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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 September 30, 2015

 

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 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 (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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: 50,962,516 outstanding (excluding 2,650,767 shares held in the treasury) as of November 6, 2015.

 

 

 



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 September 30, 2015 (Unaudited) and December 31, 2014

2

Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

3

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

4

Consolidated Statement of Changes in Equity (Unaudited) for the Nine Months Ended September 30, 2015

5

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2015 and 2014

6

Notes to Consolidated Financial Statements (Unaudited)

8

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

40

Item 3. Quantitative and Qualitative Disclosures about Market Risk

55

Item 4. Controls and Procedures

56

PART II. OTHER INFORMATION

56

Item 1. Legal Proceedings

56

Item 1A. Risk Factors

57

Item 6. Exhibits

57

Signatures

58

 



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. We use words such as “anticipates,” “expects,” “believes,” “intends,” “should,” “will,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words.  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.  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, 2014 (the “2014 Annual Report”).

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

115,612,829

 

$

50,417,745

 

Restricted cash (includes $57,182,387 and $216,405,894 from consolidated VIEs, respectively)

 

58,810,664

 

218,100,529

 

Loans and investments, net (includes $966,708,196 and $968,600,472 from consolidated VIEs, respectively)

 

1,506,324,128

 

1,459,475,650

 

Available-for-sale securities, at fair value

 

646,682

 

2,499,709

 

Investments in equity affiliates

 

27,828,747

 

4,869,066

 

Real estate owned, net (includes $0 and $80,732,144 from consolidated VIEs, respectively)

 

70,758,676

 

84,925,641

 

Real estate held-for-sale, net

 

17,651,894

 

14,381,733

 

Due from related party (includes $43,451 and $0 from consolidated VIEs, respectively)

 

674,958

 

36,515

 

Other assets (includes $16,919,931 and $14,949,956 from consolidated VIEs, respectively)

 

49,121,917

 

45,716,002

 

Total assets

 

$

1,847,430,495

 

$

1,880,422,590

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

122,463,494

 

$

180,386,200

 

Collateralized loan obligations (includes $767,877,232 and $458,250,000 from consolidated VIEs, respectively)

 

767,877,232

 

458,250,000

 

Collateralized debt obligations (includes $0 and $331,395,126 from consolidated VIEs, respectively)

 

 

331,395,126

 

Senior unsecured notes

 

97,860,025

 

97,860,025

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

160,250,265

 

159,833,260

 

Notes payable

 

1,000,000

 

1,300,000

 

Mortgage note payable — real estate owned

 

27,155,000

 

21,865,136

 

Mortgage note payable — real estate held-for-sale

 

 

9,119,221

 

Due to related party

 

2,686,325

 

2,653,333

 

Due to borrowers (includes $953,138 and $0 from consolidated VIEs, respectively)

 

51,229,859

 

32,972,606

 

Other liabilities (includes $1,739,903 and $7,385,474 from consolidated VIEs, respectively)

 

51,244,284

 

49,332,212

 

Total liabilities

 

1,281,766,484

 

1,344,967,119

 

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; 7.75% Series B, $31,500,000 aggregate liquidation preference; 1,260,000 shares issued and outstanding; 8.50% Series C, $22,500,000 aggregate liquidation preference; 900,000 shares issued and outstanding

 

89,295,905

 

89,295,905

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 53,613,283 and 53,128,075 shares issued, respectively; 50,962,516 and 50,477,308 shares outstanding, respectively

 

536,132

 

531,280

 

Additional paid-in capital

 

632,766,503

 

629,880,774

 

Treasury stock, at cost — 2,650,767 shares

 

(17,100,916

)

(17,100,916

)

Accumulated deficit

 

(133,491,962

)

(152,483,322

)

Accumulated other comprehensive loss

 

(6,341,651

)

(14,668,250

)

Total equity

 

565,664,011

 

535,455,471

 

Total liabilities and equity

 

$

1,847,430,495

 

$

1,880,422,590

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Interest income

 

$

26,025,709

 

$

29,657,960

 

$

79,575,689

 

$

80,062,244

 

Other interest income, net

 

 

 

7,884,344

 

 

Interest expense

 

11,885,363

 

12,334,034

 

37,405,492

 

34,148,009

 

Net interest income

 

14,140,346

 

17,323,926

 

50,054,541

 

45,914,235

 

Other revenue:

 

 

 

 

 

 

 

 

 

Property operating income

 

7,202,851

 

8,443,877

 

22,855,028

 

26,703,348

 

Other income, net

 

51,633

 

518,318

 

164,449

 

1,526,901

 

Total other revenue

 

7,254,484

 

8,962,195

 

23,019,477

 

28,230,249

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

4,877,059

 

3,639,722

 

14,133,403

 

10,578,219

 

Selling and administrative

 

3,179,534

 

2,330,033

 

8,985,148

 

7,507,097

 

Property operating expenses

 

6,028,585

 

7,266,859

 

18,381,317

 

21,687,062

 

Depreciation and amortization

 

1,250,761

 

1,806,683

 

4,137,080

 

5,776,719

 

Impairment loss on real estate owned

 

 

 

 

250,000

 

Provision for loan losses (net of recoveries)

 

