of bankruptcy and a portfolio of hotel assets that was transferred to the Company by the owner, a creditor trust.  Both of these portfolios were acquired in the first quarter of 2011.  As of March 31, 2010, the Company had one real estate owned property.  Additionally, another real estate investment was reclassified from real estate owned to real estate held-for-sale in the third quarter of 2010, which resulted in a reclassification from property operating income into discontinued operations for all prior periods.  See Note 6 — “Real Estate Owned and Held-For-Sale” for further details.

 

Other income — Other income represents loan structuring, defeasance, and miscellaneous asset management fees associated with the Company’s loans and investments portfolio.  The Company recognizes these forms of income when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.

 

Investment in Equity Affiliates

 

The Company invests in joint ventures that are formed to acquire, develop, and/or sell real estate assets.  These joint ventures are not majority owned or controlled by the Company, or are VIEs for which the Company is not the primary beneficiary, and are not consolidated in its financial statements.  These investments are recorded under either the equity or cost method of accounting as appropriate.  The Company records its share of the net income and losses from the underlying properties of its equity method investments and any other-than-temporary impairment on these investments on a single line item in the Consolidated Statements of Operations as income or losses from equity affiliates.

 

Stock-Based Compensation

 

The Company has granted certain of its employees, independent directors, and employees of ACM, restricted stock awards consisting of shares of the Company’s common stock that vest annually over a multi-year period, subject to the recipient’s continued service to the Company.  The Company records stock-based compensation expense at the grant date fair value of the related stock-based award with subsequent remeasurement for any unvested shares granted to non-employees of the Company with such amounts expensed against earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods.  Dividends are paid on the restricted stock as dividends are paid on shares of the Company’s common stock whether or not they are vested.  Stock-based compensation is disclosed in the Company’s Consolidated Statements of Operations under “employee compensation and benefits” for employees and under “selling and administrative” expense for non-employees.

 

Income Taxes

 

The Company is organized and conducts its operations to qualify as a REIT and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on taxable income which is distributed to its stockholders, provided that the Company distributes at least 90% of its taxable income and meets certain other requirements.  Certain REIT income may be subject to state and local income taxes.  The Company’s assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by the Company’s taxable REIT subsidiaries, the income of which is subject to federal and state income tax.  Under current federal tax law, the income and the tax on such income, if any, attributable to certain debt extinguishment transactions realized in 2009 and 2010 may, at the Company’s election, be deferred to future periods.

 

12



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.  This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides clarity on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

 

Other Comprehensive Income / (Loss)

 

The Company divides comprehensive income or loss into net income (loss) and other comprehensive income (loss), which includes unrealized gains and losses on available-for-sale securities.  In addition, to the extent the Company’s derivative instruments qualify as hedges, net unrealized gains or losses are reported as a component of accumulated other comprehensive income/(loss).  See “Derivatives and Hedging Activities” below.  At March 31, 2011, accumulated other comprehensive loss was $46.2 million and consisted of $47.4 million of net unrealized loss on derivatives designated as cash flow hedges and a $1.2 million unrealized gain related to available-for-sale securities.  At December 31, 2010, accumulated other comprehensive loss was $55.2 million and consisted of $55.3 million of net unrealized losses on derivatives designated as cash flow hedges and a $0.1 million unrealized gain related to available-for-sale securities.

 

Derivatives and Hedging Activities

 

The Company recognizes all derivatives as either assets or liabilities at fair value and these amounts are recorded in other assets or other liabilities on the Consolidated Balance Sheets.  Additionally, the fair value adjustments will affect either accumulated other comprehensive income (loss) until the hedged item is recognized in earnings, or net income (loss) depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.  The Company utilizes quotations from a third party to assist in the determination of these fair values.

 

The Company records all derivatives on the Consolidated Balance Sheets at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether a company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

In the normal course of business, the Company may use a variety of derivative financial instruments to manage, or hedge, interest rate risk.  These derivative financial instruments must be effective in reducing its interest rate risk exposure in order to qualify for hedge accounting.  When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income (loss) for each period until the derivative instrument matures or is settled.  In cases where a derivative financial instrument is terminated early, any gain or loss is generally amortized over the remaining life of the hedged item.  Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income (loss).  Derivatives are used for hedging purposes rather than speculation.  See Note 8 — “Derivative Financial Instruments” for further details.

 

13



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Variable Interest Entities

 

The Company has evaluated its loans and investments, mortgage related securities, investments in equity affiliates, junior subordinated notes and CDOs, in order to determine if they qualify as VIEs or as variable interests in VIEs.  This evaluation resulted in the Company determining that its bridge loans, junior participation loans, mezzanine loans, preferred equity investments, investments in equity affiliates, junior subordinated notes, CDOs, and investments in debt securities were potential VIEs or variable interests in VIEs.  A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties.  A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  See Note 9 — “Variable Interest Entities” for further details.

 

Recently Issued Accounting Pronouncements

 

In April 2011, the FASB issued updated guidance on a creditor’s determination of whether a restructuring will be a troubled debt restructuring, which establishes new guidelines in evaluating whether a loan modification meets the criteria of a troubled debt restructuring.  This guidance is effective as of the third quarter of 2011, applied retrospectively to the beginning of the fiscal year as required, and its adoption is not expected to have a material effect on the Company’s Consolidated Financial Statements.

 

In December 2010, the FASB issued updated guidance on business combinations, which clarifies that when pro forma financial information is required, it is to be presented as if the business combination occurred at the beginning of the prior year.  The guidance also requires a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination.  The guidance is effective for business combinations in fiscal years beginning on or after December 15, 2010 and the adoption of this guidance on January 1, 2011 did not have a material effect on the Company’s Consolidated Financial Statements.

 

In July 2010, the FASB issued updated guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses which requires a greater level of information disclosed about the credit quality of loans and allowance for loan losses, as well as additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  This guidance is effective as of the fourth quarter of 2010, except for the information related to loans modified in a troubled debt restructuring which was postponed by the FASB to the third quarter of 2011.  As the guidance only amends existing disclosure requirements, its adoption resulted in additional disclosures and did not have a material effect on the Company’s Consolidated Financial Statements.

