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EX-32 - EX-32 - ARBOR REALTY TRUST INCa16-11512_1ex32.htm
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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 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

 

(I.R.S. Employer

incorporation)

 

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

 

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 August 4, 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 June 30, 2016 (Unaudited) and December 31, 2015

2

Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2016 and 2015

3

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2016 and 2015

4

Consolidated Statement of Changes in Equity (Unaudited) for the Six Months Ended June 30, 2016

5

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

38

Item 3. Quantitative and Qualitative Disclosures about Market Risk

51

Item 4. Controls and Procedures

51

PART II. OTHER INFORMATION

51

Item 1. Legal Proceedings

51

Item 1A. Risk Factors

52

Item 6. Exhibits

52

Signatures

53

 



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

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

160,177,704

 

$

188,708,687

 

Restricted cash

 

158,667,541

 

48,301,244

 

Loans and investments, net

 

1,511,596,691

 

1,450,334,341

 

Available-for-sale securities, at fair value

 

440,920

 

2,022,030

 

Investments in equity affiliates

 

38,649,254

 

30,870,235

 

Real estate owned, net

 

20,012,783

 

60,845,509

 

Real estate held-for-sale, net

 

 

8,669,203

 

Due from related party

 

781,782

 

8,082,265

 

Other assets

 

26,419,806

 

29,558,430

 

Total assets

 

$

1,916,746,481

 

$

1,827,391,944

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

259,171,941

 

$

136,252,135

 

Collateralized loan obligations

 

760,632,528

 

758,899,661

 

Senior unsecured notes

 

94,140,028

 

93,764,994

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

157,468,377

 

157,117,130

 

Mortgage note payable - real estate owned

 

 

27,155,000

 

Due to related party

 

2,166,790

 

3,428,333

 

Due to borrowers

 

32,561,558

 

34,629,595

 

Other liabilities

 

44,932,044

 

51,054,321

 

Total liabilities

 

1,351,073,266

 

1,262,301,169

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

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

 

618,403,101

 

616,244,196

 

Accumulated deficit

 

(140,103,326

)

(136,118,001

)

Accumulated other comprehensive loss

 

(2,436,279

)

(4,840,950

)

Total equity

 

565,673,215

 

565,090,775

 

Total liabilities and equity

 

$

1,916,746,481

 

$

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 June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

27,969,498

 

$

26,340,585

 

$

53,787,963

 

$

53,549,980

 

Other interest income, net

 

2,539,274

 

7,884,344

 

2,539,274

 

7,884,344

 

Interest expense

 

13,243,488

 

11,592,762

 

25,992,101

 

25,520,129

 

Net interest income

 

17,265,284

 

22,632,167

 

30,335,136

 

35,914,195

 

Other revenue:

 

 

 

 

 

 

 

 

 

Property operating income

 

4,426,555

 

7,201,834

 

9,758,087

 

15,652,177

 

Other income, net

 

214,668

 

76,816

 

304,431

 

112,816

 

Total other revenue

 

4,641,223

 

7,278,650

 

10,062,518

 

15,764,993

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

4,311,412

 

4,966,138

 

8,639,754

 

9,256,344

 

Selling and administrative

 

1,719,337

 

2,623,750

 

4,374,813

 

5,521,560

 

Acquisition costs

 

745,734

 

284,054

 

3,855,644

 

284,054

 

Property operating expenses

 

3,856,264

 

5,967,644

 

8,172,819

 

12,352,732

 

Depreciation and amortization

 

443,112

 

1,447,642

 

1,320,645

 

2,886,319

 

Impairment loss on real estate owned

 

11,200,000

 

 

11,200,000

 

 

Provision for loan losses (net of recoveries)

 

44,005

 

1,093,544

 

29,005

 

2,076,224

 

Management fee - related party

 

2,850,000

 

2,675,000

 

5,550,000

 

5,350,000

 

Total other expenses

 

25,169,864

 

19,057,772

 

43,142,680

 

37,727,233

 

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

 

(3,263,357

)

10,853,045

 

(2,745,026

)

13,951,955

 

Gain on acceleration of deferred income

 

 

 

 

11,009,162

 

Loss on termination of swaps

 

 

