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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 March 31, 2016

 

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

(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: 51,381,405 outstanding as of May 5, 2016.

 

 

 



Table of Contents

 

ARBOR REALTY TRUST, INC.

 

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

2

 

Item 1. Financial Statements

2

 

 

Consolidated Balance Sheets at March 31, 2016 (Unaudited) and December 31, 2015

2

 

 

Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2016 and 2015

3

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2016 and 2015

4

 

 

Consolidated Statement of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2016

5

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2016 and 2015

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

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

36

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

45

 

Item 4. Controls and Procedures

46

PART II. OTHER INFORMATION

46

 

Item 1. Legal Proceedings

46

 

Item 1A. Risk Factors

46

 

Item 6. Exhibits

47

Signatures

48

 



Table of Contents

 

Forward Looking 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, 2015 (the “2015 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

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

145,132,766

 

$

188,708,687

 

Restricted cash (includes $18,113,410 and $46,695,819 from consolidated VIEs, respectively)

 

20,124,435

 

48,301,244

 

Loans and investments, net (includes $1,005,837,830 and $968,970,064 from consolidated VIEs, respectively)

 

1,581,621,970

 

1,450,334,341

 

Available-for-sale securities, at fair value

 

411,525

 

2,022,030

 

Investments in equity affiliates

 

34,927,586

 

30,870,235

 

Real estate owned, net

 

31,698,213

 

60,845,509

 

Real estate held-for-sale, net

 

28,590,235

 

8,669,203

 

Due from related party (includes $36,451 and $36,451 from consolidated VIEs, respectively)

 

435,552

 

8,082,265

 

Other assets (includes $7,109,833 and $6,969,201 from consolidated VIEs, respectively)

 

29,478,178

 

29,558,430

 

Total assets

 

$

1,872,420,460

 

$

1,827,391,944

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

183,926,292

 

$

136,252,135

 

Collateralized loan obligations (includes $759,734,287 and $758,899,661 from consolidated VIEs, respectively)

 

759,734,287

 

758,899,661

 

Senior unsecured notes

 

93,955,461

 

93,764,994

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

157,305,257

 

157,117,130

 

Mortgage note payable — real estate owned

 

 

27,155,000

 

Mortgage note payable — real estate held-for-sale

 

27,112,443

 

 

Due to related party (includes $1,061,877 and $0 from consolidated VIEs, respectively)

 

2,406,027

 

3,428,333

 

Due to borrowers

 

42,020,339

 

34,629,595

 

Other liabilities (includes $1,240,211 and $1,224,193 from consolidated VIEs, respectively)

 

44,605,843

 

51,054,321

 

Total liabilities

 

1,311,065,949

 

1,262,301,169

 

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; 51,381,405 and 50,962,516 shares issued and outstanding, respectively

 

513,814

 

509,625

 

Additional paid-in capital

 

617,921,438

 

616,244,196

 

Accumulated deficit

 

(142,631,782

)

(136,118,001

)

Accumulated other comprehensive loss

 

(3,744,864

)

(4,840,950

)

Total equity

 

561,354,511

 

565,090,775

 

Total liabilities and equity

 

$

1,872,420,460

 

$

1,827,391,944

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Interest income

 

$

25,818,465

 

$

27,209,395

 

Interest expense

 

12,748,613

 

13,927,367

 

Net interest income

 

13,069,852

 

13,282,028

 

Other revenue:

 

 

 

 

 

Property operating income

 

5,331,532

 

8,450,343

 

Other income, net

 

89,763

 

36,000

 

Total other revenue

 

5,421,295

 

8,486,343

 

Other expenses:

 

 

 

 

 

Employee compensation and benefits

 

4,328,342

 

4,290,206

 

Selling and administrative

 

2,655,476

 

2,897,810

 

Acquisition costs

 

3,109,910

 

 

Property operating expenses

 

4,316,555

 

6,385,088

 

Depreciation and amortization

 

877,533

 

1,438,677

 

Provision for loan losses (net of recoveries)

 

(15,000

)

982,680

 

Management fee - related party

 

2,700,000

 

2,675,000

 

Total other expenses

 

17,972,816

 

18,669,461

 

Income before gain on acceleration of deferred income, loss on termination of swaps, gain on sale of real estate and income from equity affiliates

 

518,331

 

3,098,910

 

Gain on acceleration of deferred income

 

 

11,009,162

 

Loss on termination of swaps

 

 

(4,289,450

)

Gain on sale of real estate

 

607,553

 

3,984,364

 

Income from equity affiliates

 

1,897,442

 

3,095,913

 

Net income

 

3,023,326

 

16,898,899

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

Net income attributable to common stockholders

 

$

1,134,896

 

$

15,010,469

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.02

 

$

0.30

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.02

 

$

0.30

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.15

 

$

0.13

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

Basic

 

51,045,219

 

50,544,575

 

Diluted

 

51,095,128

 

50,832,736

 

 

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 March 31,

 

 

 

2016

 

2015

 

Net income

 

$

3,023,326

 

$

16,898,899

 

Unrealized (loss) gain on securities available-for-sale, at fair value

 

(58,789

)

58,789

 

Unrealized loss on derivative financial instruments, net

 

(209,789

)

(741,571

)

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

 

 

4,285,995

 

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

 

1,364,664

 

1,730,927

 

Comprehensive income

 

4,119,412

 

22,233,039

 

Less:

 

 

 

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

Comprehensive income attributable to common stockholders

 

$

2,230,982

 

$

20,344,609

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

Three Months Ended March 31, 2016

 

 

 

Preferred
Stock
Shares

 

Preferred
Stock
Value

 

Common
Stock
Shares

 

Common
Stock
Par Value

 

Additional
Paid-in Capital

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

Balance — January 1, 2016

 

3,711,500

 

$

89,295,905

 

50,962,516

 

$

509,625

 

$

616,244,196

 

$

(136,118,001

)

$

(4,840,950

)

$

565,090,775

 

Stock-based compensation

 

 

 

 