 

In January 2010, the FASB issued updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the roll forward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy.  The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.  The gross presentation of the Level 3 roll forward is required for interim and annual reporting periods beginning after December 15, 2010 and its adoption on January 1, 2011 did not have a material effect on the Company’s Consolidated Financial Statements.

 

14



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Note 3 — Loans and Investments

 

The following table sets forth the composition of the Company’s loan and investment portfolio at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2011

 

At December 31, 2010

 

 

 

March 31,

 

Percent

 

December 31,

 

Percent

 

Loan

 

Wtd. Avg.

 

Loan

 

Wtd. Avg.

 

 

 

2011

 

of Total

 

2010

 

of Total

 

Count

 

Pay Rate(1)

 

Count

 

Pay Rate(1)

 

 

 

(Unaudited)

 

 

 

 

 

(Unaudited)

 

 

 

 

 

Bridge loans

 

$

989,769,698

 

66%

 

$

1,070,013,851

 

66%

 

51

 

4.23%

 

54

 

4.14%

 

Mezzanine loans

 

216,396,702

 

14%

 

233,406,411

 

14%

 

28

 

5.02%

 

30

 

4.83%

 

Junior participation loans

 

198,021,507

 

13%

 

240,971,047

 

15%

 

9

 

5.22%

 

12

 

5.15%

 

Preferred equity investments

 

90,586,631

 

7%

 

89,472,959

 

5%

 

18

 

2.69%

 

17

 

5.68%

 

 

 

1,494,774,538

 

100%

 

1,633,864,268

 

100%

 

106

 

4.38%

 

113

 

4.47%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(13,918,936

)

 

 

(14,168,578

)

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(163,902,754

)

 

 

(205,470,302

)

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,316,952,848

 

 

 

$

1,414,225,388

 

 

 

 

 

 

 

 

 

 

 

 


(1) “Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in the Company’s portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements.  Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.  At March 31, 2011, the Company had no such loans in its portfolio that were currently accruing such interest.

 

Concentration of Credit Risk

 

The Company operates in one portfolio segment, commercial mortgage loans and investments.  Commercial mortgage loans and investments can potentially subject the Company to concentrations of credit risk.  The Company is subject to concentration risk in that, as of March 31, 2011, the unpaid principal balance related to 27 loans with five unrelated borrowers represented approximately 29% of total assets.  At December 31, 2010 the unpaid principal balance related to 32 loans with five unrelated borrowers represented approximately 32% of total assets.  As of March 31, 2011 and December 31, 2010, the Company had 106 and 113 loans and investments, respectively.

 

As a result of the loan review process at March 31, 2011, the Company identified loans and investments that it considers higher-risk loans that had a carrying value, before loan loss reserves, of approximately $327.6 million and a weighted average loan-to-value (“LTV”) ratio of 98%, compared to lower-risk loans with a carrying value, before loan loss reserves, of $1.1 billion and a weighted average LTV ratio of 85%.

 

As a component of the Company’s policies and procedures for loan valuation and risk assessment, each loan and investment is assigned a credit risk rating.  Individual ratings range from one to five, with one being the lowest risk and five being the highest.  Each credit risk rating has benchmark guidelines which pertain to debt-service coverage ratios, LTV ratio, borrower strength, asset quality, and funded cash reserves.  Other factors such as guarantees, market strength, remaining loan term, and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan.  This metric provides a helpful snapshot of portfolio quality and credit risk.  Given the Company’s asset management approach, however, the risk rating process does not result in differing levels of diligence contingent upon credit rating.  That is because all portfolio assets are subject to the level of scrutiny and ongoing analysis consistent with that of a ‘high-risk” loan.  All assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance is reviewed, and forward-looking projections are created.  Generally speaking, given the Company’s typical loan and investment

 

15



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

profile, a risk rating of three suggests that the Company expects the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired.  A risk rating of four indicates the Company anticipates that the loan will require a modification of some kind.  A risk rating of five indicates the Company expects the loan to underperform over the term, and that there could be loss of interest and/or principal.  Ratings of 3.5 and 4.5 generally indicate loans that have characteristics of both the immediately higher and lower classifications.  Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, condition of the market of the underlying collateral, additional collateral or other credit enhancements, or loan terms, may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

 

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class as of March 31, 2011 and December 31, 2010 is as follows:

 

 

 

As of March 31, 2011

 

As of December 31, 2010

 

Asset Class

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

LTV
Ratio

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

LTV
Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

570,287,223

 

38.1%

 

3.5

 

86%

 

$

615,788,256

 

37.7%

 

3.6

 

87%

 

Office

 

556,824,760

 

37.3%

 

3.3

 

87%

 

563,914,007

 

34.5%

 

3.3

 

87%

 

Hotel

 

135,170,782

 

9.0%

 

3.8

 

92%

 

220,277,021

 

13.5%

 

3.9

 

95%

 

Land

 

162,852,317

 

10.9%

 

4.1

 

94%

 

164,161,755

 

10.0%

 

4.1

 

94%

 

Commercial

 

54,989,456

 

3.7%

 

3.6

 

91%

 

55,073,229

 

3.4%

 

3.6

 

92%

 

Condo

 

14,650,000

 

1.0%

 

3.9

 

91%

 

14,650,000

 

0.9%

 

3.9

 

90%

 

Total

 

$

1,494,774,538

 

100.0%

 

3.5

 

88%

 

$

1,633,864,268

 

100.0%

 

3.6

 

89%

 

 

Geographic Concentration Risk

 

As of March 31, 2011, 41%, 16%, and 7% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California, and Florida, respectively.  As of December 31, 2010, 38%, 15%, and 12% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California and Florida, respectively.

 

Impaired Loans and Allowance for Loan Losses

 

The Company performs evaluations of the loan portfolio quarterly to assess the performance of its loans and whether a reserve for impairment should be recorded.  The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement.

