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EX-10.4 - EX-10.4 - ARBOR REALTY TRUST INCa17-8832_1ex10d4.htm
EX-10.3 - EX-10.3 - ARBOR REALTY TRUST INCa17-8832_1ex10d3.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 March 31, 2017

 

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)

 

(Registrant’s telephone number, including area code): (516) 506-4200

 

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.

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Large accelerated filer

o

Accelerated filer   x

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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: 51,850,250 outstanding as of April 28, 2017.

 

 

 




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; adverse changes in our status with government-sponsored enterprises affecting our ability to originate loans through such programs; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in federal and state laws and regulations, including changes in tax laws; the availability and cost of capital for future investments; and competition. 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.

 

Additional information regarding these and other risks and uncertainties we face is contained in our annual report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 3, 2017 and in our other reports and filings with the SEC.

 

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,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

104,843,232

 

$

138,645,430

 

Restricted cash

 

115,263,038

 

29,314,929

 

Loans and investments, net

 

1,639,768,626

 

1,695,732,351

 

Loans held-for-sale, net

 

573,193,542

 

673,367,304

 

Capitalized mortgage servicing rights, net

 

238,931,168

 

227,742,986

 

Available-for-sale securities, at fair value

 

5,307,502

 

5,403,463

 

Securities held-to-maturity, net

 

7,905,689

 

 

Investments in equity affiliates

 

33,380,722

 

33,948,853

 

Real estate owned, net

 

18,752,812

 

19,491,805

 

Due from related party

 

37,030,187

 

1,464,732

 

Goodwill and other intangible assets

 

96,089,432

 

97,489,884

 

Other assets

 

43,961,884

 

48,184,509

 

Total assets

 

$

2,914,427,834

 

$

2,970,786,246

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

855,076,736

 

$

906,636,790

 

Collateralized loan obligations

 

729,248,014

 

728,441,109

 

Senior unsecured notes

 

94,712,335

 

94,521,566

 

Convertible senior unsecured notes, net

 

94,239,527

 

80,660,038

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

139,103,147

 

157,858,555

 

Related party financing

 

50,000,000

 

50,000,000

 

Due to related party

 

2,260,847

 

6,038,707

 

Due to borrowers

 

75,967,465

 

81,019,386

 

Allowance for loss-sharing obligations

 

32,219,490

 

32,407,554

 

Other liabilities

 

81,934,390

 

86,164,613

 

Total liabilities

 

2,154,761,951

 

2,223,748,318

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Arbor Realty Trust, Inc. stockholders’ equity:

 

 

 

 

 

Preferred stock, cumulative, redeemable, $0.01 par value: 100,000,000 shares authorized; special voting preferred shares; 21,230,769 shares issued and outstanding; 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

 

89,508,213

 

89,508,213

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 51,850,250 and 51,401,295 shares issued and outstanding, respectively

 

518,502

 

514,013

 

Additional paid-in capital

 

624,585,307

 

621,931,995

 

Accumulated deficit

 

(118,263,597

)

(125,134,403

)

Accumulated other comprehensive income

 

587,891

 

320,917

 

Total Arbor Realty Trust, Inc. stockholders’ equity

 

596,936,316

 

587,140,735

 

Noncontrolling interest

 

162,729,567

 

159,897,193

 

Total equity

 

759,665,883

 

747,037,928

 

Total liabilities and equity

 

$

2,914,427,834

 

$

2,970,786,246

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Interest income

 

$

33,525,016

 

$

25,818,465

 

Interest expense

 

19,436,838

 

12,748,613

 

Net interest income

 

14,088,178

 

13,069,852

 

Other revenue:

 

 

 

 

 

Gain on sales, including fee-based services, net

 

19,170,856

 

 

Mortgage servicing rights

 

20,030,340

 

 

Servicing revenue, net

 

4,793,643

 

 

Property operating income

 

3,223,204

 

5,331,532

 

Other income, net

 

(886,297

)

89,763

 

Total other revenue

 

46,331,746

 

5,421,295

 

Other expenses:

 

 

 

 

 

Employee compensation and benefits

 

19,841,464

 

4,328,342

 

Selling and administrative

 

7,693,887

 

2,655,476

 

Acquisition costs

 

 

3,109,910

 

Property operating expenses

 

2,637,904

 

4,316,555

 

Depreciation and amortization

 

1,897,249

 

877,533

 

Impairment loss on real estate owned

 

1,200,000

 

 

Provision for loss sharing

 

1,679,385

 

 

Provision for loan losses (net of recoveries)

 

(695,653

)

(15,000

)

Management fee - related party

 

4,000,000

 

2,700,000

 

Total other expenses

 

38,254,236

 

17,972,816

 