 

419,890

 

4,199

 

1,677,232

 

 

 

 

 

1,681,431

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(1,001

)

(10

)

10

 

 

 

 

 

 

Distributions — common stock

 

 

 

 

 

 

 

 

 

 

 

(7,644,227

)

 

 

(7,644,227

)

Distributions — preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,888,430

)

 

 

(1,888,430

)

Distributions — preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(4,450

)

 

 

(4,450

)

Net income

 

 

 

 

 

 

 

 

 

 

 

3,023,326

 

 

 

3,023,326

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(58,789

)

(58,789

)

Unrealized loss on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(209,789

)

(209,789

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

1,364,664

 

1,364,664

 

Balance — March 31, 2016

 

3,711,500

 

$

89,295,905

 

51,381,405

 

$

 513,814

 

$

617,921,438

 

$

(142,631,782

)

$

(3,744,864

)

$

561,354,511

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Operating activities:

 

 

 

 

 

Net income

 

$

3,023,326

 

$

16,898,899

 

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

 

 

 

 

 

Depreciation and amortization

 

877,533

 

1,438,677

 

Stock-based compensation

 

1,681,431

 

1,692,066

 

Gain on acceleration of deferred income

 

 

(11,009,162

)

Loss on termination of swaps

 

 

4,289,450

 

Gain on sale of real estate

 

(607,553

)

(3,984,364

)

Gain on sale of securities

 

(15,491

)

 

Provision for loan losses (net of recoveries)

 

(15,000

)

982,680

 

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

 

852,174

 

1,527,715

 

Income from equity affiliates

 

(1,897,442

)

(3,095,913

)

Changes in operating assets and liabilities

 

(61,383

)

(6,468,321

)

Net cash provided by operating activities

 

$

3,837,595

 

$

2,271,727

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(283,857,810

)

(329,471,068

)

Payoffs and paydowns of loans and investments

 

159,039,238

 

174,980,791

 

Deferred fees

 

2,842,917

 

1,450,479

 

Investment in real estate, net

 

(391,691

)

(894,119

)

Contributions to equity affiliates

 

(2,448,122

)

(13,259,007

)

Proceeds from sale of real estate, net

 

9,347,975

 

18,482,352

 

Proceeds from sale of available-for-sale securities

 

1,567,207

 

 

Net cash used in investing activities

 

$

(113,900,286

)

$

(148,710,572

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements, credit facilities and notes payable

 

105,388,934

 

409,849,941

 

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

 

(57,939,994

)

(191,260,767

)

Proceeds from mortgage note payable — real estate owned

 

 

27,155,000

 

Paydowns and payoffs of mortgage note payable — real estate

 

(42,557

)

(30,984,357

)

Proceeds from collateralized loan obligations

 

 

219,000,000

 

Payoffs and paydowns of collateralized debt obligations

 

 

(232,650,676

)

Payoffs and paydowns of collateralized loan obligations

 

 

(177,000,000

)

Change in restricted cash

 

27,771,209

 

190,312,724

 

Payments on swaps and margin calls to counterparties

 

 

(290,000

)

Receipts on swaps and returns of margin calls from counterparties

 

930,000

 

1,270,000

 

Distributions paid on common stock

 

(7,644,227

)

(6,562,050

)

Distributions paid on preferred stock

 

(1,888,430

)

(1,888,430

)

Distributions paid on preferred stock of private REIT

 

(4,450

)

(3,894

)

Payment of deferred financing costs

 

(83,715

)

(5,491,908

)

Net cash provided by financing activities

 

$

66,486,770

 

$

201,455,583

 

Net (decrease) increase in cash and cash equivalents

 

$

(43,575,921

)

$

55,016,738

 

Cash and cash equivalents at beginning of period

 

188,708,687

 

50,417,745

 

Cash and cash equivalents at end of period

 

$

145,132,766

 

$

105,434,483

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

11,097,134

 

$

12,091,253

 

Cash used for taxes

 

$

60,887

 

$

215,331

 

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

 

$

28,590,235

 

$

 

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

 

$

27,112,443

 

$

 

 

See Notes to Consolidated Financial Statements.

 

7



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Note 1 —Description of Business

 

Arbor Realty Trust, Inc. is a Maryland corporation that was formed in 2003 to invest in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages, 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 subsidiaries.  We are externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM” or our “Manager”).  We organize and conduct our operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

 

Proposed Acquisition of our Manager’s Agency Platform

 

On February 25, 2016, we entered into an asset purchase agreement (“Purchase Agreement”) to acquire the agency platform (the “ACM Agency Business”) of our Manager for $250.0 million (the “Proposed Acquisition”). The purchase price is to be paid 50% in cash and 50% in units of limited partnership interest in ARLP which are redeemable for cash, or at our option, for shares of our common stock on a one-for-one basis (“OP Units”). The equity component of the purchase price consists of 19.23 million OP Units which was based on a stock price of $6.50 per share. Each of the OP Units will be paired with a share of our newly-designated special voting preferred stock which will entitle ACM to one vote per share on any matter submitted to a vote of our stockholders. The OP Units are entitled to receive distributions if and when our Board of Directors authorizes and declares common stock distributions. The purchase price is subject to potential adjustment based on changes in the value of ACM’s servicing portfolio being acquired on the closing date. ACM has offered the option, at the discretion of the special committee of our Board of Directors, to provide for up to $50.0 million of financing to satisfy a portion of the cash consideration to be paid by us. All ACM employees directly related to the ACM Agency Business (approximately 230 employees) will become our employees following the consummation of the Proposed Acquisition.

 

The ACM Agency Business is comprised of its (i) underwriting, originating, selling and servicing multifamily mortgages under the Federal National Mortgage Association (“Fannie Mae”) delegated underwriting and servicing (“DUS”), U.S. Department of Housing and Urban Development (“HUD”)/Federal Housing Administration (“FHA”), Government National Mortgage Association (“GNMA”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and conduit/commercial mortgage-backed securities (“CMBS”) programs, and (ii) certain assets and liabilities primarily consisting of the mortgage servicing rights related to the agency servicing portfolio, agency loans held for sale, warehouse financing of agency loans held for sale and other assets and liabilities directly related to the ACM Agency Business.