277,464

 

1,326,538

 

2,353,688

 

590,695

 

Management fee - related party

 

2,725,000

 

2,450,000

 

8,075,000

 

7,400,000

 

Total other expenses

 

18,338,403

 

18,819,835

 

56,065,636

 

53,789,792

 

Income before gain on acceleration of deferred income, loss on termination of swaps, (loss) gain on sale of real estate, gain on sale of equity interest, incentive management fee and income (loss) from equity affiliates

 

3,056,427

 

7,466,286

 

17,008,382

 

20,354,692

 

Gain on acceleration of deferred income

 

8,162,720

 

 

19,171,882

 

 

Loss on termination of swaps

 

(340,197

)

 

(4,629,647

)

 

(Loss) gain on sale of real estate

 

 

(199,749

)

3,984,364

 

(199,749

)

Gain on sale of equity interest

 

 

77,123,133

 

 

84,974,399

 

Incentive management fee — equity interest — related party

 

 

(19,047,949

)

 

(19,047,949

)

Income (loss) from equity affiliates

 

6,353,239

 

(51,170

)

10,983,177

 

29,371

 

Net income

 

17,232,189

 

65,290,551

 

46,518,158

 

86,110,764

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,367,825

 

Net income attributable to common stockholders

 

$

15,343,759

 

$

63,402,121

 

$

40,852,868

 

$

80,742,939

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.30

 

$

1.26

 

$

0.80

 

$

1.61

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.30

 

$

1.26

 

$

0.80

 

$

1.60

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.15

 

$

0.13

 

$

0.43

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

50,962,516

 

50,477,308

 

50,822,444

 

50,031,205

 

Diluted

 

50,962,516

 

50,477,308

 

50,917,442

 

50,331,623

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

 

$

17,232,189

 

$

65,290,551

 

$

46,518,158

 

$

86,110,764

 

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

 

(176,368

)

(276,368

)

246,973

 

(305,763

)

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

 

 

 

 

(431,476

)

Unrealized (loss) gain on derivative financial instruments, net

 

(349,012

)

265,078

 

(1,255,739

)

(813,366

)

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

 

340,197

 

 

4,626,192

 

 

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

 

1,467,673

 

3,059,660

 

4,709,173

 

9,614,701

 

Comprehensive income

 

18,514,679

 

68,338,921

 

54,844,757

 

94,174,860

 

Less:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,367,825

 

Comprehensive income attributable to common stockholders

 

$

16,626,249

 

$

66,450,491

 

$

49,179,467

 

$

88,807,035

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

Nine Months Ended September 30, 2015

 

 

 

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, 2015

 

3,711,500

 

$

89,295,905

 

53,128,075

 

$

531,280

 

$

629,880,774

 

(2,650,767

)

$

(17,100,916

)

$

(152,483,322

)

$

(14,668,250

)

$

535,455,471

 

Stock-based compensation

 

 

 

 

 

486,124

 

4,861

 

2,885,720

 

 

 

 

 

 

 

 

 

2,890,581

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(916

)

(9

)

9

 

 

 

 

 

 

 

 

 

 

Distributions — common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,850,942

)

 

 

(21,850,942

)

Distributions —preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,665,290

)

 

 

(5,665,290

)

Distributions — preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,566

)

 

 

(10,566

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,518,158

 

 

 

46,518,158

 

Unrealized gain on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

246,973

 

246,973

 

Unrealized loss on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,255,739

)

(1,255,739

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,626,192

 

4,626,192

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,709,173

 

4,709,173

 

Balance — September 30, 2015

 

3,711,500

 

$

89,295,905

 

53,613,283

 

$

536,132

 

$

632,766,503

 

(2,650,767

)

$

(17,100,916

)

$

(133,491,962

)

$

(6,341,651

)

$

565,664,011

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

Operating activities:

 

 

 

 

 

Net income

 

$

46,518,158

 

$

86,110,764

 

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

 

 

 

 

 

Depreciation and amortization

 

4,137,080

 

5,776,719

 

Stock-based compensation

 

2,890,581

 

1,688,631

 

Gain on acceleration of deferred income

 

(19,171,882

)

 

Loss on termination of swaps

 

4,629,647

 

 

(Gain) loss on sale of real estate

 

(3,984,364

)

199,749

 

Gain on sale of securities

 

 

(518,640

)

Provision for loan losses (net of recoveries)

 

2,353,688

 

590,695

 

Impairment loss on real estate owned

 

 

250,000

 

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

 

1,709,609

 

(960,987

)

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

 

 

(41,867

)

Gain on sale of equity interest

 

 

(84,974,399

)

Incentive management fee — equity interest — related party

 

 

19,047,949

 

Income from equity affiliates

 

(10,983,177

)

(29,371

)

Changes in operating assets and liabilities:

 

 

 

 

 

Other assets

 

(1,711,045

)

(1,711,433

)

Distributions of operations from equity affiliates

 

5,041,468

 

121,475

 

Other liabilities

 

4,708,840

 

1,143,709

 

Change in restricted cash

 

66,358

 

(594,552

)

Due to/from related party

 

(605,451

)

(1,277,682

)

Net cash provided by operating activities

 

$

35,599,510

 

