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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 June 30, 2014

 

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

(Address of principal executive offices)

 

11553

(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 x  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 o

(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:GRAPHIC

 

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: 50,477,308 outstanding (excluding 2,650,767 shares held in the treasury) as of August 1, 2014.

 

 

 



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 June 30, 2014 (Unaudited) and December 31, 2013

2

Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

3

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013

4

Consolidated Statement of Changes in Equity (Unaudited) for the Six Months Ended June 30, 2014

5

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and 2013

6

Notes to the Consolidated Statements (Unaudited)

8

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

43

Item 3. Quantitative and Qualitative Disclosures about Market Risk

68

Item 4. Controls and Procedures

70

PART II. OTHER INFORMATION

70

Item 1. Legal Proceedings

70

Item 1A. Risk Factors

71

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

71

Item 3. Defaults Upon Senior Securities

71

Item 4. Mine Safety Disclosures

71

Item 5. Other Information

72

Item 6. Exhibits

72

Signatures

73

 



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,” “seek,” “anticipate,” “estimate,” “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; legislative/regulatory changes; the availability and cost of capital for future investments; competition; and other risks detailed from time to time in our  reports filed with the Securities and Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect 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, 2013.

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

47,813,740

 

$

60,389,552

 

Restricted cash (includes $155,539,121 and $54,051,439 from consolidated VIEs, respectively)

 

156,795,469

 

54,962,316

 

Loans and investments, net (includes $1,258,768,746 and $1,196,434,032 from consolidated VIEs, respectively)

 

1,502,586,691

 

1,523,699,653

 

Available-for-sale securities, at fair value

 

2,805,471

 

37,315,652

 

Investments in equity affiliates

 

4,588,107

 

4,680,306

 

Real estate owned, net (includes $80,787,215 and $80,787,215 from consolidated VIEs, respectively)

 

120,830,942

 

111,718,177

 

Real estate held-for-sale, net

 

 

11,477,676

 

Due from related party (includes $23,043 and $91,988 from consolidated VIEs, respectively)

 

358,110

 

98,058

 

Prepaid management fee — related party

 

19,047,949

 

19,047,949

 

Other assets (includes $23,321,607 and $19,861,310 from consolidated VIEs, respectively)

 

48,146,390

 

54,083,143

 

Total assets

 

$

1,902,972,869

 

$

1,877,472,482

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

22,204,000

 

$

159,125,023

 

Collateralized debt obligations (includes $433,297,191 and $639,622,981 from consolidated VIEs, respectively)

 

433,297,191

 

639,622,981

 

Collateralized loan obligations (includes $545,750,000 and $264,500,000 from consolidated VIEs, respectively)

 

545,750,000

 

264,500,000

 

Senior unsecured notes

 

58,637,625

 

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

159,557,894

 

159,291,427

 

Notes payable

 

2,498,542

 

2,500,000

 

Mortgage note payable — real estate owned

 

53,538,637

 

42,745,650

 

Mortgage note payable — real estate held-for-sale

 

 

11,005,354

 

Due to related party

 

1,666,667

 

2,794,087

 

Due to borrowers

 

16,979,900

 

20,326,030

 

Deferred revenue

 

77,123,133

 

77,123,133

 

Other liabilities (includes $10,779,854 and $13,944,737 from consolidated VIEs, respectively)

 

55,127,961

 

60,842,515

 

Total liabilities

 

1,426,381,550

 

1,439,876,200

 

Commitments and contingencies

 

 

 

Equity:

 

 

 

 

 

Arbor Realty Trust, Inc. stockholders’ equity:

 

 

 

 

 

Preferred stock, cumulative, redeemable, $0.01 par value: 100,000,000 shares authorized; 8.25% Series A, $38,787,500 aggregate liquidation preference; 1,551,500 shares issued and outstanding at June 30, 2014 and December 31, 2013; 7.75% Series B, $31,500,000 aggregate liquidation preference; 1,260,000 shares issued and outstanding at June 30, 2014 and December 31, 2013; 8.50% Series C, $22,500,000 aggregate liquidation preference; 900,000 shares issued and outstanding at June 30, 2014, no shares issued and outstanding at December 31, 2013

 

89,295,905

 

67,654,655

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 53,128,075 shares issued, 50,477,308 shares outstanding at June 30, 2014 and 51,787,075 shares issued, 49,136,308 shares outstanding at December 31, 2013

 

531,280

 

517,870

 

Additional paid-in capital

 

631,889,669

 

623,993,245

 

Treasury stock, at cost — 2,650,767 shares at June 30, 2014 and December 31, 2013

 

(17,100,916

)

(17,100,916

)

Accumulated deficit

 

(207,803,092

)

(212,231,319

)

Accumulated other comprehensive loss

 

(20,221,527

)

(25,237,253

)

Total equity

 

476,591,319

 

437,596,282

 

Total liabilities and equity

 

$

1,902,972,869

 

$

1,877,472,482

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Interest income

 

$

25,492,429

 

$

24,329,116

 

$

50,404,284

 

$

47,317,938

 

Interest expense

 

11,222,597

 

10,333,073

 

21,813,975

 

20,975,317

 

Net interest income

 

14,269,832

 

13,996,043

 

28,590,309

 

26,342,621

 

Other revenue:

 

 

 

 

 

 

 

 

 

Property operating income

 

9,001,383

 

8,231,822

 

18,259,471

 

17,127,256

 

Other income, net

 

150,187

 

605,317

 

1,008,583

 

1,984,775

 

Total other revenue

 

9,151,570

 

8,837,139

 

19,268,054

 

19,112,031

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

3,552,548

 