 

 

(4,289,450

)

Gain on sale of real estate

 

11,023,134

 

 

11,630,687

 

3,984,364

 

Income from equity affiliates

 

4,367,101

 

1,534,025

 

6,264,543

 

4,629,938

 

Net income

 

12,126,878

 

12,387,070

 

15,150,204

 

29,285,969

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

3,776,860

 

3,776,860

 

Net income attributable to common stockholders

 

$

10,238,448

 

$

10,498,640

 

$

11,373,344

 

$

25,509,109

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.20

 

$

0.21

 

$

0.22

 

$

0.50

 

Diluted earnings per common share

 

$

0.20

 

$

0.21

 

$

0.22

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding

 

 

 

 

 

 

 

 

 

Basic

 

51,381,405

 

50,955,648

 

51,213,312

 

50,751,247

 

Diluted

 

51,741,951

 

50,955,648

 

51,418,539

 

50,894,531

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.15

 

$

0.15

 

$

0.30

 

$

0.28

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,126,878

 

$

12,387,070

 

$

15,150,204

 

$

29,285,969

 

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

 

29,395

 

364,552

 

(29,395

)

423,341

 

Unrealized loss on derivative financial instruments, net

 

(52,445

)

(165,156

)

(262,234

)

(906,727

)

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

 

1,331,637

 

1,510,573

 

2,696,300

 

3,241,500

 

Comprehensive income

 

13,435,465

 

14,097,039

 

17,554,875

 

36,330,078

 

Less:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

3,776,860

 

3,776,860

 

Comprehensive income attributable to common stockholders

 

$

11,547,035

 

$

12,208,609

 

$

13,778,015

 

$

32,553,218

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

Six Months Ended June 30, 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

 

2,158,895

 

 

 

 

 

2,163,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(1,001

)

(10

)

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(15,351,438

)

 

 

(15,351,438

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(3,776,860

)

 

 

(3,776,860

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(7,231

)

 

 

(7,231

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

15,150,204

 

 

 

15,150,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,395

)

(29,395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(262,234

)

(262,234

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

2,696,300

 

2,696,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2016

 

3,711,500

 

$

89,295,905

 

51,381,405

 

$

513,814

 

$

618,403,101

 

$

(140,103,326

)

$

(2,436,279

)

$

565,673,215

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

15,150,204

 

$

29,285,969

 

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

 

 

 

 

 

Depreciation and amortization

 

1,320,645

 

2,886,319

 

Stock-based compensation

 

2,163,094

 

2,427,268

 

Gain on acceleration of deferred income

 

 

(11,009,162

)

Loss on termination of swaps

 

 

4,289,450

 

Gain on sale of real estate

 

(11,630,687

)

(3,984,364

)

Impairment loss on real estate owned

 

11,200,000

 

 

Gain on sale of securities

 

(15,491

)

 

Provision for loan losses (net of recoveries)

 

29,005

 

2,076,224

 

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

 

1,652,392

 

1,684,017

 

Income from equity affiliates

 

(6,264,543

)

(4,629,938

)

Changes in operating assets and liabilities

 

4,082,516

 

(3,505,259

)

Net cash provided by operating activities

 

17,687,135

 

19,520,524

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(475,924,501

)

(557,256,118

)

Payoffs and paydowns of loans and investments

 

410,975,653

 

551,201,085

 

Deferred fees

 

4,568,476

 

2,482,316

 

Principle collection on securities, net

 

 

2,100,000

 

Investments in real estate, net

 

(417,809

)

(1,393,615

)

Contributions to equity affiliates

 

(4,187,582

)

(14,949,918

)

Distributions from equity affiliates

 

1,013,080

 

 

Proceeds from sale of real estate

 

49,029,780

 

18,482,352

 

Proceeds from sale of available-for-sale securities

 

1,567,207

 

 

Net cash (used in) provided by investing activities

 

(13,375,696

)

666,102

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements, credit facilities and notes payable

 

204,046,488

 

479,205,709

 

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

 

(81,620,294

)

(335,854,714

)

Proceeds from mortgage note payable - real estate owned

 

 

27,155,000

 

Paydowns and payoffs of mortgage note payable - real estate owned

 