$

24,820,760

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(734,651,094

)

(685,671,067

)

Payoffs and paydowns of loans and investments

 

698,138,074

 

694,560,068

 

Due to borrowers and reserves

 

 

(36,239

)

Deferred fees

 

3,707,798

 

4,692,501

 

Principal collection on securities, net

 

2,100,000

 

663,684

 

Investment in real estate, net

 

(2,025,366

)

(3,674,350

)

Contributions to equity affiliates

 

(17,017,972

)

(526,499

)

Proceeds from sale of real estate, net

 

18,482,352

 

2,945,590

 

Proceeds from sale of available-for-sale securities

 

 

33,904,172

 

Distributions from equity affiliates

 

 

7,943,465

 

Net cash (used in) provided by investing activities

 

$

(31,266,208

)

$

54,801,325

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

555,589,837

 

251,210,535

 

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

 

(612,512,543

)

(340,229,448

)

Proceeds from mortgage note payable — real estate owned

 

27,155,000

 

 

Paydowns and payoffs of mortgage note payable — real estate owned

 

(30,984,357

)

(4,937,098

)

Proceeds from collateralized loan obligations

 

486,625,000

 

281,250,000

 

Proceeds from senior unsecured notes

 

 

97,860,025

 

Payoffs and paydowns of collateralized debt obligations

 

(312,071,055

)

(267,332,444

)

Payoffs and paydowns of collateralized loan obligations

 

(177,000,000

)

 

Change in restricted cash

 

159,223,507

 

(88,292,049

)

Payments on financial instruments underlying linked transactions

 

 

(59,613,649

)

Receipts on financial instruments underlying linked transactions

 

 

66,027,912

 

Payments on swaps and margin calls to counterparties

 

(290,000

)

(1,272,106

)

Receipts on swaps and returns of margin calls from counterparties

 

3,330,000

 

7,243,010

 

Proceeds from issuance of common stock

 

 

6,800,000

 

Expenses paid on issuance of common stock

 

 

(221,143

)

Proceeds from issuance of preferred stock

 

 

22,500,000

 

Expenses paid on issuance of preferred stock

 

 

(779,131

)

Distributions paid on common stock

 

(21,850,942

)

(19,467,490

)

Distributions paid on preferred stock

 

(5,665,290

)

(5,208,450

)

Distributions paid on preferred stock of private REIT

 

(10,566

)

(10,806

)

Cancellation of warrants

 

 

(2,602,500

)

Payment of deferred financing costs

 

(10,676,809

)

(10,062,642

)

Net cash provided by (used in) financing activities

 

$

60,861,782

 

$

(67,137,474

)

Net increase in cash and cash equivalents

 

$

65,195,084

 

$

12,484,611

 

Cash and cash equivalents at beginning of period

 

50,417,745

 

60,389,552

 

Cash and cash equivalents at end of period

 

$

115,612,829

 

$

72,874,163

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

32,665,815

 

$

31,067,603

 

Cash used for taxes

 

$

385,932

 

$

76,281

 

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

 

$

203,438

 

Distributions accrued on 8.50% Series C preferred stock

 

$

159,375

 

$

159,375

 

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

 

$

17,516,488

 

$

14,952,919

 

Loan transferred to real estate owned, net

 

$

5,900,000

 

$

 

Satisfaction of participation loan

 

$

1,300,000

 

$

 

Retirement of participation liability

 

$

1,300,000

 

$

 

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

 

$

 

$

12,785,851

 

Accrued and unpaid expenses on preferred stock offerings

 

$

 

$

79,619

 

Accrued and unpaid expenses on common stock offerings

 

$

 

$

64,857

 

 

See Notes to Consolidated Financial Statements.

 

7



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

Note 1 —Description of Business

 

Arbor Realty Trust, Inc. is a Maryland corporation that was formed in June 2003 to invest in a diversified portfolio of multifamily and commercial real estate related assets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgage loans, preferred and direct equity.  We may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.  We conduct substantially all of our operations through our operating partnership, Arbor Realty Limited Partnership (“ARLP”), and ARLP’s wholly-owned subsidiaries.  We are externally managed and advised by Arbor Commercial Mortgage, LLC (our “Manager”).  We organize and conduct our operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

 

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 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 our 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 our consolidated financial statements and notes thereto included in our 2014 Annual Report, which was filed with the SEC.

 

The accompanying unaudited consolidated financial statements include our financial statements, our wholly-owned subsidiaries, and partnerships or other joint ventures in which we own a voting interest of greater than 50 percent, and variable interest entities (“VIEs”) of which we are 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 us 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, we have separately disclosed parenthetically the assets and liabilities of our collateralized debt obligation (“CDO”) and collateralized loan obligation (“CLO”) subsidiaries on our consolidated balance sheets.  Entities in which we have significant influence are accounted for primarily under the equity method.

 

As a REIT, we are generally not subject to federal income tax on our REIT—taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT—taxable income and meet certain other requirements.  As of September 30, 2015 and 2014, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for the nine months ended September 30, 2015 and 2014.  Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.  During the nine months ended September 30, 2015 and 2014, we did not record any provision for income taxes for these taxable REIT subsidiaries as we expect any income to be offset by available federal and state net operating loss carryforwards.