2,968,678

 

6,938,497

 

6,052,317

 

Selling and administrative

 

3,194,845

 

2,969,733

 

5,177,064

 

5,159,016

 

Property operating expenses

 

7,423,080

 

7,161,334

 

14,420,203

 

14,031,493

 

Depreciation and amortization

 

2,158,353

 

1,827,595

 

3,970,036

 

3,459,726

 

Impairment loss on real estate owned

 

 

 

250,000

 

 

Provision for loan losses (net of recoveries)

 

(870,187

)

821,722

 

(735,843

)

3,321,877

 

Management fee - related party

 

2,500,000

 

2,800,000

 

4,950,000

 

5,600,000

 

Total other expenses

 

17,958,639

 

18,549,062

 

34,969,957

 

37,624,429

 

Income before gain on extinguishment of debt, gain on sale of equity interest and income (loss) from equity affiliates

 

5,462,763

 

4,284,120

 

12,888,406

 

7,830,223

 

Gain on extinguishment of debt

 

 

 

 

3,763,000

 

Gain on sale of equity interest

 

7,851,266

 

 

7,851,266

 

 

Income (loss) from equity affiliates

 

40,493

 

(81,804

)

80,541

 

(163,689

)

Net income

 

13,354,522

 

4,202,316

 

20,820,213

 

11,429,534

 

Preferred stock dividends

 

1,888,465

 

1,152,617

 

3,479,395

 

1,685,945

 

Net income attributable to noncontrolling interest

 

 

53,833

 

 

107,484

 

Net income attributable to Arbor Realty Trust, Inc. common stockholders

 

$

11,466,057

 

$

2,995,866

 

$

17,340,818

 

$

9,636,105

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.23

 

$

0.07

 

$

0.35

 

$

0.25

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.23

 

$

0.07

 

$

0.35

 

$

0.25

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.13

 

$

0.12

 

$

0.26

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

50,267,462

 

43,113,898

 

49,804,457

 

38,468,718

 

Diluted

 

50,701,742

 

43,555,495

 

50,229,899

 

38,921,834

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

13,354,522

 

$

4,202,316

 

$

20,820,213

 

$

11,429,534

 

Unrealized gain (loss) on securities available-for-sale, net

 

29,394

 

58,789

 

(29,395

)

58,789

 

Reclassification of unrealized gain on securities available-for-sale realized into earnings

 

 

(100,000

)

(431,476

)

(100,000

)

Unrealized (loss) gain on derivative financial instruments

 

(636,671

)

1,640,042

 

(1,078,444

)

1,285,062

 

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

 

3,114,164

 

3,516,886

 

6,555,041

 

7,012,650

 

Comprehensive income

 

15,861,409

 

9,318,033

 

25,835,939

 

19,686,035

 

Less:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

1,888,465

 

1,152,617

 

3,479,395

 

1,685,945

 

Comprehensive income attributable to noncontrolling interest

 

 

53,833

 

 

107,484

 

Comprehensive income attributable to Arbor Realty Trust, Inc. common stockholders

 

$

13,972,944

 

$

8,111,583

 

$

22,356,544

 

$

17,892,606

 

 

See Notes to Consolidated Financial Statements.

 

4


 

 


Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

Six Months Ended June 30, 2014

 

 

 

Preferred
Stock
Shares

 

Preferred
Stock
Value

 

Common
Stock
Shares

 

Common
Stock
Par
Value

 

Additional
Paid-in
Capital

 

Treasury
Stock

Shares

 

Treasury
Stock

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

Balance — January 1, 2014

 

2,811,500

 

$

67,654,655

 

51,787,075

 

$

517,870

 

$

623,993,245

 

(2,650,767

)

$

(17,100,916

)

$

(212,231,319

)

$

(25,237,253

)

$

437,596,282

 

Issuance of common stock

 

 

 

 

 

1,000,000

 

10,000

 

6,504,000

 

 

 

 

 

 

 

 

 

6,514,000

 

Issuance of 8.50% Series C preferred stock

 

900,000

 

21,641,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,641,250

 

Stock-based compensation

 

 

 

 

 

341,000

 

3,410

 

1,392,424

 

 

 

 

 

 

 

 

 

1,395,834

 

Distributions — common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,905,440

)

 

 

(12,905,440

)

Distributions —preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,479,395

)

 

 

(3,479,395

)

Distributions — preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,151

)

 

 

(7,151

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,820,213

 

 

 

20,820,213

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,395

)

(29,395

)

Reclassification of unrealized gain on securities available-for- sale realized into earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(431,476

)

(431,476

)

Unrealized loss on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,078,444

)

(1,078,444

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,555,041

 

6,555,041

 

Balance — June 30, 2014

 

3,711,500

 

$

89,295,905

 

53,128,075

 

$

531,280

 

$

631,889,669

 

(2,650,767

)

$

(17,100,916

)

$

(207,803,092

)

$

(20,221,527

)

$

476,591,319

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Operating activities:

 

 

 

 

 

Net income

 

$

20,820,213

 

$

11,429,534

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,970,036

 

3,459,726

 

Stock-based compensation

 

1,395,834

 

1,249,491

 

Gain on sale of securities

 

(518,640

)

(1,100,000

)

Gain on extinguishment of debt

 

 

(3,763,000

)

Provision for loan losses (net of recoveries)

 

(735,843

)

3,321,877

 

Impairment loss on real estate owned

 

250,000

 

 

Amortization and accretion of interest, fees and intangible assets, net

 

174,903

 

(855,523

)

Change in fair value of non-qualifying swaps and linked transactions

 