(27,155,000

)

(30,984,357

)

Proceeds from collateralized loan obligations

 

 

219,000,000

 

Payoffs and paydowns of collateralized debt obligations

 

 

(240,971,174

)

Payoffs and paydowns of collateralized loan obligations

 

 

(177,000,000

)

Change in restricted cash

 

(111,072,901

)

141,293,748

 

Payments on swaps and margin calls to counterparties

 

 

(290,000

)

Receipts on swaps and returns of margin calls from counterparties

 

2,250,049

 

2,200,000

 

Distributions paid on common stock

 

(15,351,438

)

(14,206,565

)

Distributions paid on preferred stock

 

(3,776,860

)

(3,776,860

)

Distributions paid on preferred stock of private REIT

 

(7,231

)

(6,952

)

Payment of deferred financing costs

 

(155,235

)

(6,304,548

)

Net cash (used in) provided by financing activities

 

(32,842,422

)

59,459,287

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(28,530,983

)

79,645,913

 

Cash and cash equivalents at beginning of period

 

188,708,687

 

50,417,745

 

Cash and cash equivalents at end of period

 

$

160,177,704

 

$

130,063,658

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

22,983,701

 

$

22,715,060

 

Cash used for taxes

 

$

112,799

 

$

345,259

 

 

 

 

 

 

 

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

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 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.

 

Acquisition of our Manager’s Agency Platform

 

On July 14, 2016, we completed the previously announced acquisition of the agency platform (the “ACM Agency Business”) of our Manager (the “ACM Acquisition”) pursuant to an asset purchase agreement (“Purchase Agreement”) dated February 25, 2016. The aggregate purchase price was $276.0 million, which was paid with $138.0 million in stock, $88.0 million in cash and with the issuance of a $50.0 million seller financing instrument. The equity component of the purchase price was paid with 21.23 million of operating partnership units (“OP Units), which was based on a stock price of $6.50 per share. The closing price of our common stock on the day of the ACM Acquisition was $7.29 per share; therefore, the estimated fair value of the total consideration given to our Manager approximates $293.0 million. Each of the OP Units are paired with a share of our newly-designated special voting preferred stock, which provides 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 future common stock distributions. The OP Units are also redeemable for cash, or at our option, for shares of our common stock on a one-for-one basis.

 

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.

 

All ACM employees directly related to the ACM Agency Business (approximately 235 employees) have become our employees as of the acquisition completion date. In addition, pursuant to the Purchase Agreement, we have a two year option 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.

 

In connection with the ACM Acquisition, we incurred advisory fees totaling $0.7 million and $3.9 million during the three and six months ended June 30, 2016, respectively, and fees totaling $8.3 million to date. We expect to recognize additional fees in the third quarter of 2016 as a result of completing the ACM Acquisition in July 2016.

 

Except where specifically indicated, the information contained in this report does not include information pertaining to the ACM Agency Business.

 

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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

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.  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 June 30, 2016 and 2015, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for the six months ended June 30, 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 six months ended June 30, 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 June 30, 2016, our significant accounting policies, which are detailed in our 2015 Annual Report, have not changed materially.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will be required to use forward-looking information to better form their credit loss estimates. This updated guidance also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses. The guidance is effective for us beginning in the first quarter of 2020, and early adoption is permitted beginning in the first quarter of 2019. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

 

In March 2016, the FASB amended its guidance on stock compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

is effective for the first quarter of 2017 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

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.

 

Recently Adopted Accounting Pronouncements

 

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 an impact 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. See Note 9 — “Variable Interest Entities” for further details.

 

Note 3 — Loans and Investments

 

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

 

 

 

June 30, 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

 

$

1,422,007,444

 

89

%

111

 

5.26

%

18.6

 

0

%

76

%

Mezzanine loans

 

54,115,825

 

3

%

12

 

8.99

%

21.3

 

37

%

79

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

5.2

 

83

%

84

%

Preferred equity investments

 

66,668,000

 

4

%

9

 

6.37

%

27.7

 

47

%

92

%

 

 

1,605,047,851

 

100

%

134

 

5.40

%

18.6

 

6

%

77

%

Unearned revenue

 

(9,619,585

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(83,831,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,511,596,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 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.