 

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.

 

8



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

Significant Accounting Policies

 

As of September 30, 2015, our significant accounting policies, which are detailed in our 2014 Annual Report, have not changed materially.

 

Recently Issued Accounting Pronouncements

 

In September 2015, the Financial Accounting Standards Board (“FASB”) amended its guidance on measurement-period adjustments arising from business combinations.  The guidance is effective for the first quarter of 2016 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

In April 2015, the FASB amended its guidance on the balance sheet presentation of debt issuance costs.  The guidance is effective for the first quarter of 2016 and we do not expect it to have a material effect on our consolidated financial statements other than the balance sheet presentation of debt and other assets.

 

In February 2015, the FASB amended its guidance on the consolidation analysis of variable interest entities.  The guidance is effective for the first quarter of 2016 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

In January 2015, the FASB eliminated the concept of extraordinary items and thus the requirement to assess whether an event or transaction requires extraordinary classification on the financial statements.  The guidance is effective for the first quarter of 2016.  We early adopted this new guidance in the first quarter of 2015 and it did not have a material effect on our consolidated financial statements.

 

Note 3 — Loans and Investments

 

The following table sets forth the composition of our loan and investment portfolio:

 

 

 

September 30,
2015

 

Percent
of Total

 

Loan
Count

 

Wtd.
Avg. Pay
Rate (1)

 

Wtd. Avg.
Remaining
Months to
Maturity

 

Wtd. Avg.
First
Dollar
LTV
Ratio (2)

 

Wtd. Avg.
Last
Dollar
LTV
Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,384,470,022

 

87

%

105

 

5.44

%

16.4

 

0

%

75

%

Mezzanine loans

 

59,942,557

 

4

%

14

 

9.46

%

43.5

 

45

%

81

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

10.1

 

90

%

87

%

Preferred equity investments

 

92,350,109

 

5

%

11

 

7.52

%

32.3

 

43

%

81

%

 

 

1,599,019,270

 

100

%

132

 

5.67

%

18.1

 

8

%

76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(9,334,634

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(83,360,508

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,506,324,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,
2014

 

Percent
of Total

 

Loan
Count

 

Wtd.
Avg. Pay
Rate (1)

 

Wtd. Avg.
Remaining
Months to
Maturity

 

Wtd. Avg.
First
Dollar
LTV
Ratio (2)

 

Wtd. Avg.
Last
Dollar
LTV
Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,273,439,238

 

80

%

101

 

5.19

%

19.8

 

0

%

74

%

Mezzanine loans

 

76,392,650

 

5

%

17

 

9.78

%

37.1

 

47

%

81

%

Junior participation loans

 

104,091,952

 

7

%

4

 

4.62

%

12.3

 

86

%

88

%

Preferred equity investments

 

133,505,658

 

8

%

17

 

6.11

%

45.5

 

62

%

84

%

 

 

1,587,429,498

 

100

%

139

 

5.45

%

22.3

 

13

%

76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(12,466,528

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(115,487,320

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,459,475,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 


(1)          “Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in our 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 our 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 we will absorb a total loss of our position.

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

 

During the first quarter of 2015, we acquired a $116.0 million defaulted first mortgage, at par.  We financed this acquisition primarily with a new $87.0 million warehouse repurchase facility.  In the second quarter of 2015, the first mortgage paid off and as a result, we repaid the $87.0 million warehouse facility and recognized income totaling $6.7 million, net of fees and expenses.  The $6.7 million of income is comprised of other interest income totaling $7.9 million, partially offset by $1.2 million of expenses related to this transaction that were recorded in employee compensation and benefits.

 

Concentration of Credit Risk

 

We operate in one portfolio segment, commercial mortgage loans and investments.  Commercial mortgage loans and investments can potentially subject us to concentrations of credit risk.  We are subject to concentration risk in that, at September 30, 2015, the unpaid principal balance (“UPB”) related to 17 loans with five different borrowers represented approximately 18% of total assets.  At December 31, 2014, the UPB related to 31 loans with five different borrowers represented approximately 23% of total assets.  We measure our relative loss position for our mezzanine loans, junior participation loans, and preferred equity investments by determining the point where we will be exposed to losses based on our position in the capital stack as compared to the fair value of the underlying collateral.  We determine our 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 our 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 we will absorb a total loss of our position.  Last dollar LTV is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.

 

We assign 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 our 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.  Assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed.  Generally speaking, given our typical loan and investment profile, a risk rating of three suggests that we expect 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 we anticipate that the loan will require a modification of some kind.  A risk rating of five indicates we expect the loan to underperform over its term, and 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 September 30, 2015 and December 31, 2014, we identified loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of approximately $151.4 million and $189.4 million, respectively, and a weighted average last dollar LTV ratio of 94% for each period.