(42,774

)

1,040,379

 

Gain on sale of equity interest

 

(7,851,266

)

 

(Income) loss from equity affiliates

 

(80,541

)

163,689

 

Changes in operating assets and liabilities:

 

 

 

 

 

Other assets

 

(1,631,606

)

(335,388

)

Distributions of operations from equity affiliates

 

80,541

 

48,813

 

Other liabilities

 

(359,716

)

(41,279

)

Change in restricted cash

 

(599,081

)

(332,851

)

Due to/from related party

 

(1,387,472

)

(1,182,935

)

Net cash provided by operating activities

 

$

13,484,588

 

$

13,102,533

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(456,177,017

)

(285,483,359

)

Payoffs and paydowns of loans and investments

 

474,807,344

 

70,432,700

 

Due to borrowers and reserves

 

(36,239

)

(585,143

)

Deferred fees, net

 

3,527,198

 

1,937,037

 

Purchase of securities, net

 

 

(29,024,327

)

Principal collection on securities, net

 

663,684

 

24,611,838

 

Investment in real estate, net

 

(2,208,067

)

(3,938,759

)

Proceeds from sale of available-for-sale securities

 

33,904,172

 

2,100,000

 

Distributions from equity affiliates

 

7,943,465

 

 

Net cash provided by / (used in) investing activities

 

$

62,424,540

 

$

(219,950,013

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements, loan participations, credit facilities and notes payable

 

162,062,708

 

88,043,151

 

Paydowns and payoffs of repurchase agreements, loan participations and credit facilities

 

(298,985,189

)

(117,607,334

)

Paydown of mortgage notes payable

 

(212,367

)

 

Proceeds from collateralized loan obligations

 

281,250,000

 

177,000,000

 

Proceeds from senior unsecured notes

 

58,637,625

 

 

Payoffs and paydowns of collateralized debt obligations

 

(205,956,327

)

(64,214,811

)

Change in restricted cash

 

(101,234,072

)

8,720,762

 

Payments on financial instruments underlying linked transactions

 

(59,613,649

)

(97,567,458

)

Receipts on financial instruments underlying linked transactions

 

66,027,912

 

91,913,598

 

Payments on swaps and margin calls to counterparties

 

(1,022,106

)

(51,364,587

)

Receipts on swaps and margin calls from counterparties

 

5,433,010

 

51,972,076

 

Distributions paid to noncontrolling interest

 

 

(103,819

)

Proceeds from issuance of common stock

 

6,800,000

 

91,696,328

 

Expenses paid on issuance of common stock

 

(221,143

)

(3,194,741

)

Proceeds from issuance of preferred stock

 

22,500,000

 

70,287,500

 

Expenses paid on issuance of preferred stock

 

(779,131

)

(2,614,057

)

Distributions paid on common stock

 

(12,905,440

)

(9,330,990

)

Distributions paid on preferred stock

 

(3,320,020

)

(1,066,656

)

Distributions paid on preferred stock of private REIT

 

(7,151

)

(7,230

)

Payment of deferred financing costs

 

(6,939,600

)

(4,191,067

)

Net cash (used in) / provided by financing activities

 

$

(88,484,940

)

$

228,370,665

 

Net (decrease) increase in cash and cash equivalents

 

$

(12,575,812

)

$

21,523,185

 

Cash and cash equivalents at beginning of period

 

60,389,552

 

29,188,889

 

Cash and cash equivalents at end of period

 

$

47,813,740

 

$

50,712,074

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

20,351,898

 

$

23,611,936

 

Cash used for taxes

 

$

70,256

 

$

208,071

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Distributions accrued on 8.25% Series A preferred stock

 

$

266,664

 

$

266,664

 

Distributions accrued on 7.75% Series B preferred stock

 

$

203,438

 

$

352,625

 

Distributions accrued on 8.50% Series C preferred stock

 

$

159,375

 

$

 

Accrued and unpaid expenses on preferred stock offerings

 

$

79,619

 

$

18,788

 

Accrued and unpaid expenses on common stock offerings

 

$

64,857

 

$

 

Investment transferred from real estate held-for-sale, net to real estate owned, net

 

$

11,444,812

 

$

 

Mortgage note payable - real estate held-for-sale transferred to real estate owned

 

$

11,005,354

 

$

 

Accrued and unpaid expenses on collateralized loan obligation offering

 

$

 

$

500,000

 

 

See Notes to Consolidated Financial Statements.

 

7


 

 


Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

Note 1 —Description of Business

 

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 organizes and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

 

The Company’s charter provides for the issuance of up to 500 million shares of common stock, with a par value of $0.01 per share, and 100 million shares of preferred stock, with a par value of $0.01 per share.

 

Note 2 — Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with 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, certain information and footnote disclosures normally included in the consolidated financial statements prepared under GAAP have been condensed or omitted.  In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which was filed with the SEC.

 

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.  Current 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”) and three collateralized loan obligation (“CLO”) subsidiaries on its Consolidated Balance Sheets.  Entities in which the Company has significant influence are accounted for primarily under the equity method.

 

As a REIT, the Company 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.  Also, under current federal tax law, the income and the tax on such income attributable to certain debt extinguishment transactions realized in 2009 or 2010 have been deferred to future periods at the Company’s election.  As of June 30, 2014 and 2013, the Company was in compliance with all REIT requirements and, therefore, has not provided for income tax expense for the six months ended June 30, 2014 and 2013.  Certain of the Company’s assets that produce non-qualifying income are owned by its taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.  During the six months ended June 30, 2014 and 2013, the Company did not record any provision for income taxes for these taxable REIT subsidiaries.