 

During the first quarter of 2015, we acquired a $116.0 million defaulted first mortgage, at par, that paid off in the subsequent quarter resulting in the recognition of income totaling $6.7 million, net of fees and expenses. The $6.7 million of income consisted 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. In April 2016, additional funds held in escrow from the note payoff were released following an arbitration proceeding and we recognized income totaling $1.9 million, net of fees and expenses. The $1.9 million of income consisted of other interest income totaling $2.5 million, partially offset by $0.6 million of expenses related to the 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 June 30, 2016, the unpaid principal balance (“UPB”) related to 31 loans with five different borrowers represented 21% 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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

guidelines used in determining a certain risk rating, subjective items such as borrower strength, condition of the market of the underlying collateral, additional collateral or other credit enhancements, or loan terms, may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

 

As a result of the loan review process at June 30, 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 $152.2 million and $154.7 million, respectively, and a weighted average last dollar LTV ratio of 99% for each period.

 

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

 

 

 

June 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,223,485,513

 

76

%

2.9

 

1

%

75

%

Office

 

165,703,185

 

10

%

3.3

 

36

%

73

%

Land

 

141,508,043

 

9

%

3.9

 

3

%

95

%

Hotel

 

55,587,776

 

4

%

3.8

 

38

%

80

%

Other

 

18,763,334

 

1

%

3.2

 

21

%

69

%

Total

 

$

1,605,047,851

 

100

%

3.0

 

6

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

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 June 30, 2016, 26%, 16%, 14% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, California, Florida 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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

86,746,575

 

$

116,470,000

 

$

86,761,575

 

$

115,487,320

 

Provision for loan losses

 

59,005

 

1,110,629

 

59,005

 

2,110,629

 

Charge-offs

 

(2,959,005

)

 

(2,959,005

)

 

Recoveries of reserves

 

(15,000

)

(17,085

)

(30,000

)

(34,405

)

Allownace at end of period

 

$

83,831,575

 

$

117,563,544

 

$

83,831,575

 

$

117,563,544

 

 

During the three and six months ended June 30, 2016, we received a $1.8 million discounted payoff on an impaired bridge loan with an aggregate carrying value before reserves of $4.8 million, resulting in the recognition of an additional provision for loan losses of $0.1 million and a charge-off of $3.0 million.

 

The provision for loan losses recorded in the three and six months ended June 30, 2015 was comprised of one loan and three loans, respectively, with an aggregate carrying value before reserves of $114.8 million and $127.8 million, respectively.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Multifamily

 

$

2,959,005

 

$

 

$

2,959,005

 

$

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Multifamily

 

(15,000

)

(17,085

)

(30,000

)

(34,405

)

 

 

 

 

 

 

 

 

 

 

Net (Charge-offs) Recoveries

 

$

(2,944,005

)

$

17,085

 

$

(2,929,005

)

$

34,405

 

 

 

 

 

 

 

 

 

 

 

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

 

(0.2

)%

0.0

%

(0.2

)%

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 June 30, 2016 and 2015.

 

We have six loans with a carrying value totaling $120.4 million at June 30, 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 five of the loans with a carrying value totaling $111.0 million entitle us to a weighted average accrual rate of interest of 8.15%.  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 June 30, 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)

June 30, 2016

 

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

 

 

 

June 30, 2016

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

2,662,115

 

$

2,570,618

 

$

2,575,653

 

$

5,004,615

 

$

47,669

 

$

5,012,115

 

$

111,205

 

Office

 

27,571,582

 

22,787,444

 

21,972,444

 

27,573,832

 

23,115

 

27,576,082

 

46,162

 

Land

 

130,012,569

 

125,168,351

 

53,883,478

 

129,042,390

 

 

128,740,618

 

 

Hotel

 

34,750,000

 

34,496,568

 

3,700,000

 

34,750,000

 

283,768

 

34,750,000

 

565,917

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

Total

 

$

196,696,266

 

$

186,722,981

 

$

83,831,575

 

$

198,070,837

 

$

354,552

 

$

197,778,815

 

$

723,284

 

 

 

 

December 31, 2015

 