Income before gain on extinguishment of debt, gain on sale of real estate, income from equity affiliates and provision for income taxes

 

22,165,688

 

518,331

 

Gain on extinguishment of debt

 

7,116,243

 

 

Gain on sale of real estate

 

 

607,553

 

Income from equity affiliates

 

762,777

 

1,897,442

 

Provision for income taxes

 

(6,101,000

)

 

Net income

 

23,943,708

 

3,023,326

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

Net income attributable to noncontrolling interest

 

6,441,604

 

 

Net income attributable to common stockholders

 

$

15,613,674

 

$

1,134,896

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.30

 

$

0.02

 

Diluted earnings per common share

 

$

0.30

 

$

0.02

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

51,461,156

 

51,045,219

 

Diluted

 

73,730,068

 

51,095,128

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.17

 

$

0.15

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Net income

 

$

23,943,708

 

$

3,023,326

 

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

 

29,395

 

(58,789

)

Unrealized gain (loss) on derivative financial instruments, net

 

202

 

(209,789

)

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

 

237,377

 

1,364,664

 

Comprehensive income

 

24,210,682

 

4,119,412

 

Less:

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

6,519,578

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

Comprehensive income attributable to common stockholders

 

$

15,802,674

 

$

2,230,982

 

 

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, 2017

 

 

 

Preferred
Stock Shares

 

Preferred Stock
Value

 

Common
Stock Shares

 

Common
Stock Par
Value

 

Additional Paid-
in Capital

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Income

 

Total Arbor
Realty Trust, Inc.
Stockholders’
Equity

 

Noncontrolling
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2016

 

24,942,269

 

$

89,508,213

 

51,401,295

 

$

514,013

 

$

621,931,995

 

$

(125,134,403

)

$

320,917

 

$

587,140,735

 

$

159,897,193

 

$

747,037,928

 

Stock-based compensation

 

 

 

 

 

448,955

 

4,489

 

2,300,033

 

 

 

 

 

2,304,522

 

 

 

2,304,522

 

Issuance of convertible senior unsecured notes, net

 

 

 

 

 

 

 

 

 

353,279

 

 

 

 

 

353,279

 

 

 

353,279

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(8,738,220

)

 

 

(8,738,220

)

 

 

(8,738,220

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,888,430

)

 

 

(1,888,430

)

 

 

(1,888,430

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(4,648

)

 

 

(4,648

)

 

 

(4,648

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,609,230

)

(3,609,230

)

Net income

 

 

 

 

 

 

 

 

 

 

 

17,502,104

 

 

 

17,502,104

 

6,441,604

 

23,943,708

 

Unrealized gain on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

29,395

 

29,395

 

 

 

29,395

 

Unrealized gain on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

202

 

202

 

 

 

202

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

237,377

 

237,377

 

 

 

237,377

 

Balance — March 31, 2017

 

24,942,269

 

$

89,508,213

 

51,850,250

 

$

518,502

 

$

624,585,307

 

$

(118,263,597

)

$

587,891

 

$

596,936,316

 

$

162,729,567

 

$

759,665,883

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

23,943,708

 

$

3,023,326

 

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

 

 

 

 

 

Depreciation and amortization

 

1,897,249

 

877,533

 

Stock-based compensation

 

2,304,522

 

1,681,431

 

Amortization and accretion of interest and fees, net

 

741,865

 

852,174

 

Amortization of capitalized mortgage servicing rights

 

11,888,001

 

 

Originations of loans held-for-sale

 

(1,267,712,671

)

 

Proceeds from sales of loans held-for-sale, net of gain on sale

 

1,364,850,072

 

 

Payoffs and paydowns of loans held-for-sale

 

34,998

 

 

Mortgage servicing rights

 

(20,030,340

)

 

Write-off of capitalized mortgage servicing rights from payoffs

 

3,393,463

 

 

Impairment loss on real estate owned

 

1,200,000

 

 

Provision for loan losses (net of recoveries)

 

(695,653

)

(15,000

)

Provision for loss sharing (net of recoveries)

 

1,679,385

 

 

Net charge-offs for loss sharing obligations

 

(1,867,449

)

 

Gain on extinguishment of debt

 

(7,116,243

)

 

Gain on sale of real estate

 

 

(607,553

)

Gain on sale of securities

 

 

(15,491

)

Deferred tax provision

 

1,827,000

 

 

Income from equity affiliates

 

(762,777

)

(1,897,442

)

Change in fair value of available-for-sale securities

 

125,355

 

 

Changes in operating assets and liabilities

 

(42,460,721

)

(61,383

)

Net cash provided by operating activities

 

73,239,764

 

3,837,595

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(138,951,649

)

(283,857,810

)

Payoffs and paydowns of loans and investments

 