 

10



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class is as follows:

 

 

 

September 30, 2015

 

Asset Class

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

Wtd. Avg.
First Dollar
LTV Ratio

 

Wtd. Avg.
Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

1,113,588,289

 

69.6

%

2.8

 

3

%

74

%

Office

 

199,197,437

 

12.5

%

3.0

 

29

%

83

%

Land

 

179,900,212

 

11.3

%

3.7

 

4

%

84

%

Hotel

 

66,250,000

 

4.1

%

3.3

 

32

%

80

%

Other

 

40,083,332

 

2.5

%

2.6

 

10

%

67

%

Total

 

$

1,599,019,270

 

100.0

%

2.9

 

8

%

76

%

 

 

 

December 31, 2014

 

Asset Class

 

Unpaid
Principal
Balance

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal
Risk Rating

 

Wtd. Avg.
First Dollar
LTV Ratio

 

Wtd. Avg.
Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

1,157,462,400

 

72.9

%

2.9

 

10

%

73

%

Office

 

230,491,164

 

14.5

%

3.3

 

29

%

79

%

Land

 

128,367,601

 

8.1

%

3.9

 

6

%

88

%

Hotel

 

66,250,000

 

4.2

%

3.5

 

32

%

83

%

Other

 

4,858,333

 

0.3

%

2.9

 

69

%

75

%

Total

 

$

1,587,429,498

 

100.0

%

3.1

 

13

%

76

%

 

Geographic Concentration Risk

 

As of September 30, 2015, 29%, 14%, 14% and 13% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas, California and Florida, respectively.  As of December 31, 2014, 28%, 14% and 10% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Florida and Texas, respectively.

 

Impaired Loans and Allowance for Loan Losses

 

We perform an evaluation of the loan portfolio quarterly to assess the performance of our loans and whether a reserve for impairment should be recorded.  We consider a loan impaired when, based upon current information and events, it is probable that we 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 and nine months ended September 30, 2015, we recognized provision for loan losses totaling $1.0 million and $3.1 million, respectively.  During both periods, we also recorded net recoveries of previously recorded loan losses totaling $0.7 million, resulting in a provision for loan losses, net of recoveries totaling $0.3 million and $2.4 million, respectively.

 

During the three and nine months ended September 30, 2014 we recognized a provision for loan losses totaling $2.9 million and $7.8 million, respectively.  During these periods, we also recorded net recoveries of previously recorded loan losses totaling $1.5 million and $7.2 million, respectively, resulting in a provision for loan losses, net of recoveries totaling $1.3 million and $0.6 million, respectively.

 

The provision for loan losses recorded in the three months ended September 30, 2015 was on two loans with an aggregate carrying value before reserves of $117.2 million, while the provision for the nine months ended September 30, 2015 was comprised of three loans with an aggregate carrying value of $121.9 million and a loan that was transferred to real estate owned with a carrying value of $8.3 million before reserves.

 

The provision for loan losses recorded in the three months ended September 30, 2014 was comprised of two loans with an aggregate carrying value of $144.7 million, while the provision for the nine months ended September 30, 2014 was comprised of four loans with an aggregate carrying value of $158.5 million.

 

11



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of the period

 

$

117,563,544

 

$

115,059,988

 

$

115,487,320

 

$

122,277,411

 

Provision for loan losses

 

982,453

 

2,860,000

 

3,093,082

 

7,810,000

 

Charge-offs

 

(32,000,000

)

 

(32,000,000

)

(6,501,079

)

Charge-off on loan reclassified to real estate owned, net

 

(2,500,000

)

 

(2,500,000

)

 

Recoveries of reserves

 

(685,489

)

(1,533,462

)

(719,894

)

(7,199,806

)

Allowance at end of the period

 

$

83,360,508

 

$

116,386,526

 

$

83,360,508

 

$

116,386,526

 

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Hotel

 

$

(32,000,000

)

$

 

$

(32,000,000

)

$

 

Office

 

(2,500,000

)

 

(2,500,000

)

 

Multi-family

 

 

 

 

(6,501,079

)

Total

 

$

(34,500,000

)

$

 

$

(34,500,000

)

$

(6,501,079

)

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Multi-family

 

$

(685,489

)

$

(1,533,462

)

$

(719,894

)

$

(7,199,806

)

Total

 

$

(685,489

)

$

(1,533,462

)

$

(719,894

)

$

(7,199,806

)

 

 

 

 

 

 

 

 

 

 

Net (Charge-offs) Recoveries

 

$

(33,814,511

)

$

1,533,462

 

$

(33,780,106

)

$

698,727

 

 

 

 

 

 

 

 

 

 

 

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

 

(2.0

)%

0.1

%

(2.1

)%

0.0

%

 

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of September 30, 2015 and 2014.

 

During the three and nine months ended September 30, 2015, we charged-off $32.0 million of previously recorded reserves due to the write-off of a fully reserved junior participation loan.  We also charged-off $2.5 million in connection with the transfer of an office building by deed in lieu of foreclosure to real estate owned, net.