 

In addition, pursuant to the Purchase Agreement, ACM has provided a two year option for us to purchase the existing management agreement and fully internalize our management structure for $25.0 million (increasing to $27.0 million in the second year). The exercise of this option is at the discretion of the special committee of our Board of Directors, which has no obligation to exercise its option.

 

The transaction contemplated pursuant to the Purchase Agreement will require certain government and government-sponsored enterprise (“GSE”) approvals as well as a vote of our stockholders and other third party approvals. To date, the Federal Trade Commission has granted us early termination of the mandatory waiting period for our Hart-Scott-Rodino filing, we filed our definitive proxy statement with the SEC and we have scheduled our special shareholder meeting to vote on the Proposed Acquisition for June 1, 2016. We are also pursuing the other approvals needed to close the Proposed Acquisition. This transaction is expected to close by the third quarter of 2016; however, there can be no assurances that this transaction will be completed during this period or at all. In connection with evaluating this potential transaction, we incurred advisory fees totaling $3.1 million during the three months ended March 31, 2016 and fees totaling $7.6 million to date.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

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 2015 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 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 March 31, 2016 and 2015, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for the three months ended March 31, 2016 and 2015.  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 three months ended March 31, 2016 and 2015, 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.

 

Significant Accounting Policies

 

As of March 31, 2016, our significant accounting policies, which are detailed in our 2015 Annual Report, have not changed materially.

 

Recently Issued Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) amended its guidance on stock compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance is effective for the first quarter of 2017 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

In March 2016, the FASB amended its guidance on accounting for equity method investments. Among other things, the amended guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance is effective for the first quarter of 2017 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

In February 2016, the FASB amended its guidance on accounting for leases that requires an entity to recognize balance sheet assets and liabilities for leases with terms of more than 12 months and also requires disclosure of key information about an entity’s leasing arrangements. The guidance is effective for the first quarter of 2019 with early adoption permitted. A modified retrospective approach is required. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

 

In January 2016, the FASB amended its guidance on the recognition and measurement of financial assets and liabilities.  The amended guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This update also, among other things, eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is effective for the first quarter of 2018 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

In September 2015, the FASB amended its guidance on measurement-period adjustments arising from business combinations.  The guidance was effective for the first quarter of 2016 and it did not have a material impact on our consolidated financial statements.

 

In April 2015, the FASB amended its guidance on the balance sheet presentation of debt issuance costs.  The guidance was effective for the first quarter of 2016.  We early adopted this guidance in the fourth quarter of 2015 and it did not have a material effect on our consolidated financial statements.

 

In February 2015, the FASB amended its guidance on the consolidation analysis of VIEs.  The guidance was effective for the first quarter of 2016 and it did not have a material impact on our consolidated financial statements.

 

Note 3 — Loans and Investments

 

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

 

 

 

March 31,
2016

 

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

 

$

1,481,287,587

 

88

%

112

 

5.46

%

18.1

 

0

%

76

%

Mezzanine loans

 

44,251,715

 

3

%

11

 

8.55

%

26.9

 

30

%

79

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

8.2

 

85

%

87

%

Preferred equity investments

 

89,539,476

 

5

%

10

 

7.29

%

27.9

 

44

%

85

%

 

 

1,677,335,360

 

100

%

135

 

5.60

%

18.5

 

7

%

77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(8,966,815

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(86,746,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,581,621,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

 

 

December 31,
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

 

$

1,353,132,435

 

88

%

105

 

5.48

%

16.7

 

0

%

75

%

Mezzanine loans

 

40,390,905

 

3

%

11

 

8.19

%

32.9

 

35

%

83

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

11.2

 

85

%

87

%

Preferred equity investments

 

89,346,123

 

5

%

10

 

7.52

%

30.5

 

43

%

80

%

 

 

1,545,126,045

 

100

%

128

 

5.63

%

17.7

 

7

%

76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(8,030,129

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(86,761,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,450,334,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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.

 

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 March 31, 2016, the unpaid principal balance (“UPB”) related to 23 loans with five different borrowers represented 23% of total assets.  At December 31, 2015, the UPB related to 22 loans with five different borrowers represented 22% 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.

 

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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

As a result of the loan review process at March 31, 2016 and December 31, 2015, we identified loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $155.3 million and $154.7 million, respectively, and a weighted average last dollar LTV ratio of 94% for each period.

 

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

 

 

 

March 31, 2016

 

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

 

$

1,243,001,961

 

74

%

3.0

 

2

%

76

%

Office

 

198,324,828

 

12

%

2.9

 

27

%

75

%

Land

 

169,470,238

 

10

%

3.7

 

4

%

89

%

Hotel

 

34,750,000

 

2

%

4.0

 

60

%

100

%

Other

 

31,788,333

 

2

%

3.1

 

12

%

68

%

Total

 

$

1,677,335,360

 

100

%

3.1

 

7

%

77

%

 

 

 

December 31, 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

 

$

1,083,822,788

 

70

%

3.0

 

2

%

75

%

Office

 

198,829,086

 

13

%

3.0

 

27

%

75

%

Land

 

164,410,838

 

11

%

3.8

 

5

%

90

%

Hotel

 

66,250,000

 

4

%

3.5

 

32

%

80

%

Other

 

31,813,333

 

2

%

3.1

 

13

%

67

%

Total

 

$

1,545,126,045

 

100

%

3.1

 

7

%

76

%

 

Geographic Concentration Risk

 

As of March 31, 2016, 30%, 16%, 14% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Florida, California and Texas, respectively.  As of December 31, 2015, 34%, 14%, 14% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Florida, California 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 accrued interest according to the contractual terms of the loan agreement.

 

During the three months ended March 31, 2016, we recorded a recovery of a previously recorded loan loss of less than $0.1 million.