191,752,450

 

159,039,238

 

Deferred fees

 

224,831

 

2,842,917

 

Investments in real estate, net

 

(118,656

)

(391,691

)

Contributions to equity affiliates

 

(348,055

)

(2,448,122

)

Distributions from equity affiliates

 

385,121

 

 

Proceeds from sale of real estate, net

 

 

9,347,975

 

Proceeds from sale of available-for-sale securities

 

 

1,567,207

 

Purchase of securities held-to-maturity, net

 

(7,837,502

)

 

Payoffs and paydowns of securities held-to-maturity

 

2,325

 

 

Due to borrowers and reserves

 

(753,218

)

 

Net cash provided by (used in) investing activities

 

44,355,647

 

(113,900,286

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

2,439,585,278

 

105,388,934

 

Payoffs and paydowns of repurchase agreements, loan participations and credit facilities

 

(2,491,429,581

)

(57,939,994

)

Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities

 

(12,691,086

)

 

Paydowns and payoffs of mortgage note payable - real estate owned

 

 

(42,557

)

Proceeds from convertible senior unsecured notes

 

13,750,000

 

 

Change in restricted cash

 

(85,968,109

)

27,771,209

 

Receipts on swaps and returns of margin calls from counterparties

 

429,539

 

930,000

 

Distributions paid on common stock

 

(8,738,220

)

(7,644,227

)

Distributions paid on noncontrolling interest

 

(3,609,230

)

 

Distributions paid on preferred stock

 

(1,888,430

)

(1,888,430

)

Distributions paid on preferred stock of private REIT

 

(4,648

)

(4,450

)

Payment of deferred financing costs

 

(833,122

)

(83,715

)

Net cash (used in) provided by financing activities

 

(151,397,609

)

66,486,770

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(33,802,198

)

(43,575,921

)

Cash and cash equivalents at beginning of period

 

138,645,430

 

188,708,687

 

Cash and cash equivalents at end of period

 

$

104,843,232

 

$

145,132,766

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

15,014,105

 

$

11,097,134

 

Cash used for taxes

 

$

749,696

 

$

60,887

 

 

 

 

 

 

 

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

 

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

 

$

 

$

28,590,235

 

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

 

$

 

$

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, 2017

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed in 2003 and is externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM” or our “Manager”). Through our Structured Loan Origination and Investment Business, or “Structured Business,” we 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. Through our Agency Loan Origination and Servicing Business, or “Agency Business,” we originate, sell and service a range of multifamily finance products through the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the government-sponsored enterprises, or the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Authority (“FHA”) and the U.S. Department of Housing and Urban Development (together with Ginnie Mae and FHA, “HUD”) and the conduit/commercial mortgage-backed securities (“CMBS”) programs. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs.

 

Substantially all of our operations are conducted through our operating partnership, Arbor Realty Limited Partnership (“ARLP”), for which we serve as the general partner, and ARLP’s subsidiaries. We are organized to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.

 

Note 2 — Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

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 2016 Annual Report, which was filed with the SEC.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include our financial statements and the financial statements of our wholly owned subsidiaries, partnerships and other joint ventures in which we own a controlling interest, including variable interest entities (“VIEs”) of which we are the primary beneficiary.  Entities in which we have a significant influence are accounted for under the equity method. See Note 16 — Variable Interest Entities for information about our VIEs. All significant inter-company transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of 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

 

We describe our significant accounting policies in our 2016 Annual Report. There have been no significant changes in our significant accounting policies since December 31, 2016.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

Recently Adopted Accounting Pronouncements

 

Description

 

Adoption Date

 

Effect on Financial Statements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU 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.

 

First quarter of 2017.

 

The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

 

 

 

 

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting. This ASU, among other things, 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 the investment was held.

 

First quarter of 2017.

 

The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

 

 

 

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) to be presented as noncurrent on the balance sheet.

 

First quarter of 2017, on a retrospective basis.

 

The adoption of this guidance did not have an impact on our consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

Description

 

Effective Date

 

Effect on Financial Statements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.  This ASU eliminates step two from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value with the carrying amount of goodwill.

 

First quarter of 2020 with early adoption permitted beginning in the first quarter of 2017.

 

We are evaluating the timing of our adoption and the impact this guidance may have on our consolidated financial statements.

 

 

 

 

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business. It also provides more consistency in applying the guidance, reduces the costs of application and makes the definition of a business more operable.

 

First quarter of 2018.

 

The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but it is not expected to have a material impact on our consolidated financial statements.