 

During the quarter ended March 31, 2011, the Company determined that the fair value of the underlying collateral securing four impaired loans with an aggregate carrying value of $27.6 million was less than the net carrying value of the loans, resulting in a $1.6 million provision for loan losses for the three months ended March 31, 2011.  In addition, during the quarter, the Company received a cash recovery of $0.2 million related to a fully reserved loan as well as a $0.8 million recovery of reserve related to a loan that was modified in the subsequent quarter.  These recoveries were recorded in provision for loan losses on the Statement of Operations.  The effect of the recoveries resulted in a provision for loan losses, net of recoveries, of $0.5 million for the three months ended March 31, 2011.  The $1.6 million of loan loss reserves recorded during the three months ended March 31, 2011 was attributable to loans on which the Company had previously recorded reserves.  The Company recorded a $25.0 million provision for loan losses for the three months ended March 31, 2010 when it performed an evaluation of its loan portfolio and determined that the fair value of the underlying collateral securing ten impaired loans with an aggregate carrying value of $150.0 million was less than the net carrying value of the loans.  There were no loans for which the value of the collateral securing the loan was less than the carrying value of the loan for which the Company had not recorded a provision for loan loss.

 

16



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

At March 31, 2011, the Company had a total of 27 loans with an aggregate carrying value, before reserves, of $382.1 million for which impairment reserves have been recorded.  At December 31, 2010, the Company had a total of 30 loans with an aggregate carrying value, before reserves, of $530.6 million for which impairment reserves have been recorded.

 

A summary of the changes in the allowance for loan losses is as follows:

 

 

 

For the Three
Months Ended

 

For the Three
Months Ended

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Allowance at beginning of the period

 

$

205,470,302

 

$

326,328,039

 

Provision for loan losses

 

1,550,000

 

25,000,000

 

Charge-offs

 

(10,391,754

)

 

Charge-offs on loans reclassified to real estate owned, net

 

(31,710,929

)

 

Recoveries of reserves

 

(1,014,865

)

 

Allowance at end of the period

 

$

163,902,754

 

$

351,328,039

 

 

A summary of the Company’s impaired loans by asset class is as follows:

 

 

 

As of March 31, 2011

 

Three Months Ended
March 31, 2011

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

130,251,403

 

$

128,570,491

 

$

57,260,569

 

$

160,411,797

 

$

954,522

 

Office

 

84,218,653

 

79,044,313

 

20,200,000

 

87,711,998

 

1,093,115

 

Hotel

 

33,671,507

 

35,780,962

 

18,671,515

 

76,171,507

 

243,787

 

Land

 

130,255,660

 

128,722,258

 

58,700,000

 

130,255,661

 

8,356

 

Condo

 

10,000,000

 

10,000,000

 

9,070,670

 

10,000,000

 

60,000

 

Total

 

$

388,397,223

 

$

382,118,024

 

$

163,902,754

 

$

464,550,963

 

$

2,359,780

 

 

 

 

As of December 31, 2010

 

Three months Ended
 March 31, 2010

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

190,572,190

 

$

189,163,526

 

$

77,681,683

 

$

260,320,797

 

$

1,935,795

 

Office

 

91,205,342

 

86,132,382

 

27,996,434

 

38,418,388

 

494,272

 

Hotel

 

118,671,507

 

116,643,603

 

32,021,515

 

150,407,421

 

102,030

 

Land

 

130,255,661

 

128,686,443

 

58,700,000

 

203,104,483

 

2,155,013

 

Commercial

 

 

 

 

38,297,087

 

 

Condo

 

10,000,000

 

10,000,000

 

9,070,670

 

15,899,279

 

90,967

 

Retail

 

 

 

 

6,580,636

 

29,425

 

Total

 

$

540,704,700

 

$

530,625,954

 

$

205,470,302

 

$

713,028,091

 

$

4,807,502

 

 


(1) Represents the unpaid principal balance of impaired loans less unearned revenue and other holdbacks and adjustments by asset class.

 

(2) Represents an average of the beginning and ending unpaid principal balance of each asset class.

 

During the quarter ended March 31, 2011, the Company sold a mezzanine loan with a carrying value of $7.0 million, which had been fully reserved for in a prior period, for $0.2 million and wrote down a bridge loan with a carrying value of $44.5 million to $2.9 million, after principal paydowns of $38.0 million, and recorded charge-offs to previously recorded reserves of $10.4 million.  The Company also charged-off $31.7 million of loan loss reserves related to two loans with carrying values totaling approximately $77.2 million, net of reserves and assumed debt, on properties that were transferred to the Company by the owner, a creditor trust as well as purchased by the Company out of bankruptcy and recorded to real estate owned, net on the Company’s Consolidated Balance Sheet in the first quarter of 2011.  See Note 6 — “Real Estate Owned and Held-For-Sale” for further details.  A loss on restructured loans of $1.0 million was accrued for the three months ended March 31, 2011 as a result of the execution of a forbearance agreement on a loan modified in the subsequent quarter and was included in other

 

17



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

liabilities.  There were no charge-offs, reclassifications to real estate owned, recoveries of reserves, or loss on restructured loans for the quarter ended March 31, 2010.

 

As of March 31, 2011, ten loans with a net carrying value of approximately $24.6 million, net of related loan loss reserves of $34.9 million, were classified as non-performing and all ten loans had loan loss reserves.  Income is generally recognized on a cash basis only to the extent it is received.  Full income recognition will resume when the loan becomes contractually current and performance has recommenced.  As of December 31, 2010, nine loans with a net carrying value of approximately $25.6 million, net of related loan loss reserves of $54.2 million, were classified as non-performing for which income recognition had been suspended.  The Company had previously established loan loss reserves on all of these loans.