 

8



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that could materially affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

 

Certain prior year amounts have been reclassified to conform to current period presentation.  In the second quarter of 2014, the Company reclassified a property from real estate held-for-sale to real estate owned when it was determined that a sale of the property would not take place, resulting in reclassifications of the property’s operating activity and related depreciation for all prior periods presented from discontinued operations to property operating income and property operating expenses.

 

Significant Accounting Policies

 

As of June 30, 2014, the Company’s significant accounting policies, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, have not changed materially.

 

Recently Issued Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance that changes how repurchase agreements determined to be linked transactions are recorded.  Under the new guidance, the repurchase agreement is to be accounted for separately from the initial transfer of the financial asset and not as a forward contract derivative.  The guidance is effective for transactions outstanding as of the first quarter of 2015, and early adoption is not permitted.  The Company does not expect this guidance to have a material effect on the Company’s Consolidated Financial Statements.

 

In May 2014, the FASB issued updated guidance on the recognition of revenue relating to the transfer of goods, services and non-financial assets.  This guidance does not pertain to financial instrument contracts and thus does not have a material effect on the Company’s Consolidated Financial Statements.

 

In April 2014, the FASB issued updated guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  As a result of this new guidance, future dispositions of real estate owned assets may no longer meet the criteria to be considered as discontinued operations.  The guidance is effective prospectively as of the first quarter of 2015, with early adoption permitted for new disposals or new classifications as held-for-sale.  The Company early adopted this new guidance in the first quarter of 2014 and it did not have a material effect on the Company’s Consolidated Financial Statements.

 

In July 2013, the FASB issued updated guidance that resolves the diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  This new accounting guidance requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward that would apply in settlement of an uncertain tax position.  The guidance was effective as of the first quarter of 2014 and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.

 

9



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

Note 3 — Loans and Investments

 

The following table sets forth the composition of the Company’s loan and investment portfolio at June 30, 2014 and December 31, 2013:

 

 

 

June 30,
 2014

 

Percent
of Total

 

Loan
Count

 

Wtd.
Avg. Pay
Rate (1)

 

Wtd. Avg.
Remaining

Months to
Maturity

 

First
Dollar

LTV
Ratio (2)

 

Last
Dollar

LTV
Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,198,904,475

 

73

%

97

 

5.17

%

17.3

 

0

%

74

%

Mezzanine loans

 

80,457,777

 

5

%

25

 

7.85

%

46.2

 

62

%

86

%

Junior participation loans

 

239,117,251

 

15

%

7

 

4.36

%

15.3

 

60

%

83

%

Preferred equity investments

 

113,294,001

 

7

%

16

 

6.30

%

51.6

 

23

%

37

%

 

 

1,631,773,504

 

100

%

145

 

5.26

%

20.8

 

14

%

73

%

Unearned revenue

 

(14,126,825

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(115,059,988

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,502,586,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2013

 

Percent
of Total

 

Loan
Count

 

Wtd.
Avg. Pay
Rate (1)

 

Wtd. Avg.
Remaining

Months to
Maturity

 

First
Dollar

LTV
Ratio (2)

 

Last
Dollar

LTV
Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,171,783,914

 

71

%

95

 

5.11

%

18.5

 

0

%

76

%

Mezzanine loans

 

118,550,172

 

7

%

27

 

7.02

%

58.2

 

56

%

83

%

Junior participation loans

 

248,337,542

 

15

%

7

 

4.21

%

19.6

 

60

%

81

%

Preferred equity investments

 

121,523,673

 

7

%

15

 

7.20

%

45.5

 

58

%

79

%

 

 

1,660,195,301

 

100

%

144

 

5.26

%

23.5

 

17

%

77

%

Unearned revenue

 

(14,218,237

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(122,277,411

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,523,699,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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.

(2)         The “First Dollar LTV Ratio” is calculated by comparing the total of the Company’s senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will absorb a total loss of its position.

(3)         The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of the Company’s loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will initially absorb a loss.

 

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 June 30, 2014, the unpaid principal balance related to 25 loans with five different borrowers represented approximately 24% of total assets.  At December 31, 2013, the unpaid principal balance related to 28 loans with five different borrowers represented approximately 30% of total assets.  The Company measures its relative loss position for its mezzanine loans, junior participation loans, and preferred equity investments by determining the point where the Company will be exposed to losses based on its position in the capital stack as compared to the fair value of the underlying collateral.  The Company determines its loss position on both a first dollar loan-to-value (“LTV”) and a last dollar LTV basis.  First dollar LTV is calculated by comparing the total of the Company’s senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will absorb a total loss of its

 

10



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

position.  Last dollar LTV is calculated by comparing the total of the carrying value of the Company’s loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which the Company will initially absorb a loss.

 

The Company assigns a credit risk rating to each loan and investment.  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 that pertain to debt-service coverage ratios, LTV ratios, 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 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 its 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.

 

As a result of the loan review process at June 30, 2014 and December 31, 2013, the Company identified loans and investments that it considers higher-risk loans that had a carrying value, before loan loss reserves, of approximately $186.0 million and $187.5 million, respectively, and a weighted average last dollar LTV ratio of 93%, respectively.