 

We have six loans with a carrying value totaling $116.4 million at September 30, 2015, which mature in September 2017, that are collateralized by a land development project.  The loans do not carry a current pay rate of interest, but four of the loans with a carrying value totaling $97.5 million entitle us to a weighted average accrual rate of interest of 9.60%.  We 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.  We have recorded cumulative allowances for loan losses of $47.8 million related to these loans as of September 30, 2015.  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)

September 30, 2015

 

A summary of our impaired loans by asset class is as follows:

 

 

 

September 30, 2015

 

Three Months Ended
September 30, 2015

 

Nine Months Ended
September 30, 2015

 

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

 

$

7,377,115

 

$

7,365,764

 

$

5,020,653

 

$

23,291,302

 

$

109,115

 

$

23,308,505

 

$

253,096

 

Office

 

27,585,082

 

22,800,944

 

21,972,444

 

31,835,832

 

1,225,877

 

31,835,832

 

1,782,922

 

Land

 

125,674,855

 

121,216,612

 

52,667,411

 

124,865,743

 

 

123,742,628

 

 

Hotel

 

34,750,000

 

34,489,277

 

3,700,000

 

34,750,000

 

264,898

 

34,750,000

 

782,926

 

Total

 

$

195,387,052

 

$

185,872,597

 

$

83,360,508

 

$

214,742,877

 

$

1,599,890

 

$

213,636,965

 

$

2,818,944

 

 

 

 

December 31, 2014

 

Three Months Ended
September 30, 2014

 

Nine Months Ended
September 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

 

$

39,239,894

 

$

39,232,710

 

$

36,469,894

 

$

44,727,875

 

$

257,014

 

$

52,795,793

 

$

689,284

 

Office

 

36,086,582

 

30,498,273

 

23,972,444

 

45,086,582

 

517,319

 

40,586,582

 

1,303,615

 

Land

 

121,810,400

 

117,621,457

 

51,344,982

 

118,752,869

 

 

117,608,264

 

 

Hotel

 

34,750,000

 

34,249,959

 

3,700,000

 

34,875,000

 

231,808

 

17,375,000

 

403,182

 

Total

 

$

231,886,876

 

$

221,602,399

 

$

115,487,320

 

$

243,442,326

 

$

1,006,141

 

$

228,365,639

 

$

2,396,081

 

 


(1)       Represents the UPB of impaired loans less unearned revenue and other holdbacks and adjustments by asset class and was comprised of eight loans at September 30, 2015 and ten loans at December 31, 2014.

 

(2)       Represents an average of the beginning and ending UPB of each asset class.

 

As of September 30, 2015, three loans with an aggregate net carrying value of $1.7 million, net of related loan loss reserves on two of the loans of $21.2 million, were classified as non-performing.  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, 2014, three loans with an aggregate net carrying value of $7.0 million, net of related loan loss reserves on the two loans of $34.0 million, were classified as non-performing.

 

A summary of our non-performing loans by asset class is as follows:

 

 

 

September 30, 2015

 

December 31, 2014

 

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

 

$

765,799

 

$

 

$

765,799

 

$

32,765,799

 

$

765,799

 

$

32,000,000

 

Office

 

20,472,444

 

 

20,472,444

 

8,277,757

 

 

8,277,757

 

Commercial

 

1,700,000

 

1,700,000

 

 

 

 

 

Total

 

$

22,938,243

 

$

1,700,000

 

$

21,238,243

 

$

41,043,556

 

$

765,799

 

$

40,277,757

 

 

At September 30, 2015, we did not have any loans contractually past due 90 days or more that are still accruing interest.

 

A summary of loan modifications, refinancings and/or extensions by asset class that we considered to be troubled debt restructurings were as follows:

 

 

 

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

Asset Class

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Rate of
Interest

 

Extended
Unpaid
Principal
Balance

 

Extended
Weighted
Average
Rate of
Interest

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Weighted
Average
Rate of
Interest

 

Extended
Unpaid
Principal
Balance

 

Extended
Weighted
Average
Rate of
Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

$

 

 

$

 

 

5

 

$

35,609,122

 

5.12

%

$

35,609,122

 

5.12

%

Office

 

1

 

2,430,000

 

3.69

%

2,430,000

 

3.69

%

1

 

2,430,000

 

3.69

%

2,430,000

 

3.69

%

Total

 

1

 

$

2,430,000

 

3.69

%

$

2,430,000

 

3.69

%

6

 

$

38,039,122

 

5.03

%

$

38,039,122

 

5.03

%

 

13



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

 

 

Three Months Ended September 30, 2014

 

Nine Months Ended September 30, 2014

 

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

 

Extended
Unpaid
Principal
Balance

 

Extended
Rate of
Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel

 

1

 

$

35,000,000

 

1.95

%

$

34,750,000

 

2.95

%

1

 

$

35,000,000

 

1.95

%

$

34,750,000

 

2.95

%

 

There were no loans in which we considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of September 30, 2015 and 2014 and no additional loans were considered to be impaired due to our troubled debt restructuring analysis for the three and nine months ended September 30, 2015 and 2014.  We had an unfunded commitment of $0.1 million on the extended loans which were considered troubled debt restructurings as of September 30, 2015 and no unfunded commitment on the extended loan which was considered troubled debt restructuring as of September 30, 2014.

 

Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs.  As of September 30, 2015, we had total interest reserves of $21.4 million on 62 loans with an aggregate UPB of $858.8 million.