 

A summary of the Company’s non-performing loans by asset class as of March 31, 2011 and December 31, 2010 is as follows:

 

 

 

As of March 31, 2011

 

As of December 31, 2010

 

Asset Class

 

Carrying
Value

 

Less Than
90 Days
Past Due

 

Greater
Than 90
Days Past
Due

 

Carrying
Value

 

Less Than
90 Days
Past Due

 

Greater
Than 90
Days Past
Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

28,109,931

 

$

5,654,672

 

$

22,455,259

 

$

41,236,389

 

$

1,363,097

 

$

39,873,292

 

Office

 

2,800,000

 

 

2,800,000

 

9,806,298

 

 

9,806,298

 

Hotel

 

3,671,507

 

 

3,671,507

 

3,671,507

 

 

3,671,507

 

Land

 

24,999,972

 

 

24,999,972

 

24,999,972

 

 

24,999,972

 

Total

 

$

59,581,410

 

$

5,654,672

 

$

53,926,738

 

$

79,714,166

 

$

1,363,097

 

$

78,351,069

 

 

At March 31, 2011, the Company did not have any loans contractually past due 90 days or more that are still accruing interest.  In addition, the Company had unfunded commitments totaling $0.2 million on modified loans classified as troubled debt restructurings.

 

18



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Note 4 — Available-For-Sale Securities

 

The following is a summary of the Company’s securities classified as available-for-sale at March 31, 2011:

 

 

 

Face

 

Amortized

 

Beginning

 

Amortization

 

Unrealized

 

Estimated

 

 

 

Value

 

Cost

 

Carrying Value

 

of Premium

 

Gain

 

Fair Value

 

Common equity securities

 

$

 

$

58,789

 

$

176,368

 

$

 

$

58,789

 

$

235,157

 

Collateralized debt obligation bond

 

10,000,000

 

1,000,000

 

1,000,000

 

 

1,000,000

 

2,000,000

 

Commercial mortgage-backed security

 

2,100,000

 

2,109,456

 

2,122,050

 

(12,594

)

 

2,109,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

12,100,000

 

$

3,168,245

 

$

3,298,418

 

$

(12,594

)

$

1,058,789

 

$

4,344,613

 

 

The following is a summary of the Company’s securities classified as available-for-sale at December 31, 2010:

 

 

 

Face

 

Amortized

 

Beginning

 

Other-Than-
Temporary

 

Unrealized

 

Estimated

 

 

 

Value

 

Cost

 

Carrying Value

 

Impairment

 

Gain

 

Fair Value

 

Common equity securities

 

$

 

$

88,184

 

$

88,184

 

$

(29,395

)

$

117,579

 

$

176,368

 

Collateralized debt obligation bond

 

10,000,000

 

7,975,405

 

7,975,405

 

(6,975,405

)

 

1,000,000

 

Commercial mortgage-backed security

 

2,100,000

 

2,122,050

 

2,122,050

 

 

 

2,122,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

12,100,000

 

$

10,185,639

 

$

10,185,639

 

$

(7,004,800

)

$

117,579

 

$

3,298,418

 

 

The following is a summary of the underlying credit ratings of the Company’s CDO bond and CMBS investments available-for-sale at March 31, 2011 and December 31, 2010:

 

 

 

At March 31, 2011

 

At December 31, 2010

 

 

 

 

 

Amortized

 

Percent

 

 

 

Amortized

 

Percent

 

Rating (1)

 

#

 

Cost

 

of Total

 

#

 

Cost

 

of Total

 

BB-

 

 

$

 

 

1

 

$

7,975,405

 

79

%

CCC-

 

2

 

3,109,456

 

100

%

1

 

2,122,050

 

21

%

 

 

2

 

$

3,109,456

 

100

%

2

 

$

10,097,455

 

100

%

 


(1) Based on the rating published by Standard & Poor’s for each security.

 

The Company owns 2,939,465 shares of common stock of Realty Finance Corporation, formerly CBRE Realty Finance, Inc., a commercial real estate specialty finance company, which it purchased in 2007 for $16.7 million, and which had a fair value of $0.2 million at March 31, 2011.  As of March 31, 2011, an unrealized gain totaling $0.2 million was recorded in accumulated other comprehensive loss related to these securities.

 

The Company owns a CDO bond security, purchased at a discount in 2008 for $7.5 million, which bears interest at a spread of 30 basis points over LIBOR, has a stated maturity of 41.0 years, but has an estimated remaining life of 5.1 years based on the maturities of the underlying assets.  As of the second quarter of 2010, the Company is no longer accreting income on the security which had $2.0 million of original discount and a fair value of $2.0 million at March 31, 2011.  As of March 31, 2011, an unrealized gain of $1.0 million was recorded in accumulated other comprehensive loss related to this security.

 

19



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The Company owns a CMBS investment, purchased at a premium in 2010 for $2.1 million, which is collateralized by a portfolio of hotel properties.  The Company currently has two mezzanine loans with a carrying value before loan loss reserves of $30.0 million related to this portfolio.  The CMBS investment bears interest at a spread of 89 basis points over LIBOR, has a stated maturity of 9.2 years, but has an estimated remaining life of 0.2 years based on the maturity of the underlying asset, and a fair value of $2.1 million at March 31, 2011.

 

Available-for-sale securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive loss.  The Company does not intend to sell its available-for-sale investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity.  The Company evaluates these securities periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value.  The Company’s evaluation is based on its assessment of cash flows which is supplemented by third-party research reports, internal review of the underlying assets securing the investments, levels of subordination and the ratings of the securities and the underlying collateral.  The Company’s estimation of cash flows expected to be generated by the securities portfolio is based upon an internal review of the underlying mortgage loans securing the investments both on an absolute basis and compared to the Company’s initial underwriting for each investment and efforts are supplemented by third party research reports, third party market assessments and dialogue with market participants.  Management closely monitors market conditions on which it bases such decisions.  As of March 31, 2011, the CDO bond security available-for-sale has been in a loss position as compared to its original purchase price for more than twelve months.  Based on the Company’s analysis in 2010, the Company concluded that this CDO bond investment was other-than-temporarily impaired and recorded a $7.0 million impairment charge in the second quarter of 2010 to the Company’s Consolidated Statement of Operations which was reclassified from accumulated other comprehensive loss.  The Company also concluded that the common stock securities were other-than-temporarily impaired and recorded $16.2 million, $0.4 million and less than $0.1 million of impairment charges to the Consolidated Statements of Operations in 2008, 2009 and 2010, respectively.  No impairment was recorded on the available-for-sale securities for the three months ended March 31, 2011 and 2010.