 

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class as of June 30, 2014 and December 31, 2013 is as follows:

 

 

 

June 30, 2014

 

Asset Class

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

First Dollar
LTV Ratio

 

Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

1,099,801,629

 

67.4

%

3.1

 

8

%

70

%

Office

 

310,658,048

 

19.0

%

3.2

 

35

%

79

%

Land

 

120,269,874

 

7.4

%

4.0

 

4

%

88

%

Hotel

 

66,500,000

 

4.1

%

3.8

 

30

%

84

%

Commercial

 

24,593,953

 

1.5

%

3.0

 

4

%

49

%

Retail

 

9,950,000

 

0.6

%

2.5

 

23

%

70

%

Total

 

$

1,631,773,504

 

100.0

%

3.2

 

14

%

73

%

 

 

 

December 31, 2013

 

Asset Class

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

First Dollar
LTV Ratio

 

Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

1,068,529,815

 

64.4

%

3.3

 

14

%

75

%

Office

 

358,832,526

 

21.6

%

3.2

 

32

%

82

%

Land

 

116,751,563

 

7.0

%

4.0

 

3

%

88

%

Hotel

 

69,181,252

 

4.2

%

3.8

 

26

%

84

%

Commercial

 

24,900,145

 

1.5

%

3.0

 

3

%

49

%

Condo

 

15,250,000

 

0.9

%

3.7

 

41

%

65

%

Retail

 

6,750,000

 

0.4

%

2.5

 

0

%

63

%

Total

 

$

1,660,195,301

 

100.0

%

3.3

 

17

%

77

%

 

11



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

Geographic Concentration Risk

 

As of June 30, 2014, 34% and 13% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York and Texas, respectively.  As of December 31, 2013, 36% and 10% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York and Texas, respectively.

 

Impaired Loans and Allowance for Loan Losses

 

The Company performs an evaluation 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 three months ended June 30, 2014, the Company determined that the fair value of the underlying collateral securing three impaired loans with an aggregate carrying value of $153.7 million was less than the net carrying value of the loan, resulting in a $4.0 million provision for loan losses. During the six months ended June 30, 2014, the Company determined that the fair value of the underlying collateral securing four impaired loans with an aggregate carrying value of $158.6 million was less than the net carrying value of the loans, resulting in a $5.0 million provision for loan losses.  In addition, during the three and six months ended June 30, 2014, the Company recorded $4.8 million and $5.7 million, respectively, of net recoveries of previously recorded loan loss reserves resulting in a provision for loan losses, net of recoveries, of $(0.9) million and $(0.7) million, respectively.  Of the $4.0 million and $5.0 million of loan loss reserves recorded during the three and six months ended June 30, 2014, $1.3 million and $2.3 million, respectively, were attributable to loans on which the Company had previously recorded reserves.

 

During the three months ended June 30, 2013, the Company determined that the fair value of the underlying collateral securing two impaired loans with an aggregate carrying value of $12.9 million was less than the net carrying value of the loans, resulting in a $1.5 million provision for loan losses.  During the six months ended June 30, 2013, the Company determined that the fair value of the underlying collateral securing four impaired loans with an aggregate carrying value of $26.6 million was less than the net carrying value of the loans, resulting in a $4.0 million provision for loan losses.  In addition, during the three and six months ended June 30, 2013, the Company recorded $0.7 million, respectively, of net recoveries of previously recorded loan loss reserves resulting in a provision for loan losses, net of recoveries, of $0.8 million and $3.3 million.  The $1.5 million and $4.0 million of loan loss reserves recorded during the three and six months ended June 30, 2013 were attributable to four loans on which the Company had not previously recorded reserves.

 

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 as of June 30, 2014 and 2013.

 

At June 30, 2014, the Company had a total of 14 loans with an aggregate carrying value, before loan loss reserves, of $237.6 million for which impairment reserves have been recorded.  At December 31, 2013, the Company had a total of 15 loans with an aggregate carrying value, before loan loss reserves, of $207.5 million for which impairment reserves have been recorded.  Additionally, the Company has seven loans with an unpaid principal balance totaling approximately $113.6 million at June 30, 2014, which mature in September 2014, that are collateralized by a land development project.  The loans do not carry a pay rate of interest, but four of the loans with an unpaid principal balance totaling approximately $101.9 million entitle the Company to a weighted average accrual rate of interest of approximately 9.60%.  The Company suspended the recording of the accrual rate of interest on these loans, as these loans were impaired and management deemed the collection of this interest to be doubtful.  The Company has recorded cumulative allowances for loan losses of $45.0 million related to these loans as of June 30, 2014.  The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development’s outputs upon completion of the project, and litigation risk.  Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

 

12



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

During the quarter ended June 30, 2014, the Company received principal payoffs on a bridge loan and a mezzanine loan with an aggregate carrying value of $9.6 million and recorded a charge-off to previously recorded reserves of $0.8 million as well as cash recoveries of $4.8 million.  During the six months ended June 30, 2014, the Company received payoffs on a bridge and a mezzanine loan with a total carrying value of $9.6 million, wrote off a mezzanine loan with a carrying value of $6.5 million, recorded charge-offs to previously recorded reserves totaling $6.5 million and recorded cash recoveries totaling $5.6 million.

 

During the quarter ended June 30, 2013, the Company recorded cash recoveries of $0.7 million.  During the six months ended June 30, 2013, the Company wrote off a bridge loan, two mezzanine loans and a junior participation loan with a total carrying value of $18.5 million and recorded a charge-off to previously recorded reserves of $18.5 million as well as cash recoveries totaling $0.7 million.