Three Months Ended June 30, 2015

 

Six Months Ended June 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

7,362,115

 

$

7,350,764

 

$

5,505,653

 

$

39,214,032

 

$

73,892

 

$

39,222,692

 

$

143,981

 

Office

 

27,580,582

 

22,796,444

 

21,972,444

 

36,086,582

 

282,192

 

36,086,582

 

557,045

 

Land

 

127,468,667

 

122,875,774

 

53,883,478

 

123,196,757

 

 

122,933,516

 

 

Hotel

 

34,750,000

 

34,486,433

 

3,700,000

 

34,750,000

 

260,898

 

34,750,000

 

518,028

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

 

 

 

 

Total

 

$

198,861,364

 

$

189,209,415

 

$

86,761,575

 

$

233,247,371

 

$

616,982

 

$

232,992,790

 

$

1,219,054

 

 


(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 June 30, 2016 and December 31, 2015.

 

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

 

As of June 30, 2016, three fully reserved loans with loan loss reserves totaling $22.9 million were classified as non-performing.  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. 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.

 

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

 

 

 

June 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

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 June 30, 2016, we did not have any loans contractually past due 90 days or more that are still accruing interest.

 

14



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

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

 

 

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Weighted
Average
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

 

Asset Class

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

$

 

 

$

 

 

1

 

$

14,646,456

 

5.24

%

$

14,646,456

 

5.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

4

 

$

29,416,456

 

4.95

%

$

29,416,456

 

4.95

%

5

 

$

35,609,122

 

5.12

%

$

35,609,122

 

5.12

%

 

There were no loans in which we considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of June 30, 2016 and 2015 and no additional loans were considered to be impaired due to our troubled debt restructuring analysis for the three and six months ended June 30, 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 June 30, 2016, we had total interest reserves of $16.7 million on 65 loans with an aggregate UPB of $807.1 million.

 

Note 4 — Securities

 

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

 

The following is a summary of our securities classified as available-for-sale at June 30, 2016:

 

 

 

Amortized
Cost

 

Cummulative
Unrealized Gain

 

Carrying Value /
Estimated Fair
Value

 

 

 

 

 

 

 

 

 

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

 

$

58,789

 

$

382,131

 

$

440,920

 

 

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

 

 

 

Face Value

 

Amortized
Cost

 

Cummulative
Unrealized Gain

 

Carrying Value /
Estimated 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.

 

Note 5 — Investments in Equity Affiliates

 

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

 

15



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

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

 

June 30, 2016

 

December 31, 2015

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

33,668,202

 

$

25,923,679

 

$

 

West Shore Café

 

1,995,932

 

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

 

87,293

 

92,796

 

4,994,166

 

Lexford Portfolio

 

100

 

100

 

 

Ritz-Carlton Club

 

 

 

 

Total

 

$

38,649,254

 

$

30,870,235

 

$

6,681,666

 

 

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 and six months ended June 30, 2016, we recorded $3.1 million and $4.6 million, respectively, and during the three and six months ended June 30, 2015, we recorded $1.5 million and $4.6 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

In 2015, through ARI, we invested $9.7 million for a 50% non-controlling interest in a joint venture that invests in non-qualified residential mortgages purchased from the mortgage banking business’s origination platform.  We also funded $4.2 million of additional mortgage purchases during the six months ended June 30, 2016, for a total investment of $13.9 million as of June 30, 2016. In the second quarter of 2016, we received our first cash distribution of $1.2 million, which was classified as a return of capital. During the three and six months ended June 30, 2016, we recorded income of  $0.1 million for both periods and, during the three and six months ended June 30, 2015, we recorded a loss of less than $0.1 million for both periods 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 June 30,

 

Six Months Ended June 30,

 

Statements of Operations:

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Total revenues

 

$

58,959,781

 

$

33,121,196

 

$

101,889,213

 

$

70,985,194

 

Total expenses

 

44,856,886

 

26,788,417

 

80,864,284

 

51,942,524

 

Net income

 

$

14,102,895

 

$

6,332,779

 

$

21,024,929

 

$

19,042,670

 

 

 

 

 

 

 

 

 

 

 

Arbor’s share of income

 

$

3,148,720

 

$

1,471,459

 

$

4,718,296

 

$

4,507,256

 

 

Lexford Portfolio — In the three and six months ended June 30, 2016, we received a distribution from this equity investment and recognized income of $1.2 million and $1.4 million, respectively. See Note 14 — “Agreements and Transactions with Related Parties” for further details.