 

During the three months ended March 31, 2015, we recognized a provision for loan losses totaling $1.0 million. During the period, we also recorded net recoveries of previously recorded loan losses totaling less than $0.1 million, resulting in a provision for loan losses, net of recoveries totaling $1.0 million.  The provision for loan losses recorded in the three months ended March 31, 2015 was comprised of two loans with an aggregate carrying value before reserves of $4.8 million.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Allowance at beginning of the period

 

$

86,761,575

 

$

115,487,320

 

Provision for loan losses

 

 

1,000,000

 

Charge-offs

 

 

 

Recoveries of reserves

 

(15,000

)

(17,320

)

Allowance at end of the period

 

$

86,746,575

 

$

116,470,000

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Charge-offs:

 

 

 

 

 

Hotel

 

$

 

$

 

Office

 

 

 

Multi-family

 

 

 

Total

 

$

 

$

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

Multi-family

 

$

(15,000

)

$

(17,320

)

Total

 

$

(15,000

)

$

(17,320

)

 

 

 

 

 

 

Net (Charge-offs) Recoveries

 

$

15,000

 

$

17,320

 

 

 

 

 

 

 

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

 

0.0

%

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 March 31, 2016 and 2015.

 

We have six loans with a carrying value totaling $118.6 million at March 31, 2016, 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 $97.2 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 we deemed the collection of this interest to be doubtful.  We have recorded cumulative allowances for loan losses of $49.1 million related to these loans as of March 31, 2016.  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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

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

 

 

 

March 31, 2016

 

Three Months Ended
March 31, 2016

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

7,347,115

 

$

7,390,618

 

$

5,490,653

 

$

7,354,615

 

$

63,536

 

Office

 

27,576,082

 

22,791,944

 

21,972,444

 

27,578,332

 

23,047

 

Land

 

128,072,210

 

123,380,546

 

53,883,478

 

127,770,439

 

 

Hotel

 

34,750,000

 

34,400,000

 

3,700,000

 

34,750,000

 

282,149

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

Total

 

$

199,445,407

 

$

189,663,108

 

$

86,746,575

 

$

199,153,386

 

$

368,732

 

 

 

 

December 31, 2015

 

Three Months Ended
March 31, 2015

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying
Value (1)

 

Allowance
for Loan
Losses

 

Average
Recorded
Investment (2)

 

Interest
Income
Recognized

 

Multi-family

 

$

7,362,115

 

$

7,350,764

 

$

5,505,653

 

$

39,231,234

 

$

70,089

 

Office

 

27,580,582

 

22,796,444

 

21,972,444

 

36,086,582

 

274,853

 

Land

 

127,468,667

 

122,875,774

 

53,883,478

 

122,073,641

 

 

Hotel

 

34,750,000

 

34,486,433

 

3,700,000

 

34,875,000

 

257,130

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

 

 

Total

 

$

198,861,364

 

$

189,209,415

 

$

86,761,575

 

$

232,266,457

 

$

602,072

 

 


(1) Represents the UPB of impaired loans less unearned revenue and other holdbacks and adjustments by asset class and was comprised of nine loans at both March 31, 2016 and December 31, 2015.

 

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

 

As of March 31, 2016, three fully reserved loans with loan loss reserves totaling $22.9 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, 2015, three loans with an aggregate net carrying value of less than $0.1 million, net of related loan loss reserves on the loans of $22.9 million, were classified as non-performing.

 

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

 

 

 

March 31, 2016

 

December 31, 2015

 

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

 

$

770,653

 

$

 

$

770,653

 

$

765,799

 

$

 

$

765,799

 

Office

 

20,472,444

 

 

20,472,444

 

20,472,444

 

 

20,472,444

 

Commercial

 

1,700,000

 

 

1,700,000

 

1,700,000

 

 

1,700,000

 

Total

 

$

22,943,097

 

$

 

$

22,943,097

 

$

22,938,243

 

$

 

$

22,938,243

 

 

At March 31, 2016, 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 March 31, 2016

 

Three Months Ended March 31, 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

 

1

 

$

14,646,456

 

  5.24

%

$

14,646,456

 

5.24

%

1

 

$

6,192,666

 

5.93%

 

$

6,192,666

 

5.93

%

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

There were no loans in which we considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of March 31, 2016 and 2015 and no additional loans were considered to be impaired due to our troubled debt restructuring analysis for the three months ended March 31, 2016 and 2015. These loans were modified to increase the total recovery of the combined principal and interest from the loan.

 

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 March 31, 2016, we had total interest reserves of $16.1 million on 59 loans with an aggregate UPB of $787.8 million.

 

Note 4 — Securities

 

The following is a summary of our securities classified as available-for-sale at March 31, 2016:

 

 

 

Amortized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Cost

 

Gain

 

Fair Value

 

 

 

 

 

 

 

 

 

2,939,465 common shares of CV Holdings, Inc.

 

$

58,789

 

$

352,736

 

$

411,525

 

 

The following is a summary of our securities classified as available-for-sale at December 31, 2015:

 

 

 

Face

 

Amortized

 

Cumulative
Unrealized

 

Carrying
Value /
Estimated

 

 

 

Value

 

Cost

 

Gain

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

$

1,500,000

 

$

1,551,716

 

$

 

$

1,551,716

 

2,939,465 common shares of CV Holdings, Inc.

 

 

58,789

 

411,525

 

$

470,314

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

1,500,000

 

$

1,610,505

 

$

411,525

 

$

2,022,030

 

 

In the fourth quarter of 2015, we purchased a federal home loan mortgage corporation security at a premium for $1.6 million. This security bore interest at a fixed rate of 3.241% with a scheduled maturity in 2024. We sold this security in January 2016 for $1.6 million and recognized a gain of less than $0.1 million.