 

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

 

 

 

Six Months Ended

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

 

 

 

 

Allowance at beginning of the period

 

$

122,277,411

 

$

161,706,313

 

Provision for loan losses

 

4,950,000

 

4,000,000

 

Charge-offs

 

(6,501,079

)

(18,461,330

)

Recoveries of reserves

 

(5,666,344

)

(681,218

)

Allowance at end of the period

 

$

115,059,988

 

$

146,563,765

 

 

A summary of charge-offs and recoveries is as follows:

 

 

 

Six Months Ended

 

 

 

June 30, 2014

 

June 30, 2013

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

Multi-family

 

$

(6,501,079

)

$

(4,789,815

)

Hotel

 

 

(3,671,515

)

Condo

 

 

(10,000,000

)

Total

 

$

(6,501,079

)

$

(18,461,330

)

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

Multi-family

 

$

(5,666,344

)

$

(681,218

)

Total

 

$

(5,666,344

)

$

(681,218

)

 

 

 

 

 

 

Net Charge-offs

 

$

(834,735

)

$

(17,780,112

)

 

 

 

 

 

 

Ratio of net charge-offs during the period to average loans and investments outstanding during the period

 

0.1

%

1.1

%

 

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

 

 

 

June 30, 2014

 

Three Months Ended
June 30, 2014

 

Six Months Ended
June 30, 2014

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

49,599,938

 

$

49,016,213

 

$

38,619,274

 

$

54,400,857

 

$

218,529

 

$

57,667,857

 

$

432,270

 

Office

 

45,086,582

 

38,955,771

 

25,472,444

 

40,586,582

 

511,501

 

40,586,582

 

786,296

 

Land

 

118,375,160

 

114,650,492

 

49,768,270

 

117,409,169

 

171,374

 

117,230,555

 

171,374

 

Hotel

 

35,000,000

 

34,939,896

 

1,200,000

 

17,500,000

 

 

17,500,000

 

 

Total

 

$

248,061,680

 

$

237,562,372

 

$

115,059,988

 

$

229,896,608

 

$

901,404

 

$

232,984,994

 

$

1,389,940

 

 

13



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

 

 

December 31, 2013

 

Three Months Ended
June 30, 2013

 

Six Months Ended
June 30, 2013

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

65,735,773

 

$

65,186,623

 

$

50,786,697

 

$

66,389,172

 

$

432,625

 

$

66,142,984

 

$

1,381,705

 

Office

 

36,086,582

 

29,474,065

 

23,972,444

 

46,762,808

 

480,204

 

42,562,808

 

952,515

 

Land

 

116,085,950

 

112,810,558

 

47,518,270

 

139,063,945

 

 

139,050,225

 

 

Total

 

$

217,908,305

 

$

207,471,246

 

$

122,277,411

 

$

252,215,925

 

$

912,829

 

$

247,756,017

 

$

2,334,220

 

 


(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.

 

As of June 30, 2014, two loans with an aggregate net carrying value of approximately $6.3 million, net of related loan loss reserves of $34.0 million, were classified as non-performing, all of which had loan loss reserves.  Income from non-performing loans 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, 2013, five loans with an aggregate net carrying value of approximately $10.7 million, net of related loan loss reserves of $39.6 million, were classified as non-performing, of which one loan with a carrying value of $0.6 million did not have a loan loss reserve.

 

A summary of the Company’s non-performing loans by asset class as of June 30, 2014 and December 31, 2013 is as follows:

 

 

 

June 30, 2014

 

December 31, 2013

 

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

 

$

32,000,000

 

$

 

$

32,000,000

 

$

42,054,539

 

$

32,000,000

 

$

10,054,539

 

Office

 

8,277,796

 

 

8,277,796

 

8,277,844

 

 

8,277,844

 

Total

 

$

40,277,796

 

$

 

$

40,277,796

 

$

50,332,383

 

$

32,000,000

 

$

18,332,383

 

 

During the quarter and six months ended June 30, 2014, the Company had not refinanced and/or modified or extended any loans which were considered by the Company to be troubled debt restructurings.  During the quarter and six months ended June 30, 2013, the Company refinanced and/or modified one loan with a unpaid principal balance of $6.3 million which was not considered by the Company to be a troubled debt restructuring, however, two loans with a combined unpaid principal balance of $14.6 million that were extended during the period were considered to be trouble debt restructurings.  The Company had no unfunded commitments on the modified and extended loans which were considered troubled debt restructurings as of June 30, 2013.

 

A summary of loan modifications and extensions by asset class that the Company considered to be troubled debt restructurings during the three and six months ended June 30, 2013 were as follows:

 

 

 

Three Months Ended June 30, 2013

 

Six Months Ended June 30, 2013

 

Asset Class

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Rate of
Interest

 

Extended
Unpaid
Principal
Balance

 

Extended
Rate of
Interest

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Weighted
Average
Rate of
Interest

 

Modified
Unpaid
Principal
Balance

 

Modified
Weighted
Average
Rate of
Interest

 

Multifamily

 

 

$

 

 

$

 

 

1

 

$

6,192,666

 

5.96

%

$

6,192,666

 

5.96

%

Office

 

 

 

 

 

 

1

 

8,400,000

 

8.24

%

8,400,000

 

8.24

%

Total

 

 

$

 

 

$

 

 

2

 

$

14,592,666

 

7.27

%

$

14,592,666

 

7.27

%

 

There were no loans in which the Company considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of June 30, 2014 and 2013 and no additional loans were considered to be impaired due to the Company’s troubled debt restructuring analysis for the three and six months ended June 30, 2014 and 2013.  These loans were modified to increase the total recovery of the combined principal and interest from the loan.

 

14



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

As of June 30, 2014, the Company had total interest reserves of $14.3 million on 52 loans with an aggregate unpaid principal balance of $743.5 million.