 

Note 3 — Acquisition of Our Manager’s Agency Platform

 

On July 14, 2016, we completed the previously announced acquisition of the agency platform of our Manager (the “Acquisition”) pursuant to an asset purchase agreement (“Purchase Agreement”) dated February 25, 2016. The aggregate purchase price was $275.8 million, which was paid with $138.0 million in stock, $87.8 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 21,230,769 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 Acquisition was $7.29 per share; therefore, the estimated fair value of the total consideration given to our Manager was $292.5 million. See Note 11 — Debt Obligations for further details about the seller financing and Note 17 — Equity for further details about the OP Units.

 

We finalized the purchase price allocation during the first quarter of 2017 based on the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition date, which remained unchanged from the amounts disclosed in the 2016 Annual Report.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

Note 4 — Loans and Investments

 

The following tables set forth the composition of our structured loan and investment portfolio:

 

 

 

March 31, 2017

 

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

 

$

1,588,264,148

 

92

%

122

 

5.76

%

15.5

 

0

%

73

%

Preferred equity investments

 

63,495,646

 

4

%

9

 

6.58

%

25.2

 

44

%

90

%

Mezzanine loans

 

56,044,087

 

3

%

11

 

9.03

%

14.4

 

35

%

75

%

Junior participation loans

 

25,256,582

 

1

%

1

 

0.00

%

4.0

 

100

%

100

%

 

 

1,733,060,463

 

100

%

143

 

5.81

%

15.6

 

4

%

74

%

Allowance for loan losses

 

(83,015,922

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(10,275,915

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,639,768,626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,602,658,179

 

90

%

120

 

5.59

%

16.4

 

0

%

73

%

Preferred equity investments

 

68,120,639

 

4

%

10

 

6.83

%

23.8

 

42

%

91

%

Mezzanine loans

 

57,124,566

 

3

%

12

 

9.09

%

17.9

 

36

%

75

%

Junior participation loans

 

62,256,582

 

3

%

2

 

4.50

%

4.0

 

83

%

84

%

 

 

1,790,159,966

 

100

%

144

 

5.71

%

16.3

 

6

%

75

%

Allowance for loan losses

 

(83,711,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(10,716,040

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,695,732,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)               “Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balance (“UPB”) 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 Loan-to-Value (“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 are subject to concentration risk in that, at March 31, 2017, the UPB related to 33 loans with five different borrowers represented 15% of total assets.  At December 31, 2016, the UPB related to 35 loans with five different borrowers represented 16% of total assets. During both the three months ended March 31, 2017 and the year ended December 31, 2016, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue.

 

Effective January 1, 2017, we revised our methodology used to assign a credit risk rating to each loan and investment to be consistent with the method used by our Agency Business. We now assign ratings of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, instead of a one to five rating. Similar to our previous methodology, there are five ratings, each generally consistent with our prior ratings (i.e., pass is equivalent to a one rating, pass/watch is equivalent to a two rating, etc.), with a pass rating being the lowest risk and a doubtful rating being the highest.

 

The benchmark guidelines and other factors used in our revised methodology are substantially the same as our previous methodology. 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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

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 profile, risk ratings of pass, pass/watch and special mention suggest 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 substandard indicates we anticipate the loan may require a modification of some kind.  A risk rating of doubtful indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal.  Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, market strength or asset quality 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 March 31, 2017 and December 31, 2016, we identified loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $147.9 million and $150.5 million, respectively, and a weighted average last dollar LTV ratio of 95% for both periods.

 

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class is presented below. The internal risk ratings as of December 31, 2016 have been revised to reflect the revised methodology described above.

 

 

 

March 31, 2017

 

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

 

$

1,379,109,984

 

80

%

pass/watch

 

1

%

72

%

Land

 

132,078,710

 

8

%

substandard

 

0

%

93

%

Office

 

107,808,436

 

6

%

special mention

 

33

%

76

%

Hotel

 

70,750,000

 

4

%

special mention

 

30

%

76

%

Commercial

 

33,830,000

 

2

%

pass/watch

 

3

%

71

%

Other

 

9,483,333

 

<1

%

pass/watch

 

33

%

62

%

Total

 

$

1,733,060,463

 

100

%

special mention

 

4

%

74

%

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,421,731,108

 

79

%

special mention

 

1

%

73

%

Land

 

137,255,369

 

8

%

substandard

 

2

%

92

%

Office

 

141,710,156

 

8

%

pass/watch

 

43

%

73

%

Hotel

 

70,750,000

 

4

%

special mention

 

30

%

74

%

Commercial

 

9,205,000

 

<1

%

special mention

 

12

%

69

%

Other

 

9,508,333

 

<1

%

special mention

 

34

%

75

%

Total

 

$

1,790,159,966

 

100

%

special mention

 

6

%

75

%

 

Geographic Concentration Risk

 

As of March 31, 2017, 24%, 15%, 14% and 13% 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, 2016, 25%, 15%, 14% and 13% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, California, Florida and Texas, respectively.

