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EX-32 - EX-32 - ARBOR REALTY TRUST INCa17-13298_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, 2017

 

or

 

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

 

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

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: 61,349,916 outstanding as of July 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

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

80,759,389

 

$

138,645,430

 

Restricted cash

 

187,239,506

 

29,314,929

 

Loans and investments, net

 

1,798,865,292

 

1,695,732,351

 

Loans held-for-sale, net

 

387,354,589

 

673,367,304

 

Capitalized mortgage servicing rights, net

 

243,083,459

 

227,742,986

 

Available-for-sale securities, at fair value

 

5,102,433

 

5,403,463

 

Securities held-to-maturity, net

 

8,083,435

 

 

Investments in equity affiliates

 

32,992,895

 

33,948,853

 

Real estate owned, net

 

17,398,560

 

19,491,805

 

Due from related party

 

5,628,805

 

1,464,732

 

Goodwill and other intangible assets

 

119,688,979

 

97,489,884

 

Other assets

 

49,248,026

 

48,184,509

 

Total assets

 

$

2,935,445,368

 

$

2,970,786,246

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

505,815,453

 

$

906,636,790

 

Collateralized loan obligations

 

1,004,815,901

 

728,441,109

 

Senior unsecured notes

 

94,897,231

 

94,521,566

 

Convertible senior unsecured notes, net

 

94,803,761

 

80,660,038

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

139,248,112

 

157,858,555

 

Related party financing

 

50,000,000

 

50,000,000

 

Due to related party

 

1,477,443

 

6,038,707

 

Due to borrowers

 

86,947,525

 

81,019,386

 

Allowance for loss-sharing obligations

 

32,797,406

 

32,407,554

 

Other liabilities

 

86,660,938

 

86,164,613

 

Total liabilities

 

2,097,463,770

 

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; 61,349,916 and 51,401,295 shares issued and outstanding, respectively

 

613,499

 

514,013

 

Additional paid-in capital

 

701,397,021

 

621,931,995

 

Accumulated deficit

 

(117,379,709

)

(125,134,403

)

Accumulated other comprehensive income

 

440,919

 

320,917

 

Total Arbor Realty Trust, Inc. stockholders’ equity

 

674,579,943

 

587,140,735

 

Noncontrolling interest

 

163,401,655

 

159,897,193

 

Total equity

 

837,981,598

 

747,037,928

 

Total liabilities and equity

 

$

2,935,445,368

 

$

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 June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

34,468,274

 

$

27,969,498

 

$

67,993,290

 

$

53,787,963

 

Other interest income, net

 

 

2,539,274

 

 

2,539,274

 

Interest expense

 

20,411,386

 

13,243,488

 

39,848,224

 

25,992,101

 

Net interest income

 

14,056,888

 

17,265,284

 

28,145,066

 

30,335,136

 

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

18,830,042

 

 

38,000,898

 

 

Mortgage servicing rights

 

17,254,059

 

 

37,284,399

 

 

Servicing revenue, net

 

6,609,147

 

 

11,402,790

 

 

Property operating income

 

2,863,259

 

4,426,555

 

6,086,463

 

9,758,087

 

Other income, net

 

(821,252

)

214,668

 

(1,707,549

)

304,431

 

Total other revenue

 

44,735,255

 

4,641,223

 

91,067,001

 

10,062,518

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

21,824,684

 

4,311,412

 

41,666,148

 

8,639,754

 

Selling and administrative

 

7,834,927

 

1,719,337

 

15,528,814

 

4,374,813

 

Acquisition costs

 

 

745,734

 

 

3,855,644

 

Property operating expenses

 

2,621,922

 

3,856,264

 

5,259,826

 

8,172,819

 

Depreciation and amortization

 

1,815,726

 

443,112

 

3,712,975

 

1,320,645

 

Impairment loss on real estate owned

 

1,500,000

 

11,200,000

 

2,700,000

 

11,200,000

 

Provision for loss sharing

 

532,185

 

 

2,211,570

 