 

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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Note 5 — Investments in Equity Affiliates

 

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

 

 

 

Investments in Equity Affiliates at

 

UPB of Loans to
Equity Affiliates at

 

Equity Affiliates

 

March 31, 2016

 

December 31, 2015

 

March 31, 2016

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

29,964,030

 

$

25,923,679

 

$

 

West Shore Café

 

1,975,933

 

1,955,933

 

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

 

89,796

 

92,796

 

4,994,166

 

Lexford Portfolio

 

100

 

100

 

 

Ritz-Carlton Club

 

 

 

 

Total

 

$

34,927,586

 

$

30,870,235

 

$

6,681,666

 

 

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.  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. During the three months ended March 31, 2016 and 2015, we recorded $1.6 million and $3.1 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

In 2015, we also invested $9.7 million into a joint venture through ARI, in which we own a 50% non-controlling interest that invests in non-qualified residential mortgages purchased from the mortgage banking business’s origination platform.  We also funded $2.4 million of additional mortgage purchases during the three months ended March 31, 2016, for a total investment of $12.1 million as of March 31, 2016. During the three months ended March 31, 2016 and 2015, we recorded income and a loss of less than $0.1 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

The summarized statements of operations for our individually significant investment in ARI are as follows:

 

 

 

Three Months Ended March 31,

 

Statements of Operations:

 

2016

 

2015

 

Revenue:

 

 

 

 

 

Total revenues

 

$

42,929,432

 

$

37,863,998

 

 

 

 

 

 

 

Total expenses

 

36,007,398

 

25,154,107

 

 

 

 

 

 

 

Net income

 

$

6,922,034

 

$

12,709,891

 

Arbor’s share of income

 

$

1,592,228

 

$

3,035,797

 

 

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

 

Our real estate assets were comprised of three multifamily properties (the “Multifamily Portfolio”), one hotel property (the “Hotel Portfolio”) and an office building at March 31, 2016 and three multifamily properties, two hotel properties and an office building at December 31, 2015.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Real Estate Owned

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Hotel
Portfolio

 

Office
Building

 

Total

 

Multifamily
Portfolio

 

Hotel
Portfolio

 

Office
Building

 

Total

 

Land

 

$

3,293,651

 

$

4,509,000

 

$

7,802,651

 

$

5,538,844

 

$

3,293,651

 

$

4,509,000

 

$

13,341,495

 

Building and intangible assets

 

30,519,869

 

1,391,000

 

31,910,869

 

32,643,889

 

30,338,882

 

1,391,000

 

64,373,771

 

Less: accumulated depreciation and amortization

 

(7,789,546

)

(225,761

)

(8,015,307

)

(9,399,041

)

(7,329,615

)

(141,101

)

(16,869,757

)

Real estate owned, net

 

$

26,023,974

 

$

5,674,239

 

$

31,698,213

 

$

28,783,692

 

$

26,302,918

 

$

5,758,899

 

$

60,845,509

 

 

As of December 31, 2015, our Multifamily Portfolio had a weighted average occupancy rate of approximately 94%.

 

For the three months ended March 31, 2016 and 2015, our Hotel Portfolio had a weighted average occupancy rate of approximately 66% and 63%, respectively, a weighted average daily rate of approximately $97 and $103, respectively, and a weighted average revenue per available room of approximately $65 and $64, respectively.  The operation of a hotel property is seasonal with the majority of revenues earned in the first two quarters of the calendar year.

 

Our real estate assets had restricted cash balances totaling $2.0 million and $1.6 million as of March 31, 2016 and December 31, 2015, respectively, due to escrow requirements.

 

Real Estate Held-For-Sale

 

In the first quarter of 2016, we sold a property in the Hotel Portfolio for $9.7 million and recognized a gain of $0.6 million.  We also reclassified the three remaining properties in the Multifamily Portfolio with an aggregate carrying value of $28.6 million and an aggregate debt balance of $27.1 million as held-for-sale due to a proposed sale that was completed in April 2016. The properties were sold for $41.0 million and we expect to recognize a total gain of approximately $11.0 million. A portion of the proceeds from this sale were used to pay off the outstanding debt on these properties. See Note 7 — “Debt Obligations” for further details.

 

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.

 

As of March 31, 2016, our Multifamily Portfolio had a weighted average occupancy rate of approximately 97%.

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

Revenue:

 

 

 

 

 

Property operating income

 

$

1,695,348

 

$

1,457,995

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expense

 

1,061,828

 

1,096,038

 

Depreciation

 

334,631

 

457,637

 

Net income (loss)

 

$

298,889

 

$

(95,680

)

 

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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Credit Facilities and Repurchase Agreements

 

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

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Debt

 

Debt

 

Collateral

 

Weighted

 

Debt

 

Debt

 

Collateral

 

Weighted

 

 

 

Principal

 

Carrying

 

Carrying

 

Average

 

Principal

 

Carrying

 

Carrying

 

Average

 

 

 

Balance

 

Value

 

Value

 

Note Rate

 

Value

 

Value

 

Value

 

Note Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million warehouse repurchase facility

 

$

58,326,214

 

$

57,809,401

 

$

99,189,746

 

2.70%

 

$

58,270,774

 

$

57,610,463

 

$

99,641,504

 

2.70

%

$100 million warehousing credit facility

 

21,837,200

 

21,625,911

 

31,400,000

 

2.62%

 

24,582,200

 

24,328,863

 

38,000,000

 

2.62

%

$75 million warehousing credit facility

 

31,241,000

 

31,186,023

 

45,465,000

 

2.60%

 

13,852,500

 

13,766,445

 

18,470,000

 

2.59

%

$75 million warehousing credit facility

 

17,150,000

 

17,149,388

 

26,000,000

 

2.47%

 

 

 

 

 

$50 million warehousing credit facility

 

39,720,000

 

39,706,666

 

49,650,000

 

2.47%

 

24,120,000

 

24,114,494

 

30,200,000

 

2.46

%

$16.5 million term credit facility

 

16,500,000

 

16,448,903

 

29,750,000

 

3.23%

 

16,500,000

 

16,431,870

 

29,750,000

 

3.22

%

Total

 

$

184,774,414

 

$

183,926,292

 

$

281,454,746

 

2.65%

 

$

137,325,474

 

$

136,252,135

 

$

216,061,504

 

2.69

%

 

At March 31, 2016 and December 31, 2015, the weighted average interest rate for our credit facilities and repurchase agreements was 2.65% and 2.69%, respectively.  Including certain fees and costs, such as structuring, commitment, non-use and warehousing fees, the weighted average interest rate was 3.18% and 3.42% at March 31, 2016 and December 31, 2015, respectively. There were no interest rate swaps on these facilities at March 31, 2016 and December 31, 2015.