 

For the three months ended March 31, 2011, the Company amortized less than $0.1 million of premium into interest income from its CMBS investment and no discount was accreted into interest income from its CDO bond investment.  For the three months ended March 31, 2010, the Company accreted approximately $0.4 million of discount into interest income from its CDO bond investments, representing accretion on approximately $10.0 million of total original discount, and approximately $0.1 million of discounts into interest income from its CMBS investments.

 

As a result of selling two CMBS investments with a combined amortized cost of $11.1 million for $14.4 million in the first quarter of 2010, the Company recorded a gain on sale of securities of $3.3 million for the three months ended March 31, 2010.

 

The weighted average yield on the Company’s CDO bond and CMBS securities available-for-sale based on their face values was 0.34%, including the amortization of premium and 4.13%, including the accretion of discount, for the three months ended March 31, 2011 and 2010, respectively.

 

20



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Note 5 — Investment in Equity Affiliates

 

The following is a summary of the Company’s investment in equity affiliates at March 31, 2011 and December 31, 2010:

 

 

 

Investment in Equity Affiliates at

 

Outstanding
Loan Balance
to Equity
Affiliates at

 

 

 

March 31,

 

December 31,

 

March 31,

 

Equity Affiliates

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

930 Flushing & 80 Evergreen

 

$

554,476

 

$

554,476

 

$

23,989,456

 

 

 

 

 

 

 

 

 

450 West 33rd Street

 

 

 

50,000,000

 

 

 

 

 

 

 

 

 

1107 Broadway

 

5,720,000

 

5,720,000

 

 

 

 

 

 

 

 

 

 

Alpine Meadows

 

 

 

33,500,000

 

 

 

 

 

 

 

 

 

St. John’s Development

 

 

 

25,000,000

 

 

 

 

 

 

 

 

 

Lightstone Value Plus REIT L.P.

 

55,988,409

 

55,988,409

 

 

 

 

 

 

 

 

 

 

JT Prime

 

851,000

 

851,000

 

 

 

 

 

 

 

 

 

 

West Shore Café

 

2,097,566

 

2,147,000

 

4,000,000

 

 

 

 

 

 

 

 

 

Issuers of Junior Subordinated Notes

 

578,000

 

578,000

 

 

 

 

 

 

 

 

 

 

Total

 

$

65,789,451

 

$

65,838,885

 

$

136,489,456

 

 

The Company accounts for the 450 West 33rd Street and Lightstone Value Plus REIT L.P. investments under the cost method and the remaining investments under the equity method.

 

The following represents a change in the Company’s investments in equity affiliates:

 

West Shore Café

 

In August 2010, the Company invested approximately $2.1 million in exchange for a 50% non-controlling interest with a 20% preferred return subject to certain conditions in the West Shore Café, a restaurant / inn on an approximate 12,463 square foot lakefront property in Lake Tahoe, California.  The Company also provided a $5.5 million first mortgage loan, $4.0 million of which was initially funded, that matures in August 2013 and bears interest at a weighted average yield of 10.5%.  In the first quarter of 2011, the Company received a distribution of approximately $50,000 related to the preferred return which was recorded as a return of the investment.

 

Note 6 — Real Estate Owned and Held-For-Sale

 

The Company had a $29.8 million loan secured by a portfolio of multifamily assets in various locations of the United States that had a maturity date of June 2010 and a weighted average interest rate of approximately 4.26%.  In prior years, the Company established an $18.4 million provision for loan loss related to this portfolio reducing its carrying value to $11.4 million as of December 31, 2010.  In March 2011, the Company purchased the portfolio of multifamily assets securing this loan out of bankruptcy and assumed a $55.4 million senior interest in a first mortgage loan.  As of the date of this transaction, as well as at December 31, 2010, the loan was past due and non-performing.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $65.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three months ended March 31, 2011, the Company did

 

21



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

not record any property operating income or expenses from this portfolio because ownership did not pass to the Company until the end of the first quarter and the Company believes that any operating activity that occurred was immaterial to the Company’s interim Consolidated Financial Statements.  At March 31, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $65.3 million, cash of $0.9 million, restricted cash of $1.4 million due to a first mortgage escrow requirement, other assets of $0.4 million and a mortgage note payable of $55.4 million.  The Company will finalize the purchase price allocation within one year of the acquisition date.

 

The Company had an $85.0 million loan secured by a portfolio of six hotel assets in Florida that had a maturity date of July 2014 and a weighted average interest rate of approximately 3.75%.  During 2010, the Company established a $13.4 million provision for loan loss related to this portfolio reducing its carrying value to $71.6 million as of December 31, 2010.  In February 2011, the portfolio of hotel assets securing this loan were transferred to the Company by the owner, a creditor trust.  As of the date of this transaction, as well as at December 31, 2010, the loan was contractually current.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $67.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three months ended March 31, 2011, the Company recorded property operating income of $4.7 million and property operating expenses, including depreciation, of $3.1 million.  The operating results of the hotels are seasonal with the majority of revenues earned in the first two quarters of the calendar year.  At March 31, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $67.3 million, cash of $0.3 million, other assets of $1.9 million, receivable from related party of $2.1 million and other liabilities of $1.8 million. The Company will finalize the purchase price allocation within one year of the acquisition date.

 

The Company had a $5.6 million junior participating interest in a first mortgage loan secured by an apartment building in Tucson, Arizona that had a maturity date of July 2012 and bore interest at a fixed rate of 10%.  During 2009, the Company established a $5.6 million provision for loan loss related to this property equal to the carrying value of the loan and in the second quarter of 2010, terminated the loan as well as the provision.  In April 2010, the Company purchased the property securing this loan by deed-in-lieu of foreclosure and assumed the $20.8 million senior interest in a first mortgage loan.  The Company recorded this transaction as real estate owned in its Consolidated Financial Statements at a fair value of $20.8 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three months ended March 31, 2011, the Company recorded property operating income of $0.6 million and property operating expenses, including depreciation, of $0.8 million.  At March 31, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $19.9 million, cash of $0.1 million, other assets of $0.7 million, mortgage note payable of $20.8 million and other liabilities of $0.3 million.