 

Impaired Loans and Allowance for Loan Losses

 

We evaluate each loan in our portfolio quarterly to assess the performance of our loans and whether a reserve for impairment should be recorded.  We measure our relative loss position for our mezzanine loans, junior participation

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

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 LTV and a last dollar LTV basis, as defined above.  A summary of the changes in the allowance for loan losses is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

83,711,575

 

$

86,761,575

 

Recoveries of reserves

 

(695,653

)

(15,000

)

Allowance at end of period

 

$

83,015,922

 

$

86,746,575

 

 

The recoveries of reserves for both periods presented were related to multifamily loans and the ratio of recoveries to the average loans and investments outstanding during both the three months ended March 31, 2017 and 2016 was 0.0%.

 

At March 31, 2017 and December 31, 2016, we had a total of seven and eight loans, respectively, with an aggregate carrying value, before loan loss reserves, of $186.6 million and $187.4 million, respectively, for which impairment reserves have been recorded.

 

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, 2017 and 2016.

 

We have six loans with a carrying value totaling $120.9 million at March 31, 2017, 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 $111.6 million entitle us to a weighted average accrual rate of interest of 8.39%.  In 2008, we suspended the recording of the accrual rate of interest on these loans, as they 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, 2017.  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.

 

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

 

 

 

March 31, 2017

 

Three Months Ended March 31, 2017

 

Asset Class

 

Unpaid
Principal
Balance

 

Carrying Value (1)

 

Allowance for
Loan Losses

 

Average Recorded
Investment (2)

 

Interest Income
Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,749,020

 

$

53,883,478

 

$

131,085,948

 

$

 

Hotel

 

34,750,000

 

34,598,492

 

3,700,000

 

34,750,000

 

310,639

 

Office

 

27,558,082

 

22,773,944

 

21,972,444

 

27,560,332

 

24,689

 

Multifamily

 

1,760,000

 

1,754,965

 

1,760,000

 

2,151,058

 

22,063

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

Total

 

$

196,854,030

 

$

186,576,421

 

$

83,015,922

 

$

197,247,338

 

$

357,391

 

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

 

 

December 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

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,925,677

 

$

53,883,478

 

$

127,770,439

 

$

 

Hotel

 

34,750,000

 

34,496,296

 

3,700,000

 

34,750,000

 

282,149

 

Office

 

27,562,582

 

22,778,444

 

21,972,444

 

27,578,332

 

23,047

 

Multifamily

 

2,542,115

 

2,450,618

 

2,455,653

 

7,354,615

 

63,536

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

Total

 

$

197,640,645

 

$

187,351,035

 

$

83,711,575

 

$

199,153,386

 

$

368,732

 

 


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

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

 

At March 31, 2017, three loans with an aggregate net carrying value of $1.0 million, net of related loan loss reserves of $22.2 million, were classified as non-performing. At December 31, 2016, three fully reserved loans with an aggregate carrying value of $22.9 million were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis when 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:

 

 

 

March 31, 2017

 

December 31, 2016

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Other

 

990,667

 

 

990,667

 

 

 

 

Multifamily

 

 

 

 

680,653

 

 

680,653

 

Total

 

$

23,163,111

 

$

 

$

23,163,111

 

$

22,853,097

 

$

 

$

22,853,097

 

 

At March 31, 2017 and December 31, 2016, we did not have any loans contractually past due 90 days or more that were 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

 

Asset Class

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Wtd. Avg.
Rate of
Interest

 

Extended
Unpaid
Principal
Balance

 

Extended
Wtd. Avg.
Rate of
Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

1

 

$

14,646,456

 

5.24

%

$

14,646,456

 

5.24

%

 

There were no loan modifications, refinancings and/or extensions during the three months ended March 31, 2017 that we considered troubled debt restructurings.

 

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, 2017 and 2016 and no additional loans were considered to

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

be impaired due to our troubled debt restructuring analysis for the three months ended March 31, 2017 and 2016. 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, 2017, we had total interest reserves of $22.7 million on 76 loans with an aggregate UPB of $972.7 million. As of December 31, 2016, we had total interest reserves of $20.4 million on 75 loans with an aggregate UPB of $1.01 billion.