 

We have a $150.0 million warehouse repurchase facility with a financial institution initially used to finance a significant portion of the unwind of two of our collateralized debt obligation (“CDO”) vehicles in the first quarter of 2015. See “Collateralized Debt Obligations” below.  The facility bears interest at a rate of 212.5 basis points over LIBOR on senior mortgage loans, 350.0 basis points over LIBOR on junior mortgage loans, and matures in January 2017 with a one-year extension option.  If the estimated market value of the loans financed in this facility decrease, we may be required to pay down borrowings under this facility.  Debt carrying value is net of $0.5 million and $0.7 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 

We have a $100.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties that bore interest at a rate of 225 basis points over LIBOR and was to mature in April 2015.   In May 2015, we amended the facility decreasing the rate of interest to 215 basis points over LIBOR and extended the maturity to May 2017 with a one-year extension option, subject to certain conditions.  The facility has a maximum advance rate of 75% and also has a compensating balance requirement of $50.0 million to be maintained by us and our affiliates.  Debt carrying value is net of $0.2 million and $0.3 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively

 

We have a $75.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties that bore interest at a rate of 225 basis points over LIBOR and was to mature in June 2015.   In June 2015, we amended the facility, extending the maturity to June 2016, decreasing the rate of interest to 212.5 basis points over LIBOR, and added a new $25.0 million sublimit to finance healthcare related loans.  The healthcare related loans will have an interest rate ranging from 225 basis points to 250 basis points over LIBOR depending on the type of healthcare facility financed.  The facility has a maximum advance rate of 75%.  Debt carrying value is net of $0.1 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 

We have another $75.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily and commercial properties that bears interest at a rate of 200 basis points over LIBOR and was to mature in April 2016.  In April 2016, the facility was extended to June 2016. The facility has a maximum advance rate of 70% or 75%, depending on the property type. Debt carrying value is net of less than $0.1 million of deferred financing fees at both March 31, 2016 and December 31, 2015.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

We have a $50.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties.  The facility bears interest at a rate of 200 basis points over LIBOR and was to mature in February 2016. In February 2016, we amended the facility, increasing the committed amount by $25.0 million to $50.0 million and extending the maturity to February 2017 with two one-year extension options, subject to certain conditions. Debt carrying value is net of less than $0.1 million of deferred financing fees at both March 31, 2016 and December 31, 2015.

 

In September 2015, we entered into a $16.5 million term facility with a financial institution to finance a first mortgage loan.  The facility bears interest at a rate of 275 basis points over LIBOR, matures in December 2016 and has a compensating balance requirement of $3.0 million to be maintained by us and our affiliates.  Debt carrying value is net of $0.1 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 

Our warehouse credit facilities generally allow for an original warehousing period of up to 24 months from the initial advance on an asset. In addition, our credit facilities and repurchase agreements contain several restrictions including full repayment of an advance if a loan becomes 60 days past due, is in default or is written down by us.  Our credit facilities and repurchase agreements also contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.  See “Debt Covenants” below for details.

 

Collateralized Loan Obligations (CLOs)

 

In August 2015, we completed a collateralized securitization vehicle (“CLO V”), issuing to third party investors three tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries totaling $267.8 million, of which we purchased $12.5 million of Class C notes that we subsequently sold at par for $12.5 million.  As of the CLO closing date, the notes were secured by a portfolio of loan obligations with a face value of approximately $302.6 million, consisting primarily of bridge loans that were contributed from our existing loan portfolio.  The financing has an approximate three year replacement period that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture.  Thereafter, the outstanding debt balance will be reduced as loans are repaid.  Initially, the proceeds of the issuance of the securities also included $47.4 million for the purpose of acquiring additional loan obligations for a period of up to 120 days from the closing date of the CLO.  In September 2015, the additional proceeds were fully utilized resulting in the issuer owning loan obligations with a face value of approximately $350.0 million.  We retained a residual interest in the portfolio with a notional amount of approximately $82.3 million.  The notes have an initial weighted average interest rate of approximately 2.44% plus one-month LIBOR and interest payments on the notes are payable monthly.  Including certain fees and costs, the initial weighted average note rate was 3.07%.

 

In March 2015, we completed the unwinding of CLO II, redeeming $177.0 million of our outstanding notes which were repaid primarily from the refinancing of the remaining assets within our new and existing financing facilities as well as with cash held by the CLO and expensed $1.5 million of deferred fees in the first quarter of 2015 into interest expense on the consolidated statements of income.

 

In February 2015, we completed a collateralized securitization vehicle (“CLO IV”), issuing to third party investors three tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries totaling $219.0 million.  At closing, the notes were secured by a portfolio of loan obligations with a face value of $250.0 million, consisting primarily of bridge loans that were contributed from our existing loan portfolio, as well as $50.0 million for the purpose of acquiring additional loan obligations.  The financing has an approximate 2.5 year replacement period from closing that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture.  Thereafter, the outstanding debt balance will be reduced as loans are repaid.  We retained a residual interest in the portfolio with a notional amount of approximately $81.0 million.  The notes had an initial weighted average interest rate of approximately 2.24% plus one-month LIBOR and interest payments on the notes are payable monthly.  Including certain fees and costs, the initial weighted average note rate was 2.96%.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

The following table outlines borrowings and the corresponding collateral under our CLOs as of March 31, 2016:

 

 

 

Debt

 

Collateral

 

 

 

 