 

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

 

Our real estate assets were comprised of one hotel property and an office building at June 30, 2016 and three multifamily properties, two hotel properties and an office building at December 31, 2015.

 

16



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

Real Estate Owned

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Hotel Property

 

Office
Building

 

Total

 

Multifamily
Properties

 

Hotel
Properties

 

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

 

30,475,872

 

1,391,000

 

31,866,872

 

32,643,889

 

30,338,882

 

1,391,000

 

64,373,771

 

Less: Impairment loss

 

(11,200,000

)

 

(11,200,000

)

 

 

 

 

Less: Accumulated depreciation and amortization

 

(8,146,318

)

(310,422

)

(8,456,740

)

(9,399,041

)

(7,329,615

)

(141,101

)

(16,869,757

)

Real estate owned, net

 

$

14,423,205

 

$

5,589,578

 

$

20,012,783

 

$

28,783,692

 

$

26,302,918

 

$

5,758,899

 

$

60,845,509

 

 

For the six months ended June 30, 2016 and 2015, our hotel properties had a weighted average occupancy rate of approximately 64% and 55%, respectively, a weighted average daily rate of approximately $99 and $96, respectively, and weighted average revenue per available room of approximately $63 and $53, respectively.  The operation of a hotel property is seasonal with the majority of revenues earned in the first two quarters of the calendar year. During the second quarter of 2016, through site visits and discussion with market participants, we determined that the hotel property owned exhibited indicators of impairment and performed an impairment analysis. As a result of this impairment analysis, we recorded an impairment loss of $11.2 million.

 

At both June 30, 2016 and December 31, 2015, our office building had an occupancy rate of 100%.

 

Our real estate assets had restricted cash balances totaling $0.9 million and $1.6 million as of June 30, 2016 and December 31, 2015, respectively, due to escrow requirements.

 

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

 

Real Estate Held-For-Sale

 

In the second quarter of 2016, we sold the three remaining multifamily properties for $41.0 million and recognized a gain of $11.0 million. A portion of the sales proceeds were used to payoff the outstanding debt on these properties of $27.1 million. See Note 7 — “Debt Obligations” for further details. In the first quarter of 2016, we sold one of our hotel properties for $9.7 million and recognized a gain of $0.6 million.

 

In the first quarter of 2015, we sold a multifamily property and a hotel property classified as held-for-sale for a total of $18.8 million and recognized a gain of $4.0 million.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Property operating income

 

$

  1,149,883

 

$

  1,367,641

 

$

  2,845,231

 

$

  3,349,979

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operating expenses

 

932,518

 

1,016,112

 

1,994,346

 

2,323,404

 

Depreciation

 

 

212,020

 

334,631

 

436,326

 

Net income

 

$

  217,365

 

$

  139,509

 

$

  516,254

 

$

  590,249

 

 

17



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2016

 

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:

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Debt Principal
Balance

 

Debt Carrying
Value

 

Collateral
Carrying Value

 

Weighted
Average
Note Rate

 

Debt Principal
Balance

 

Debt Carrying
Value

 

Collateral
Carrying Value

 

Weighted
Average
Note Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million repurchase facility

 

$

94,265,469

 

$

  93,863,204

 

$

  151,142,522

 

2.74

%

$

  58,270,774

 

$

  57,610,463

 

$

  99,641,504

 

2.70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million credit facility

 

21,837,200

 

21,674,670

 

31,400,000

 

2.65

%

24,582,200

 

24,328,863

 

38,000,000

 

2.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

66,304,000

 

66,304,000

 

93,905,000

 

2.66

%

13,852,500

 

13,766,445

 

18,470,000

 

2.59

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

31,025,000

 

31,025,000

 

44,500,000

 

2.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

46,320,000

 

46,305,067

 

57,900,000

 

2.50

%

24,120,000

 

24,114,494

 

30,200,000

 

2.46

%