 

Note 4 — Securities

 

The following is a summary of the Company’s securities classified as available-for-sale at June 30, 2014:

 

 

 

Face

 

Amortized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Value

 

Cost

 

Gain

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed security (CMBS)

 

$

2,100,000

 

$

2,100,000

 

$

 

$

2,100,000

 

 

 

 

 

 

 

 

 

 

 

Common equity securities

 

 

58,789

 

646,682

 

705,471

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

2,100,000

 

$

2,158,789

 

$

646,682

 

$

2,805,471

 

 

The following is a summary of the Company’s securities classified as available-for-sale at December 31, 2013:

 

 

 

Face

 

Amortized

 

Cumulative
Unrealized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Value

 

Cost

 

Gain

 

Loss

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed security (RMBS)

 

$

39,013,690

 

$

34,049,310

 

$

437,774

 

$

(6,298

)

$

34,480,786

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed security (CMBS)

 

2,100,000

 

2,100,000

 

 

 

2,100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity securities

 

 

58,789

 

676,077

 

 

734,866

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

41,113,690

 

$

36,208,099

 

$

1,113,851

 

$

(6,298

)

$

37,315,652

 

 

The following is a summary of the underlying credit rating of the Company’s available-for-sale debt securities at June 30, 2014 and December 31, 2013:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

Amortized

 

Percent

 

 

 

Amortized

 

Percent

 

Rating (1)

 

#

 

Cost

 

of Total

 

#

 

Cost

 

of Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AA+

 

 

$

 

 

1

 

$

93,715

 

 

CCC

 

 

 

 

1

 

18,417,402

 

51

%

CCC-

 

1

 

2,100,000

 

100

%

1

 

2,100,000

 

6

%

NR

 

 

 

 

7

 

15,538,193

 

43

%

 

 

1

 

$

2,100,000

 

100

%

10

 

$

36,149,310

 

100

%

 


(1) Based on the rating published by Standard & Poor’s for each security.  NR stands for “not rated.”

 

In the first quarter of 2014, the Company sold all of its RMBS investments which had an aggregate carrying value of $33.4 million, which is net of $0.7 million of principal paydowns received during the quarter, for approximately $33.9 million and recorded a net gain of $0.5 million to other income, net on the Company’s Consolidated Statement of Income, which includes the reclassification of a net unrealized gain of $0.4 million from accumulated other comprehensive loss on the Company’s Consolidated Balance Sheet.  These RMBS investments were financed with two repurchase agreements totaling $25.3 million which were repaid with the proceeds.  See Note 7 — “Debt Obligations” for further details.

 

15



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

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 CMBS investment bears interest at a spread of 89 basis points over LIBOR, has a stated maturity of six years, but has an estimated life of one year based on the extended maturity of the underlying asset and a fair value of $2.1 million at both June 30, 2014 and December 31, 2013.

 

The Company owns 2,939,465 shares of common stock of CV Holdings, Inc., formerly Realty Finance Corporation, a commercial real estate specialty finance company, which had a fair value of approximately $0.7 million at June 30, 2014 and December 31, 2013.

 

Available-for-sale securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive loss.  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.  No impairment was recorded on the Company’s available-for-sale securities for the three and six months ended June 30, 2014 and 2013.

 

At December 31, 2013, the Company owned two RMBS investments with deteriorated credit quality that had a total aggregate carrying value of $25.8 million. These investments were sold in the first quarter of 2014 for $25.9 million.

 

The weighted average yield on the Company’s CMBS and RMBS investments based on their face values was 1.15% and 3.87%, including the amortization of premium and the accretion of discount, for the three months ended June 30, 2014 and 2013, respectively, and 2.05% and 4.18% for the six months ended June 30, 2014 and 2013, respectively.

 

Note 5 — Investments in Equity Affiliates

 

The following is a summary of the Company’s investments in equity affiliates at June 30, 2014 and December 31, 2013:

 

 

 

Investment in Equity Affiliates at

 

Unpaid Principal
Balance of Loans
to Equity
Affiliates at

 

Equity Affiliates

 

June 30, 2014

 

December 31, 2013

 

June 30, 2014

 

 

 

 

 

 

 

 

 

Lightstone Value Plus REIT L.P.

 

$

1,894,727

 

$

1,894,727

 

$

 

West Shore Café

 

1,690,280

 

1,690,280

 

1,687,500

 

Issuers of Junior Subordinated Notes

 

578,000

 

578,000

 

 

JT Prime

 

425,000

 

425,000

 

 

Lexford Portfolio

 

100

 

100

 

91,644,510

 

930 Flushing & 80 Evergreen

 

 

92,199

 

22,893,954

 

450 West 33rd Street

 

 

 

 

Ritz-Carlton Club

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,588,107

 

$

4,680,306

 

$

116,225,964

 

 

16


 


Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

The Company accounts for the 450 West 33rd Street investment under the cost method of accounting and the remaining investments under the equity method.

 

West Shore Café — The Company owns a 50% noncontrolling interest with a 20% preferred return subject to certain conditions in the West Shore Lake Café, a restaurant/inn lakefront property in Lake Tahoe, California. During the second quarter of 2014, the Company provided a $1.7 million first mortgage loan to acquire property adjacent to the original property, which matures in May 2017 and bears interest at a yield of LIBOR plus 4.00%.

 

930 Flushing & 80 Evergreen — The Company had a 12.5% preferred interest in a joint venture that owns and operates two commercial properties.  The Company also had a $22.4 million bridge loan and a $0.5 million mezzanine loan outstanding to affiliated entities of the joint venture with scheduled maturities in 2017 at June 30, 2014.