 

 

 

 

 

Loans

 

Cash

 

 

 

 

 

Face

 

Carrying

 

Unpaid

 

Carrying

 

Restricted

 

Collateral

 

 

 

Value

 

Value

 

Principal

 

Value

 

Cash (1)

 

At-Risk (2)

 

CLO III

 

$

281,250,000

 

$

279,416,407

 

$

362,392,312

 

$

361,238,817

 

$

9,897,410

 

$

 

CLO IV

 

219,000,000

 

216,267,800

 

299,042,848

 

298,381,148

 

957,153

 

 

CLO V

 

267,750,000

 

264,050,080

 

346,791,173

 

346,217,866

 

3,208,828

 

 

Total CLOs

 

$

768,000,000

 

$

759,734,287

 

$

1,008,226,333

 

$

1,005,837,831

 

$

14,063,391

 

$

 

 

The following table outlines borrowings and the corresponding collateral under our CLOs as of December 31, 2015:

 

 

 

Debt

 

Collateral

 

 

 

 

 

 

 

Loans

 

Cash

 

 

 

 

 

Face

 

Carrying

 

Unpaid

 

Carrying

 

Restricted

 

Collateral

 

 

 

Value

 

Value

 

Principal

 

Value

 

Cash (1)

 

At-Risk (2)

 

CLO III

 

$

281,250,000

 

$

279,129,518

 

$

339,019,221

 

$

338,034,689

 

$

25,135,492

 

$

 

CLO IV

 

219,000,000

 

215,985,420

 

288,581,773

 

287,946,641

 

11,418,227

 

 

CLO V

 

267,750,000

 

263,784,723

 

343,561,696

 

342,988,734

 

6,438,304

 

 

Total CLOs

 

$

768,000,000

 

$

758,899,661

 

$

971,162,690

 

$

968,970,064

 

$

42,992,023

 

$

 

 

CLO III — Issued three investment grade tranches in April 2014 with a replacement period through October 2016 and a stated maturity date in May 2024.  Interest is variable based on three-month LIBOR; the weighted average note rate was 2.87% and 2.86% at March 31, 2016 and December 31, 2015, respectively. Debt carrying value is net of $1.8 million and $2.1 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 

CLO IV — Issued three investment grade tranches in February 2015 with a replacement period through September 2017 and a stated maturity date in March 2025.  Interest is variable based on three-month LIBOR; the weighted average note rate was 2.72% and 2.71% at March 31, 2016 and December 31, 2015, respectively. Debt carrying value is net of $2.7 million and $3.0 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 

CLO V — Issued three investment grade tranches in August 2015 with a replacement period through September 2018 and a stated maturity date in September 2025.  Interest is variable based on one-month LIBOR; the weighted average note rate was 2.92% and 2.91% at March 31, 2016 and December 31, 2015, respectively. Debt carrying value is net of $3.7 million and $3.8 million of deferred financing fees at March 31, 2016 and December 31, 2015, respectively.

 


(1) Represents restricted cash held for principal repayments as well as for reinvestment in the CLOs.  Does not include restricted cash related to interest payments, delayed fundings and expenses.

 

(2) Amounts represent the face value of collateral in default, as defined by the CLO indenture, as well as assets deemed to be “credit risk.”  Credit risk assets are reported by each of the CLOs and are generally defined as one that, in the CLO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.

 

At both March 31, 2016 and December 31, 2015, the aggregate weighted average note rate for our CLOs was 2.84%.  Including certain fees and costs, the weighted average note rate was 3.27% and 3.24% at March 31, 2016 and December 31, 2015, respectively.

 

We account for our CLO transactions on our consolidated balance sheet as financing facilities.  Our CLOs are VIEs for which we are the primary beneficiary and are consolidated in our financial statements accordingly.  The investment grade tranches are treated as secured financings, and are non-recourse to us.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Collateralized Debt Obligations (CDOs)

 

In July 2015, we completed the unwind of CDO III, our last remaining CDO vehicle, redeeming $71.1 million of our outstanding notes. The notes were repaid primarily from proceeds received from the refinancing of CDO III’s remaining assets within our existing financing facilities, as well as with cash held by the CDO.  We also terminated a related interest rate swap and incurred a loss of $0.3 million in the third quarter of 2015.  CDO III had a $100.0 million revolving note class that provided a revolving note facility, which was paid off in the first quarter of 2015.

 

In January 2015, we completed the unwind of CDO I and CDO II, redeeming $167.9 million of our outstanding notes. The notes were repaid primarily from proceeds received from the refinancing of CDO I and II’s remaining assets within a new $150.0 million warehouse repurchase facility and our existing financing facilities, as well as with cash held by each CDO.  As a result of this transaction, we generated approximately $30.0 million in cash equity and expensed $0.5 million of deferred fees in the first quarter of 2015.  We also terminated the related basis and interest rate swaps and incurred a loss of $4.3 million in the first quarter of 2015.  See Note 8 — “Derivative Financial Instruments” for additional details.

 

In 2010, we re-issued our own CDO bonds we had acquired throughout 2009 with an aggregate face amount of approximately $42.8 million as part of an exchange for the retirement of $114.1 million of our junior subordinated notes.  This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of our CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity.  In January 2015, we unwound our CDO I and CDO II vehicles and reduced the balance of estimated interest by $11.0 million and in July 2015, we unwound our CDO III vehicle and reduced the remaining balance of estimated interest by $8.2 million, recording a gain on acceleration of deferred income in the consolidated statements of income.

 

Senior Unsecured Notes

 

During 2014, we issued $90.0 million aggregate principal amount of 7.375% senior unsecured notes due in 2021 in an underwritten public offering for net proceeds of $85.4 million after deducting the issuance and underwriting discounts and offering expenses.  In connection with this offering, the underwriters exercised a portion of their overallotment option for a $7.8 million aggregate principal amount providing additional net proceeds of $7.4 million.  The notes can be redeemed by us after May 15, 2017.  The interest is paid quarterly in February, May, August and November.  Including certain fees and costs, the weighted average note rate was 8.15% and 8.12% at March 31, 2016 and December 31, 2015, respectively.  The debt carrying value of $94.0 million and $93.8 million at March 31, 2016 and December 31, 2015, respectively, is net of $3.9 million and $3.5 million, respectively, of deferred financing fees. We used the net proceeds to make investments, to repurchase or pay liabilities and for general corporate purposes.