 

The Company had a $4.0 million bridge loan secured by a hotel located in St. Louis, Missouri that matured in 2009 and bore interest at a variable rate of LIBOR plus 5.00%.  In April 2009, the borrower delivered a deed-in-lieu of foreclosure to the Company.  As a result, during the second quarter of 2009 the Company recorded this investment on its balance sheet as real estate owned at a fair value of $2.9 million.  The carrying value represented the fair value of the underlying collateral at the time of the transfer.  For the three months ended March 31, 2011, the Company recorded property operating income of $0.1 million and property operating expenses, including depreciation, of $0.4 million.  For the three months ended March 31, 2010, the Company recorded property operating income of $0.2 million and property operating expenses, including depreciation, of $0.4 million.  At March 31, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $2.7 million, other assets of $0.1 million and other liabilities of $0.5 million.

 

The Company had a $9.9 million bridge loan secured by a motel located in Long Beach, California that matured in 2008 and bore interest at a variable rate of LIBOR plus 4.00%.  During 2008 and 2009, the Company recorded a $4.3 million provision for loan loss related to this property reducing the carrying amount to $5.6 million.  In August 2009, the Company was the winning bidder at a foreclosure sale of the property securing this loan which was recorded as real estate owned.  The carrying value represented the then fair value of the underlying collateral at the time of the sale.  During the third quarter of 2010, the Company agreed to sell the property to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at

 

22



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

a value of $5.5 million and reclassified property operating income and expenses for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements.  For the three months ended March 31, 2010, loss from discontinued operations consisted of property operating income of $0.1 million and property operating expenses of $0.1 million.  In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.  The Company sold the property to the third party and received net proceeds of approximately $6.8 million in October 2010.

 

The Company had a $5.0 million mezzanine loan secured by an office building located in Indianapolis, Indiana that was scheduled to mature in June 2012 and bore interest at a fixed rate of 10.72%. During the first quarter of 2008, the Company established a $1.5 million provision for loan loss related to this property reducing the carrying value to $3.5 million at March 31, 2008.  In April 2008, the Company was the winning bidder at a UCC foreclosure sale of the entity which owns the equity interest in the property securing this loan and a $41.4 million first mortgage on the property.  As a result, during the second quarter of 2008, the Company recorded this investment on its Consolidated Balance Sheet as real estate owned at fair value, which included the Company’s $3.5 million carrying value of the mezzanine loan and the $41.4 million first lien mortgage note payable.  During the third quarter of 2009, the Company mutually agreed with the first mortgage lender to appoint a receiver to operate the property and the Company is working to assist in the transfer of title to the first mortgage lender.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million, reclassified property operating income and expenses for the current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements, and recorded an impairment loss of $4.9 million in 2009.  The Company had originally planned to transfer the property to the first mortgage lender within one year of the date of its designation as held-for-sale, however, due to circumstances beyond the Company’s control, the transfer has not been completed within the one year time frame.  The Company believes it is reasonable to expect the transfer to be completed in 2011.  Based on the facts and circumstances related to this property, the Company will continue to account for this investment as real estate held-for-sale.

 

As of March 31, 2011, real estate held-for-sale consisted of land and building, net of accumulated depreciation, of approximately $41.4 million.  At March 31, 2011, the Company also had a mortgage note payable held-for-sale of $41.4 million and other liabilities of $1.2 million.  The Company did not record interest expense related to the note payable, as the interest expense is non-recourse and the Company is in the process of cooperating with the receiver and the first lien holder in order for the first lien holder to take title to the office building subject to the $41.4 million first mortgage.  For the three months ended March 31, 2011, the receiver’s issued financial statements reported net income for the office building investment.  The Company believes these amounts are not realizable at this time and, as such, did not record any income or loss on this held-for-sale investment.

 

23



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Note 7 — Debt Obligations

 

The Company utilizes a repurchase agreement, collateralized debt obligations, junior subordinated notes, a note payable, a loan participation and mortgage notes payable to finance certain of its loans and investments.  Borrowings underlying these arrangements are primarily secured by a significant amount of the Company’s loans and investments.

 

Repurchase Agreements

 

The following table outlines borrowings under the Company’s repurchase agreement as of March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Debt

 

Collateral

 

Debt

 

Collateral

 

 

 

Carrying

 

Carrying

 

Carrying

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreement, financial institution, $0.7 million committed line at March 31, 2011, expiration June 2011, interest is variable based on one-month LIBOR; the weighted average note rate was 2.78% and 2.80%, respectively

 

$

746,997

 

$

523,938

 

$

990,997

 

$

523,938

 

 

 

 

 

 

 

 

 

 

 

Total repurchase agreement

 

$

746,997

 

$

523,938

 

$

990,997

 

$

523,938

 

 

At March 31, 2011 and December 31, 2010, the weighted average note rate for the Company’s repurchase agreement was 2.78% and 2.80%, respectively.  There were no interest rate swaps on this repurchase agreement at March 31, 2011 and December 31, 2010.

 

The Company has a repurchase agreement that bears interest at 250 basis points over LIBOR.  In June 2009, the Company amended this facility extending the maturity to June 2010, with a one year extension option.  In June 2010, the Company exercised the option, extending the maturity to June 2011.  In addition, the amendment includes the removal of all financial covenants and a reduction of the committed amount reflecting the one asset currently financed in this facility.  During the three months ended March 31, 2011, the Company paid down approximately $0.2 million of this facility.  At March 31, 2011, the outstanding balance under this facility was $0.7 million.