 

Note 5 — Loans Held-for-Sale, Net

 

Loans held-for-sale, net consists of the following:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Fannie Mae

 

$

361,391,972

 

$

538,189,475

 

Freddie Mac

 

148,888,000

 

124,102,000

 

FHA

 

54,895,350

 

56,247

 

 

 

565,175,322

 

662,347,722

 

Fair value of future MSR

 

9,141,167

 

13,145,814

 

Unearned discount

 

(1,122,947

)

(2,126,232

)

Loans held-for-sale, net

 

$

573,193,542

 

$

673,367,304

 

 

Our loans held-for-sale, net are typically sold within 60 days of loan origination. At March 31, 2017 and December 31, 2016, there were no loans held-for-sale that were 90 days or more past due, and there were no loans held-for-sale that were placed on a non-accrual status. During the three months ended March 31, 2017, we sold $1.36 billion of loans held-for-sale and recorded gain on sales of $18.1 million, which are included in gain on sales, including fee-based services, net in the consolidated statements of income.

 

Note 6 — Capitalized Mortgage Servicing Rights

 

Our capitalized mortgage servicing rights (“MSRs”) reflect commercial real estate MSRs derived from loans sold in our Agency Business. The discount rates used to determine the present value of our MSRs throughout the periods presented for all MSRs were between 8 - 15% (representing a weighted average discount rate of 13%) based on management’s best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 7.0 years at March 31, 2017.

 

A summary of our capitalized MSR activity is as follows:

 

 

 

Three Months Ended March 31, 2017

 

 

 

Acquired

 

Originated

 

Total

 

Balance at beginning of period

 

$

194,800,754

 

$

32,942,232

 

$

227,742,986

 

Additions

 

 

26,469,646

 

26,469,646

 

Amortization

 

(10,461,786

)

(1,426,215

)

(11,888,001

)

Write-downs and payoffs

 

(3,393,463

)

 

(3,393,463

)

Balance at end of period

 

$

180,945,505

 

$

57,985,663

 

$

238,931,168

 

 

During the three months ended March 31, 2017, we recorded $3.4 million of write-offs relating to specific MSRs, primarily due to prepayments of certain loans. Prepayment fees totaling $2.0 million were collected in the three months ended March 31, 2017 and are included as a component of servicing revenue, net on the consolidated statements of income. As of March 31, 2017 and December 31, 2016, we had no valuation allowance recorded on any of our MSRs.

 

The expected amortization of the capitalized MSRs recorded as of March 31, 2017 is shown in the table below. Actual amortization may vary from these estimates.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

Year

 

Amortization

 

2017 (nine months ended 12/31/2017)

 

$

34,744,947

 

2018

 

42,838,488

 

2019

 

37,913,512

 

2020

 

31,092,569

 

2021

 

24,396,825

 

2022

 

18,860,374

 

Thereafter

 

49,084,453

 

Total

 

$

238,931,168

 

 

Note 7 — Mortgage Servicing

 

An analysis of the product and geographic concentrations that impact our servicing revenue is shown in the following tables:

 

March 31, 2017

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

Percent of

 

Product

 

UPB

 

Total

 

State

 

Total

 

Fannie Mae

 

$

11,804,141,502

 

82

%

Texas

 

23

%

Freddie Mac

 

2,163,123,775

 

15

%

North Carolina

 

10

%

FHA

 

498,033,800

 

3

%

California

 

9

%

Total

 

$

14,465,299,077

 

100

%

New York

 

8

%

 

 

 

 

 

 

Georgia

 

5

%

 

 

 

 

 

 

Florida

 

5

%

 

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

 

Total

 

100

%

 

December 31, 2016

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

Percent of

 

Product

 

UPB

 

Total

 

State

 

Total

 

Fannie Mae

 

$

11,181,152,400

 

83

%

Texas

 

24

%

Freddie Mac

 

1,953,244,541

 

14

%

North Carolina

 

9

%

FHA

 

420,688,577

 

3

%

California

 

8

%

Total

 

$

13,555,085,518

 

100

%

New York

 

8

%

 

 

 

 

 

 

Georgia

 

5

%

 

 

 

 

 

 

Other (1)

 

46

%

 

 

 

 

 

 

Total

 

100

%

 


(1)         No other individual state represented 5% or more of the total.

 

At both March 31, 2017 and December 31, 2016, our weighted average servicing fee was 48 basis points. We held cash in escrow for these loans totaling $386.0 million and $401.7 million at March 31, 2017 and December 31, 2016, respectively, which is not reflected in our consolidated balance sheets.  These escrows are maintained in separate accounts at two federally insured depository institutions, which may exceed FDIC insured limits.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

Note 8 — Securities

 

Available-for-Sale

 

Our available-for-sale securities consist of equity securities and Agency Business commercial mortgage interest-only securities (“Agency IOs”) from loans sold and securitized under the Freddie Mac Small Balance Loan Program (“SBL Program”).

 

Equity Securities. We own common stock of CV Holdings, Inc., formerly Realty Finance Corporation, which is a commercial real estate specialty finance company. These securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income.