 

Note 4 — Securities

 

The following is a summary of our securities classified as available-for-sale at September 30, 2015:

 

 

 

Amortized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Cost

 

Gain

 

Fair Value

 

 

 

 

 

 

 

 

 

Common equity securities

 

$

58,789

 

$

587,893

 

$

646,682

 

 

The following is a summary of our securities classified as available-for-sale at December 31, 2014:

 

 

 

Face

 

Amortized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Value

 

Cost

 

(Loss) / Gain

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed security (CMBS)

 

$

2,100,000

 

$

2,100,000

 

$

(100,000

)

$

2,000,000

 

Common equity securities

 

 

58,789

 

440,920

 

499,709

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

2,100,000

 

$

2,158,789

 

$

340,920

 

$

2,499,709

 

 

In the second quarter of 2015, our CMBS investment, which had a carrying value of $2.0 million, paid off in full. In connection with this pay off, we received proceeds of $2.1 million and reversed a $0.1 million unrealized loss from accumulated other comprehensive loss on our consolidated balance sheet.  Our CMBS investment had an underlying credit rating of CCC- based on the rating published by Standard & Poor’s at December 31, 2014.

 

We own 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 $0.6 million and $0.5 million at September 30, 2015 and December 31, 2014, respectively.

 

Available-for-sale securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive loss.

 

14



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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

In the first quarter of 2014, we sold all of our residential mortgage backed securities (“RMBS”) investments, which had an aggregate carrying value of $33.4 million, for $33.9 million and recorded a net gain of $0.5 million to other income, net on our consolidated statements of income, which includes the reclassification of a net unrealized gain of $0.4 million from accumulated other comprehensive loss on our consolidated balance sheet.  Included in these sales were two RMBS investments with deteriorated credit quality that had an aggregate carrying value of $25.8 million and that were sold for $25.9 million.  The RMBS investments were financed with two repurchase agreements totaling $25.3 million which were repaid with the proceeds.

 

The weighted average yield on our CMBS and RMBS investments, including the amortization of premium and the accretion of discount, based on their face values was 1.13% for the three months ended September 30, 2014 and 0.69% and 1.90% for the nine months ended September 30, 2015 and 2014, respectively.

 

Note 5 — Investments in Equity Affiliates

 

The following is a summary of our investments in equity affiliates:

 

 

 

Investment in Equity Affiliates at

 

UPB of Loans to
Equity Affiliates at

 

Equity Affiliates

 

September 30, 2015

 

December 31, 2014

 

September 30, 2015

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

22,898,430

 

$

 

$

 

West Shore Café

 

1,937,017

 

1,872,661

 

1,687,500

 

Lightstone Value Plus REIT L.P.

 

1,894,727

 

1,894,727

 

 

Issuers of Junior Subordinated Notes

 

578,000

 

578,000

 

 

JT Prime

 

425,000

 

425,000

 

 

East River Portfolio

 

95,473

 

98,578

 

4,994,166

 

Lexford Portfolio

 

100

 

100

 

2,328,500

 

Ritz-Carlton Club

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

27,828,747

 

$

4,869,066

 

$

9,010,166

 

 

We account for all investments in equity affiliates under the equity method.

 

Arbor Residential Investor LLC (“ARI”) — In the first quarter of 2015, we invested $9.6 million for 50% of our Manager’s indirect interest in a joint venture with a third party that was formed to invest in a residential mortgage banking business.  Our Manager retained a promote of 25% over a 10% return on this investment.  As a result of this transaction, we had an initial indirect interest of 22.5% in the mortgage banking business, which is subject to dilution upon attaining certain profit hurdles of the business.  As a result of the business’s profitability to date, we currently own a 20% indirect interest.  During the three and nine months ended September 30, 2015, we recorded $1.3 million and $5.9 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

In the first quarter of 2015, we invested $1.7 million through ARI for 100% of our Manager’s investment in non-qualified residential mortgages purchased from the mortgage banking business’s origination platform, resulting in a non-controlling ownership interest of 50% in this investment.  We also funded $5.7 million of additional mortgage purchases during the nine months ended September 30, 2015, for a total investment of $7.4 million as of September 30, 2015.  During the three and nine months ended September 30, 2015, we recorded a gain and loss of less than $0.1 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

Lexford Portfolio — In the third quarter of 2015, we received a distribution from this equity investment and recognized income of $3.9 million, net of expenses. The $3.9 million of income is comprised of income from equity affiliates of $4.9 million, partially offset by $1.0 million of expenses related to this distribution that were recorded in employee compensation and benefits.  See Note 14 — “Agreements and Transactions with Related Parties” for further details.

 

15



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

930 Flushing & 80 Evergreen — In the second quarter of 2014, our interest in these properties was sold, and we received $7.9 million in cash.  As a result, we recorded a gain on sale of equity interest in our consolidated statements of income of $7.9 million and reduced our investment by its carrying value of $0.1 million.  In the third quarter of 2014, our outstanding loans totaling $22.9 million to this joint venture were repaid in full.

 

450 West 33rd Street — In the third quarter of 2014, the existing debt on the property was refinanced and our portion of a guarantee was terminated, resulting in the recognition of the $77.1 million deferred gain as well as a $19.0 million prepaid incentive management 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

 

Our real estate assets were comprised of three multifamily properties (the “Multifamily Portfolio”), four hotel properties (the “Hotel Portfolio”) and an office building at September 30, 2015 and four multifamily properties and five hotel properties at December 31, 2014.