 

Collateralized Debt Obligations

 

The following table outlines borrowings under the Company’s collateralized debt obligations as of March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Debt

 

Collateral

 

Debt

 

Collateral

 

 

 

Carrying

 

Carrying

 

Carrying

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 4.62% and 4.52%, respectively

 

$

221,181,775

 

$

320,026,865

 

$

226,770,198

 

$

341,865,132

 

 

 

 

 

 

 

 

 

 

 

CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.76% and 2.77%, respectively

 

301,014,884

 

403,335,074

 

301,999,004

 

409,417,838

 

 

 

 

 

 

 

 

 

 

 

CDO III — Issued 10 investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 1.76% and 1.77%, respectively

 

540,507,680

 

560,572,784

 

542,083,353

 

566,122,381

 

 

 

 

 

 

 

 

 

 

 

Total CDOs

 

$

1,062,704,339

 

$

1,283,934,723

 

$

1,070,852,555

 

$

1,317,405,351

 

 

24



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

At March 31, 2011 and December 31, 2010, the aggregate weighted average note rate for the Company’s collateralized debt obligations, including the cost of interest rate swaps on assets financed in these facilities, was 2.64% and 2.63%, respectively.  Excluding the effect of swaps, the weighted average note rate at March 31, 2011 and December 31, 2010 was 0.86%.

 

As of April 15, 2009, CDO I has reached the end of its replenishment date and will no longer make $2.0 million amortization payments to investors that were made quarterly prior to the replenishment date.  Investor capital is repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO.  Proceeds distributed are recorded as a reduction of the CDO liability.

 

Amortization proceeds from CDO II were distributed quarterly with approximately $1.2 million to be paid to investors as a reduction of the CDO liability, through the end of the replenishment period in April 2011.

 

CDO III has a $100.0 million revolving note class that provides a revolving note facility.  The outstanding note balance for CDO III was $540.5 million at March 31, 2011 which included $92.2 million outstanding under the revolving note facility.  CDO III is not required to make any amortization payments prior to the end of its replenishment period in January 2012.

 

During the three months ended March 31, 2011, the Company purchased a $1.5 million investment grade rated note originally issued by its CDO III issuing entity for a price of $0.6 million from a third party investor and recorded a net gain on extinguishment of debt of $0.9 million in its 2011 Consolidated Statement of Operations.

 

During the three months ended March 31, 2010, the Company had purchased approximately $27.6 million of investment grade rated notes originally issued by its CDO I, CDO II and CDO III issuing entities for a price of $7.4 million from third party investors and recorded a net gain on extinguishment of debt of $20.2 million in its 2010 Consolidated Statements of Operations.

 

In February 2010, the Company re-issued its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of approximately $42.8 million as part of an exchange for the retirement of $114.1 million of its junior subordinated notes.  This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of the Company’s CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity, of which $22.1 million remains at March 31, 2011.  See “Junior Subordinated Notes” below for further details.

 

The Company intends to own these portfolios of real estate-related assets until their maturities and accounts for these transactions on its Balance Sheet as financing facilities.  The Company’s CDOs are VIEs for which the Company is the primary beneficiary and are consolidated in the Company’s Financial Statements accordingly.  The investment grade tranches are treated as secured financings, and are non-recourse to the Company.

 

25



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Junior Subordinated Notes

 

The following table outlines borrowings under the Company’s junior subordinated notes as of March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Debt

 

Debt

 

 

 

Carrying

 

Carrying

 

 

 

Value

 

Value

 

 

 

 

 

 

 

Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

$

25,145,134

 

$

25,126,543

 

 

 

 

 

 

 

Junior subordinated notes, maturity April 2035, unsecured, face amount of $7.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

6,264,446

 

6,260,453

 

 

 

 

 

 

 

Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

25,145,134

 

25,126,543

 

 

 

 

 

 

 

Junior subordinated notes, maturity March 2034, unsecured, face amount of $27.3 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

24,515,815

 

24,497,690

 

 

 

 

 

 

 

Junior subordinated notes, maturity June 2036, unsecured, face amount of $14.6 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

13,095,255

 

13,086,871

 

 

 

 

 

 

 

Junior subordinated notes, maturity April 2037, unsecured, face amount of $15.7 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

14,071,922

 

14,062,800

 

 

 

 

 

 

 

Junior subordinated notes, maturity April 2037, unsecured, face amount of $31.5 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

28,269,487

 

28,251,162

 

 

 

 

 

 

 

Junior subordinated notes, maturity April 2035, unsecured, face amount of $21.2 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

19,046,811

 

19,034,178

 

 

 

 

 

 

 

Junior subordinated notes, maturity June 2036, unsecured, face amount of $2.6 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%

 

2,361,582

 

2,359,998

 

 

 

 

 

 

 

Total junior subordinated notes

 

$

157,915,586

 

$

157,806,238

 

 

The carrying value under these facilities was $157.9 million at March 31, 2011 and $157.8 million at December 31, 2010, which is net of a deferred amount of $17.9 million and $18.1 million, respectively.  The current weighted average note rate was 0.50% at March 31, 2011 and December 31, 2010, however, based upon the accounting treatment for the restructuring mentioned above, the effective rate was 3.85% at March 31, 2011 and December 31, 2010.  The impact of these variable interest entities with respect to consolidation is discussed in Note 9 — “Variable Interest Entities.”

 

In February 2010, the Company retired $114.1 million of its junior subordinated notes, with a carrying value of $102.1 million, in exchange for the re-issuance of its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of $42.8 million, CDO bonds of other issuers it had acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash.  This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of our CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the bonds through their maturity, a reduction to securities available-for-sale of $0.4 million representing the fair value of CDO

 

26



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

bonds of other issuers, and a gain on extinguishment of debt of $26.3 million, or $1.03 per basic and diluted common share, in the first quarter of 2010.

 

In 2009, the Company retired $265.8 million of its then outstanding trust preferred securities, primarily consisting of $258.4 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to us in exchange for $289.3 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount.   The notes bear a fixed interest rate of 0.50% per annum until March 31, 2012 or April 30, 2012 (the “Modification Period”).  Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to three month LIBOR plus a weighted average spread of 2.90%, which was reduced to 2.77% after the exchange in February 2010 mentioned above.  The 12% increase to the face amount due upon maturity, which had a balance of $17.9 million at March 31, 2011, is being amortized into expense over the life of the notes.