 

The following is a summary of the equity securities classified as available-for-sale:

 

 

 

March 31, 2017

 

 

 

Amortized
Cost

 

Cummulative
Unrealized Gain

 

Carrying Value /
Estimated Fair
Value

 

 

 

 

 

 

 

 

 

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

 

$

58,789

 

$

587,893

 

$

646,682

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

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

 

$

58,789

 

$

558,499

 

$

617,288

 

 

Agency IOs. Through our Agency Business, we originate and sell loans to Freddie Mac under the SBL Program, which are then pooled and securitized. Prior to the Acquisition and upon securitization of SBL Program loans, our Manager received Agency IOs under the SBL Program that we acquired in the Acquisition. We elected the fair value option for the Agency IOs, which requires changes in fair value to be recognized through earnings. We record such gains and losses to gain on sales, including fee-based services, net in the consolidated statements of income. As a result of changes in the Freddie Mac SBL Program in 2016, we do not expect to receive Agency IOs from future securitizations.

 

A summary of our Agency IOs activity is as follows:

 

 

 

Three Months Ended
March 31, 2017

 

Balance at beginning of period

 

$

4,786,175

 

Changes in fair value

 

(125,355

)

Balance at end of period

 

$

4,660,820

 

 

The UPB of our Agency IOs was $880.4 million and $904.4 million at March 31, 2017 and December 31, 2016, respectively, which mature between 2035 and 2036. During the three months ended March 31, 2017, we recognized $0.3 million of interest income related to these Agency IOs.

 

Held-to-Maturity

 

As part of the SBL Program securitizations described above, we are required to purchase the bottom tranche bond, generally referred to as the “B Piece,” that represents the bottom 10%, or highest risk of the securitization. Prior to 2017, a third party investor agreed to purchase the B Piece of each SBL Program securitization at par.  During the first quarter of 2017, we retained 49%, or $12.1 million face value of a B Piece bond, at a discount, for $7.8 million and sold the remaining 51% to the third party at par. These held-to-maturity securities are carried at cost, net of unamortized discounts and are collateralized by a pool of multifamily mortgage loans, bear interest at an initial

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

weighted average variable rate of 3.50% and have an estimated weighted average maturity of 6.1 years. Approximately $1.8 million is estimated to mature within one year, $5.4 million is estimated to mature after one year through five years, $2.8 million is estimated to mature after five years through ten years and $1.7 million is estimated to mature after ten years.

 

The following is a summary of the held-to-maturity securities we held at March 31, 2017:

 

 

 

Face Value

 

Carrying Value

 

Unrealized
Gain

 

Estimated Fair
Value

 

B Piece bonds

 

$

12,067,682

 

$

7,905,689

 

$

360,673

 

$

8,266,362

 

 

We do not intend to sell these investments and it is not more-likely-than-not that we will be required to sell the investments before recovery of its cost basis, which may be at maturity.  These securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value.  As of March 31 2017, no impairment was recorded on these held-to-maturity securities.

 

Note 9 — Investments in Equity Affiliates

 

We account for all investments in equity affiliates under the equity method. 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, 2017

 

December 31, 2016

 

March 31, 2017

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

28,909,827

 

$

28,917,457

 

$

 

West Shore Café

 

2,070,347

 

2,050,347

 

1,687,500

 

Lightstone Value Plus REIT L.P

 

1,894,727

 

1,894,727

 

 

JT Prime

 

425,000

 

425,000

 

 

East River Portfolio

 

80,721

 

83,222

 

1,705,938

 

Lexford Portfolio

 

100

 

100

 

 

Issuers of Junior Subordinated Notes

 

 

578,000

 

 

Total

 

$

33,380,722

 

$

33,948,853

 

$

3,393,438

 

 

Arbor Residential Investor LLC (“ARI”).  In the three months ended March 31, 2017 and 2016, we recorded $0.1 million and $1.6 million, respectively, to income from equity affiliates in our consolidated statements of income related to our investment in this residential mortgage banking business.

 

During the three months ended March 31, 2017, we funded $0.3 million of additional mortgage purchases and received cash distributions totaling $0.4 million (which was classified as a return of capital) from a joint venture of ours that invests in non-qualified residential mortgages purchased from ARI’s origination platform. During both the three months ended March 31, 2017 and 2016, we recorded income of less than $0.1 million to income from equity affiliates in our consolidated statements of income related to this investment.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Statements of Operations:

 

 

 

 

 

Total revenues

 

$

39,471,004

 

$

42,929,432

 

Total expenses

 

39,201,999

 

36,007,398

 

Net income

 

$

269,005

 

$

6,922,034

 

 

 

 

 

 

 

Arbor’s share of income

 

$

86,070

 

$

1,592,228

 

 

Lexford Portfolio. In the three months ended March 31, 2017 and 2016, we received distributions from this equity investment and recognized income of $0.7 million and $0.3 million, respectively. See Note 19 — Agreements and Transactions with Related Parties for further details.