 

As of September 30, 2015 and December 31, 2014, the Multifamily Portfolio had a mortgage note payable of $27.2 million and $31.0 million, respectively.  See Note 7 — “Debt Obligations” for further details.

 

Real Estate Owned

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Multifamily
Portfolio

 

Hotel
Portfolio

 

Office
Building

 

Total

 

Multifamily
Portfolio

 

Hotel
Portfolio

 

Total

 

Land

 

$

5,538,844

 

$

5,393,651

 

$

5,159,000

 

$

16,091,495

 

$

5,538,844

 

$

9,393,651

 

$

14,932,495

 

Building and intangible assets

 

32,378,126

 

40,537,247

 

741,000

 

73,656,373

 

31,249,869

 

58,818,891

 

90,068,760

 

Less: accumulated depreciation and amortization

 

(8,903,456

)

(10,085,064

)

(672

)

(18,989,192

)

(7,414,267

)

(12,661,347

)

(20,075,614

)

Real estate owned, net

 

$

29,013,514

 

$

35,845,834

 

$

5,899,328

 

$

70,758,676

 

$

29,374,446

 

$

55,551,195

 

$

84,925,641

 

 

As of September 30, 2015 and December 31, 2014, our Multifamily Portfolio had a weighted average occupancy rate of approximately 92% and 90%, respectively.

 

For the nine months ended September 30, 2015 and 2014, our Hotel Portfolio had a weighted average occupancy rate of approximately 59% and 57%, respectively, a weighted average daily rate of approximately $93 and $79, respectively, and a weighted average revenue per available room of approximately $55 and $44, respectively.  The operation of the hotel properties are seasonal with the majority of revenues earned in the first two quarters of the calendar year.

 

In the third quarter of 2015, we acquired an office building by deed in lieu of foreclosure that was held as collateral for a first mortgage loan with a carrying value of $5.9 million, net of reserves.  Our acquisition accounting for this transaction has not been completed, pending the finalization of estimates used in the determination of fair values.  The preliminary measurement of net assets acquired may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities and contracts assumed and revisions of previous estimates.  We will finalize the purchase price allocation within one year of the acquisition date.  The office building was fully occupied at September 30, 2015.

 

Our real estate assets had restricted cash balances totaling $1.6 million and $1.7 million as of September 30, 2015 and December 31, 2014, respectively, due to escrow requirements.

 

16



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2015

 

Real Estate Held-For-Sale

 

In the third quarter of 2015, a property in the Hotel Portfolio with a carrying value of $6.3 million was reclassified from real estate owned to real estate held-for-sale due to a proposed sale.  In November 2015, this property was sold and we expect to recognize a gain of approximately $2.0 million in the fourth quarter of 2015.  In the second quarter of 2015, a property in the Hotel Portfolio with a carrying value of $11.2 million was reclassified from real estate owned to real estate held-for-sale due to a proposed sale.  In October 2015, this property was sold and we expect to recognize a gain of approximately $1.6 million in the fourth quarter of 2015.  In the first quarter of 2015, we sold a property in our Multifamily Portfolio as well as a property in the Hotel Portfolio classified as held-for-sale for a total of $18.8 million and recognized a gain of $4.0 million.  In the third quarter of 2014, a property in the Multifamily Portfolio was sold to a third party for $3.1 million.  In connection with this sale, we recorded a loss on sale of $0.2 million and a reduction of the mortgage note payable of $3.4 million.

 

The results of operations for properties classified as held-for-sale are summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

Property operating income

 

$

1,879,427

 

$

2,701,702

 

$

6,792,334

 

$

9,071,681

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operating expense

 

1,429,783

 

2,097,936

 

4,780,087

 

6,577,464

 

Depreciation

 

112,692

 

556,895

 

774,089

 

1,649,214

 

Net income

 

$

336,952

 

$

46,871

 

$

1,238,158

 

$

845,003

 

 

Note 7 — Debt Obligations

 

We utilize various forms of short-term and long-term financing agreements to finance certain of our loans and investments.  Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments.

 

Credit Facilities and Repurchase Agreements

 

The following table outlines borrowings under our credit facilities and repurchase agreements:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Debt

 

Collateral

 

Weighted

 

Debt

 

Collateral

 

Weighted

 

 

 

Carrying

 

Carrying

 

Average

 

Carrying

 

Carrying

 

Average

 

 

 

Value

 

Value

 

Note Rate

 

Value

 

Value

 

Note Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$175 million warehouse repurchase facility

 

$

50,155,994

 

$

92,436,355

 

2.47

%

$

 

$

 

 

$100 million warehousing credit facility

 

12,780,000

 

21,300,000

 

2.38

%

92,520,637

 

128,593,000

 

2.45

%

$75 million warehousing credit facility

 

24,476,250

 

34,735,000

 

2.51

%

42,975,000

 

58,000,000

 

2.45

%

$75 million warehousing credit facility

 

8,831,250

 

12,225,000

 

2.22

%

29,890,563

 

45,422,236

 

2.20

%

$25 million warehousing credit facility

 

9,720,000

 

12,200,000

 

2.22

%

 

 

 

$16.5 million term credit facility

 

16,500,000

 

29,750,000

 

2.98

%