 

In May 2014, the Company’s interest in the properties was sold, and the Company received $7.9 million in cash.  As a result, the Company recorded a gain on sale of equity interest in the Consolidated Statements of Income of approximately $7.9 million and reduced its investment by its carrying value of approximately $0.1 million.  In July 2014, the Company’s outstanding loans totaling $22.9 million to this joint venture were repaid in full.

 

450 West 33rd Street — The Company is a participant in an investor group that owns a non-controlling interest in an office building at 450 West 33rd Street in Manhattan, New York. The investor group as a whole has a 1.44% retained ownership interest in the property and 50% of the property’s air rights. The Company has a 29% interest in the 1.44% retained ownership interest and 50% air rights.  As a result of recording an other-than-temporary impairment during 2010, the balance of the Company’s investment was reduced to $0.

 

In 2007, the Company, as part of this investor group transferred control of the property and recorded deferred revenue of approximately $77.1 million. The gain was deferred as a result of the agreement of the joint venture members to guarantee a portion of the debt outstanding on the property.  The guarantee was allocated to the members in accordance with their ownership percentages.  The Company’s portion of the guarantee was $76.3 million.  In July 2014, the existing debt on the property was refinanced and the Company’s portion of the guarantee was terminated, resulting in the recognition of the $77.1 million deferred gain as well as a $19.0 million prepaid incentive fee for a net gain of $58.1 million.  See Note 14 — “Agreements and Transactions with Related Parties” for details of the prepaid incentive fee recorded in 2007 related to this investment.

 

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

 

Real Estate Owned

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Multifamily
Portfolio

 

Hotel
Portfolio

 

Total

 

Multifamily
Portfolio

 

Hotel
Portfolio

 

Total

 

Land

 

$

15,651,047

 

$

10,893,651

 

$

26,544,698

 

$

11,382,579

 

$

10,893,651

 

$

22,276,230

 

Building and intangible assets

 

56,023,337

 

62,632,768

 

118,656,105

 

46,115,430

 

61,632,645

 

107,748,075

 

Less: accumulated depreciation and amortization

 

(12,562,927

)

(11,806,934

)

(24,369,861

)

(8,598,915

)

(9,707,213

)

(18,306,128

)

Real estate owned, net

 

$

59,111,457

 

$

61,719,485

 

$

120,830,942

 

$

48,899,094

 

$

62,819,083

 

$

111,718,177

 

 

The Company’s real estate owned assets were comprised of seven multifamily properties (the “Multifamily Portfolio”) and five hotel properties (the “Hotel Portfolio”) at June 30, 2014.

 

In the second quarter of 2014, a property in the Multifamily Portfolio was reclassified from real estate held-for-sale to real estate owned, net as a proposed sale for this property failed to close and the property no longer met the requirements for classification as discontinued operations. This property had a carrying value of $11.4 million and a first lien mortgage of $11.0 million at June 30, 2014. In connection with this reclassification, the Company recorded depreciation of $0.3 million in the second quarter of 2014.

 

17



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2014

 

During the first quarter of 2014, a property in the Multifamily Portfolio exhibited indicators of impairment and an impairment analysis was performed. As a result of this impairment analysis based on the indicators of value from the market participants, the Company recorded an impairment loss of $0.3 million. In July 2014, this property was sold for $3.1 million, which approximated its carrying value at the time of sale.

 

As of June 30, 2014 and December 31, 2013, the Multifamily Portfolio had mortgage note payable of $53.5 million and $42.7 million, respectively, and a weighted average occupancy rate of approximately 86% and 85%, respectively.

 

For the six months ended June 30, 2014 and 2013, the Company’s Hotel Portfolio had a weighted average occupancy rate of approximately 58% and 59%, respectively, a weighted average daily rate of approximately $91 and $79, respectively, and a weighted average revenue per available room of approximately $53 and $47, respectively.

 

The Company’s real estate assets had restricted cash balances totaling $1.5 million and $0.9 million as of June 30, 2014 and December 31, 2013, respectively, due to escrow requirements.

 

Real Estate Held-For-Sale

 

As described above, during the second quarter of 2014, the Company reclassified a property in the Multifamily Portfolio from real estate held-for-sale to real estate owned, net. This property had a carrying value of $11.4 million and a first lien mortgage of $11.0 million at June 30, 2014.

 

Note 7 — Debt Obligations

 

The Company utilizes various forms of short-term and long-term financing agreements 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.

 

Credit Facilities and Repurchase Agreements

 

The following table outlines borrowings under the Company’s credit facilities and repurchase agreements as of June 30, 2014 and December 31, 2013:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Debt

 

Collateral

 

Weighted

 

Debt

 

Collateral

 

Weighted

 

 

 

Carrying

 

Carrying

 

Average

 

Carrying

 

Carrying

 

Average

 

 

 

Value

 

Value

 

Note Rate

 

Value

 

Value

 

Note Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million warehousing credit facility

 

$

7,687,500

 

$

10,250,000

 

2.44

%

$

33,300,540

 

$

45,705,813

 

2.46

%

$75 million warehousing credit facility

 

3,225,000

 

5,000,000

 

2.44

%

30,838,180

 

46,774,000

 

2.70

%

$60 million warehousing credit facility

 

11,291,500

 

17,022,236

 

2.19

%

15,063,750

 

21,800,000

 

2.20

%

$33 million warehousing credit facility

 

 

 

 

33,000,000

 

55,000,000

 

2.45

%

$20 million revolving credit facility

 

 

 

 

20,000,000

 

 

8.50

%

Repurchase agreement

 

 

 

 

12,497,000

 

15,536,049

 

1.75

%

Repurchase agreement

 

 

 

 

14,425,553

 

18,944,735

 

2.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total credit facilities and repurchase agreements