 

Issuers of Junior Subordinated Notes.  In the three months ended March 31, 2017, we purchased, at a discount, a portion of our junior subordinated notes. In connection with this extinguishment of debt, we settled our investment in these affiliated entities. See Note 11 — Debt Obligations for further details.

 

Note 10 — Real Estate Owned and Held-For-Sale

 

Our real estate assets at both March 31, 2017 and December 31, 2016 were comprised of a hotel property and an office building.

 

Real Estate Owned

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Hotel Property

 

Office
Building

 

Total

 

Hotel Property

 

Office
Building

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

3,293,651

 

$

4,509,000

 

$

7,802,651

 

$

3,293,651

 

$

4,509,000

 

$

7,802,651

 

Building and intangible assets

 

30,527,842

 

1,627,966

 

32,155,808

 

30,473,898

 

1,563,254

 

32,037,152

 

Less: Impairment loss

 

(11,807,354

)

 

(11,807,354

)

(11,200,000

)

 

(11,200,000

)

Less: Accumulated depreciation and amortization

 

(8,814,139

)

(584,154

)

(9,398,293

)

(8,658,737

)

(489,261

)

(9,147,998

)

Real estate owned, net

 

$

13,200,000

 

$

5,552,812

 

$

18,752,812

 

$

13,908,812

 

$

5,582,993

 

$

19,491,805

 

 

For the three months ended March 31, 2017 and 2016, our hotel properties had a weighted average occupancy rate of approximately 55% and 66%, respectively, a weighted average daily rate of approximately $134 and $97, respectively, and weighted average revenue per available room of approximately $73 and $65, 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. During the three months ended March 31, 2017, we received additional market analyses, including discussions with market participants, which resulted in a further impairment loss of $1.2 million.

 

At both March 31, 2017 and December 31, 2016, our office building was fully occupied by a single tenant. In April 2017, the lease expired and the building is currently vacant.

 

Our real estate assets had restricted cash balances totaling $0.7 million at both March 31, 2017 and December 31, 2016, due to escrow requirements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2017

 

Real Estate Held-For-Sale

 

In the first quarter of 2016, we sold a hotel property for $9.7 million and recognized a gain of $0.6 million.

 

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

 

 

 

Three Months Ended
March 31, 2016

 

 

 

 

 

Revenue:

 

 

 

Property operating income

 

$

1,695,348

 

 

 

 

 

Expenses:

 

 

 

Property operating expenses

 

1,061,828

 

Depreciation

 

334,631

 

Net income

 

$

298,889

 

 

There were no properties classified as held-for-sale during the three months ended March 31, 2017.

 

Note 11 — Debt Obligations

 

Credit Facilities and Repurchase Agreements

 

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

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Current
 Maturity

 

Extended
Maturity

 

Note Rate

 

Debt
Carrying
Value (1)

 

Collateral
Carrying
Value

 

Wtd.
Avg. Note
Rate

 

Debt
Carrying
Value (1)

 

Collateral
Carrying
Value

 

Wtd.
Avg. Note
Rate

 

Structured Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million repurchase facility

 

Oct. 2018

 

N/A

 

L + 2.25% to 3.50%

 

$

116,897,891

 

$

196,475,354

 

3.30%

 

$

106,051,080

 

$

183,827,574

 

3.12%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million credit facility

 

May 2017

 

May 2018

 

L + 2.15%

 

41,504,798

 

61,830,000

 

3.18%

 

21,598,322

 

34,850,000

 

2.96%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

Dec. 2017

 

N/A

 

L + 2.125% to 2.50%

 

47,031,844

 

74,158,500

 

3.15%

 

38,703,886

 

63,158,500

 

2.94%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

May 2017

 

N/A

 

L + 2.00%

 

28,800,462

 

40,725,000

 

3.02%

 

23,276,773

 

31,725,000

 

2.81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Feb. 2018

 

Feb. 2019

 

L + 2.00%

 

46,400,000

 

58,000,000

 

3.02%

 

46,373,641

 

58,000,000

 

2.81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Sept. 2019

 

N/A

 

L + 2.50% to 3.25%

 

7,812,000

 

9,825,000

 

3.53%

 

7,956,000

 

9,885,000

 

4.08%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$3 million master security agreement

 

Oct. 2020

 

N/A

 

2.96% to 3.42%

 

2,320,631

 

 

3.21%

 

2,532,966

 

 

3.21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

290,767,626

 

$

441,013,854

 

3.19%

 

$

246,492,668

 

$

381,446,074

 

3.02%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Business