 

Junior Subordinated Notes

 

The carrying value of borrowings under our junior subordinated notes was $157.3 million and $157.1 million at March 31, 2016 and December 31, 2015, respectively, which is net of a deferred amount of $15.3 million and $15.5 million, respectively, that is being amortized into interest expense over the life of the notes and $3.2 million and $3.3 million, respectively, of deferred financing fees.  These notes have maturities ranging from March 2034 through April 2037, pay interest quarterly at a fixed or floating rate of interest based on three-month LIBOR and were not redeemable for the first two years.  The current weighted average note rate was 3.45% and 3.43% at March 31, 2016 and December 31, 2015, respectively.  Including certain fees and costs, the weighted average note rate was 3.56% and 3.55% at March 31, 2016 and December 31, 2015, respectively.  The entities that issued the junior subordinated notes have been deemed VIEs.  See Note 9 — “Variable Interest Entities” for further details.

 

Mortgage Note Payable — Real Estate Owned and Held-For-Sale

 

In the first quarter of 2015, we made required paydowns of $10.3 million and repaid the Multifamily Portfolio mortgage of $20.7 million, replacing it with two new notes payable totaling $27.2 million.  At March 31, 2016, the new notes payable consists of a $24.7 million secured loan that bears interest at a fixed rate of 3.00% and matures in December 2017, as well as a $2.5 million, unsecured loan that bears interest at a variable rate of one-month LIBOR plus 2.75% and matures in December 2016. These notes payable were repaid in full in April 2016 in connection with the sale of the remaining properties in the Multifamily Portfolio.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

Debt Covenants

 

Our debt facilities contain various financial covenants and restrictions, including a minimum liquidity requirement of $20.0 million, minimum net worth requirement of $100.0 million to $300.0 million depending on the debt facility and a maximum total liabilities less subordinated debt requirement of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.  We were in compliance with all financial covenants and restrictions at March 31, 2016.

 

Our CLO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments.  If we fail these covenants in any of our CLOs, all cash flows from the applicable CLO would be diverted to repay principal and interest on the outstanding CLO bonds and we would not receive any residual payments until that CLO regained compliance with such tests.  Our CLOs were in compliance with all such covenants as of March 31, 2016, as well as on the most recent determination dates in April 2016.  In the event of a breach of the CLO covenants that could not be cured in the near-term, we would be required to fund our non-CLO expenses, including management fees and employee costs, distributions required to maintain our REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CLO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, or (v) or accessing the equity or debt capital markets, if available.  We have the right to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CLOs.  However, we may not have sufficient liquidity available to do so at such time.

 

The chart below is a summary of our CLO compliance tests as of the most recent determination dates in April

 

2016:

 

Cash Flow Triggers

 

CLO III

 

CLO IV

 

CLO V

 

 

 

 

 

 

 

 

 

Overcollateralization (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

133.33

%

136.99

%

130.72

%

 

 

 

 

 

 

 

 

Limit

 

132.33

%

135.99

%

129.72

%

 

 

 

 

 

 

 

 

Pass / Fail

 

Pass

 

Pass

 

Pass

 

 

 

 

 

 

 

 

 

Interest Coverage (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

299.10

%

327.01

%

270.88

%

 

 

 

 

 

 

 

 

Limit

 

120.00

%

120.00

%

120.00

%

 

 

 

 

 

 

 

 

Pass / Fail

 

Pass

 

Pass

 

Pass

 

 


(1) The overcollateralization ratio divides the total principal balance of all collateral in the CLO by the total principal balance of the bonds associated with the applicable ratio.  To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies.  Rating downgrades of CLO collateral will generally not have a direct impact on the principal balance of a CLO asset for purposes of calculating the CLO overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CLO vehicle.

 

(2) The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2016

 

The chart below is a summary of our CLO overcollateralization ratios as of the determination dates subsequent to each quarter:

 

Determination (1)

 

CLO III

 

CLO IV

 

CLO V

 

 

 

 

 

 

 

 

 

April 2016

 

133.33

%

136.99

%

130.72

%

January 2016

 

133.33

%

136.99

%

130.72

%

October 2015

 

133.33

%

136.99

%

130.72

%

July 2015

 

133.33

%

136.99

%

 

April 2015

 

133.33

%

136.99

%

 

 


(1) The table above represents the quarterly trend of our overcollateralization ratio, however, the CLO determination dates are monthly and we were in compliance with this test for all periods presented.

 

The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CLOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs.  No payment due under the junior subordinated indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee.  The junior subordinated indentures are also cross-defaulted with each other.

 

Note 8 — Derivative Financial Instruments

 

The following is a summary of the derivative financial instruments held by us (dollars in thousands):

 

 

 

 

 

Notional Value

 

 

 

Balance

 

Fair Value

 

Designation\
Cash Flow

 

Derivative

 

Count

 

March 31,
2016

 

Count

 

December 31,
2015

 

Expiration
Date

 

Sheet
Location

 

March 31,
2016

 

December 31,
2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying

 

LIBOR Caps

 

2

 

$

84,100

 

2

 

$

84,100

 

2017

 

Other Assets

 

$

1

 

$

3

 

Qualifying

 

Interest Rate Swaps

 

5

 

$

107,821

 

5

 

$

107,821

 

2016 - 2017

 

Other Liabilities

 

$

(3,553

)

$

(4,669

)

 

The changes in the fair value of qualifying interest rate swap cash flow hedges are recorded in accumulated other comprehensive loss on the consolidated balance sheets.  These swap agreements must be effective in reducing the variability of cash flows of the hedged items in