 

During the Modification Period, the Company will be permitted to make distributions of up to 100% of taxable income to common shareholders. The Company has agreed that such distributions will be paid in the form of the Company’s stock to the maximum extent permissible under the Internal Revenue Service rules and regulations in effect at the time of such distribution, with the balance payable in cash.  This requirement regarding distributions in stock can be terminated by the Company at any time, provided that the Company pays the note holders the original rate of interest from the time of such termination.

 

The junior subordinated notes are unsecured, have original maturities of 25 to 28 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, are not redeemable during the first two years.

 

Notes Payable

 

The following table outlines borrowings under the Company’s notes payable as of March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Debt

 

Collateral

 

Debt

 

Collateral

 

 

 

Carrying

 

Carrying

 

Carrying

 

Carrying

 

 

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Note payable relating to investment in equity affiliates, $50.2 million, expiration July 2016, interest is fixed, the weighted average note rate was 4.06%

 

$

50,157,708

 

$

55,988,411

 

$

50,157,708

 

$

55,988,411

 

 

 

 

 

 

 

 

 

 

 

Junior loan participation, secured by the Company’s interest in a first mortgage loan with a principal balance of $1.3 million, participation interest was based on a portion of the interest received from the loan which has a fixed rate of 9.57%

 

1,300,000

 

1,300,000

 

1,300,000

 

1,300,000

 

 

 

 

 

 

 

 

 

 

 

Total notes payable

 

$

51,457,708

 

$

57,288,411

 

$

51,457,708

 

$

57,288,411

 

 

At March 31, 2011 and December 31, 2010, the aggregate weighted average note rate for the Company’s notes payable was 3.95%.  There were no interest rate swaps on the notes payable at March 31, 2011 and December 31, 2010.

 

In 2008, the Company recorded a $49.5 million note payable after receiving cash related to a transaction with Lightstone Value Plus REIT, L.P. to exchange the Company’s profits interest in Prime Outlets Member, LLC (“POM”) for operating partnership units in Lightstone Value Plus REIT, L.P.  The note, which was paid down to $48.5 million as of December 31, 2008, was initially secured by the Company’s interest in POM, matures in July 2016 and bears interest at a fixed rate of 4% with payment deferred until the closing of the transaction.  Upon the closing of the POM transaction in March 2009, the note balance was increased to $50.2 million and is secured by the

 

27



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

Company’s investment in common and preferred operating partnership units in Lightstone Value Plus REIT, L.P.  In March 2009, the Company also recorded a gain on exchange of profits interest of $56.0 million.  At March 31, 2011, the outstanding balance of this note was $50.2 million.

 

The Company has a junior loan participation with an outstanding balance at March 31, 2011 of $1.3 million.  Participation borrowings have a maturity date equal to the corresponding mortgage loan and are secured by the participant’s interest in the mortgage loan.  Interest expense is based on a portion of the interest received from the loan.  The Company’s obligation to pay interest on the participation is based on the performance of the related loan.

 

Mortgage Notes Payable — Real Estate Owned

 

During the first quarter of 2011, the Company assumed a $55.4 million interest-only first lien mortgage in connection with the acquisition of real property pursuant to bankruptcy proceedings for an entity in which the Company had a $29.8 million loan secured by a portfolio of multifamily assets.  The real estate investment was classified as real estate owned in March 2011.  The mortgage bears interest at a variable rate of one-month LIBOR plus 1.23% and has a maturity date of March 2014 with a one year and three month extension option.

 

During the second quarter of 2010, the Company assumed a $20.8 million interest-only first lien mortgage related to a deed in lieu of foreclosure agreement for an entity in which the Company had a $5.6 million junior participation loan secured by an apartment building.  The real estate investment was classified as real estate owned in April 2010.  The mortgage bears interest at a fixed rate of 6.23% and has a maturity date of December 2013 with a five year extension option.

 

The total outstanding balance of these mortgages was approximately $76.1 million and $20.8 million at March 31, 2011 and December 31, 2010, respectively.

 

Mortgage Note Payable - Held-For-Sale

 

During the second quarter of 2008, the Company assumed a $41.4 million interest-only first lien mortgage related to the foreclosure of an entity in which the Company had a $5.0 million mezzanine loan.  The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale at September 30, 2009.  The mortgage bears interest at a fixed rate of 6.13% and has a maturity date of June 2012.  The outstanding balance of this mortgage was $41.4 million at March 31, 2011 and December 31, 2010.

 

Debt Covenants

 

The Company’s debt obligations do not contain financial covenants and restrictions at March 31, 2011.

 

The Company’s CDO vehicles contain interest coverage and asset over collateralization covenants that must be met as of the waterfall distribution date in order for the Company to receive such payments.  If the Company fails these covenants in any of its CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and the Company would not receive any residual payments until that CDO regained compliance with such tests.  The Company’s CDOs were in compliance with all such covenants as of March 31, 2011, as well as on the most recent determination date, with the exception of the over collateralization test of CDO I as of March 31, 2011.  As of the determination date in April 2011, the Company was in compliance with all CDO covenants.  In the event of a breach of the CDO covenants that could not be cured in the near-term, the Company would be required to fund its non-CDO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO not in breach of a CDO covenant test, (iii) income from real property and loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available. 

 

28



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

 

The chart below is a summary of the Company’s CDO compliance tests as of the most recent determination date in April 2011:

 

Cash Flow Triggers

 

CDO I

 

CDO II

 

CDO III

 

 

 

 

 

 

 

 

 

Overcollateralization (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

185.59

%

181.74

%

109.89

%

 

 

 

 

 

 

 

 

Limit

 

184.00

%

169.50

%

105.60

%

 

 

 

 

 

 

 

 

Pass / Fail

 

Pass

 

Pass

 

Pass

 

 

 

 

 

 

 

 

 

Interest Coverage (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current