 

Provision for loan losses (net of recoveries)

 

(1,760,000

)

44,005

 

(2,455,653

)

29,005

 

Management fee - related party

 

2,673,260

 

2,850,000

 

6,673,260

 

5,550,000

 

Total other expenses

 

37,042,704

 

25,169,864

 

75,296,940

 

43,142,680

 

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

 

21,749,439

 

(3,263,357

)

43,915,127

 

(2,745,026

)

Gain on extinguishment of debt

 

 

 

7,116,243

 

 

Gain on sale of real estate

 

 

11,023,134

 

 

11,630,687

 

(Loss) income from equity affiliates

 

(2,944

)

4,367,101

 

759,833

 

6,264,543

 

Provision for income taxes

 

(3,435,000

)

 

(9,536,000

)

 

Net income

 

18,311,495

 

12,126,878

 

42,255,203

 

15,150,204

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

3,776,860

 

3,776,860

 

Net income attributable to noncontrolling interest

 

4,493,627

 

 

10,935,231

 

 

Net income attributable to common stockholders

 

$

11,929,438

 

$

10,238,448

 

$

27,543,112

 

$

11,373,344

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.21

 

$

0.20

 

$

0.51

 

$

0.22

 

Diluted earnings per common share

 

$

0.21

 

$

0.20

 

$

0.50

 

$

0.22

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

56,652,334

 

51,381,405

 

54,071,085

 

51,213,312

 

Diluted

 

79,064,503

 

51,741,951

 

76,365,118

 

51,418,539

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.18

 

$

0.15

 

$

0.35

 

$

0.30

 

 

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,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18,311,495

 

$

12,126,878

 

$

42,255,203

 

$

15,150,204

 

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

 

(146,972

)

29,395

 

(117,577

)

(29,395

)

Unrealized (loss) gain on derivative financial instruments, net

 

 

(52,445

)

202

 

(262,234

)

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

 

 

1,331,637

 

237,377

 

2,696,300

 

Comprehensive income

 

18,164,523

 

13,435,465

 

42,375,205

 

17,554,875

 

Less:

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

4,453,139

 

 

10,972,717

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

3,776,860

 

3,776,860

 

Comprehensive income attributable to common stockholders

 

$

11,822,954

 

$

11,547,035

 

$

27,625,628

 

$

13,778,015

 

 

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, 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

 

Issuance of common stock

 

 

 

 

 

9,500,000

 

95,000

 

76,130,000

 

 

 

 

 

76,225,000

 

 

 

76,225,000

 

Stock-based compensation

 

 

 

 

 

448,955

 

4,489

 

2,981,744

 

 

 

 

 

2,986,233

 

 

 

2,986,233

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(334

)

(3

)

3

 

 

 

 

 

 

 

 

 

Issuance of convertible senior unsecured notes, net

 

 

 

 

 

 

 

 

 

353,279

 

 

 

 

 

353,279

 

 

 

353,279

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(19,781,265

)

 

 

(19,781,265

)

 

 

(19,781,265

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(3,776,860

)

 

 

(3,776,860

)

 

 

(3,776,860

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(7,153

)

 

 

(7,153

)

 

 

(7,153

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,430,769

)

(7,430,769

)

Net income

 

 

 

 

 

 

 

 

 

 

 

31,319,972

 

 

 

31,319,972

 

10,935,231

 

42,255,203

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(117,577

)

(117,577

)

 

 

(117,577

)

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 — June 30, 2017

 

24,942,269

 

$

89,508,213

 

61,349,916

 

$

613,499

 

$

701,397,021

 

$

(117,379,709

)

$

440,919

 

$

674,579,943

 

$

163,401,655

 

$

837,981,598

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

42,255,203

 

$

15,150,204

 

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

 

 

 

 

 

Depreciation and amortization

 

3,712,975

 

1,320,645

 

Stock-based compensation

 

2,986,233

 

2,163,094

 

Amortization and accretion of interest and fees, net

 

1,841,577

 

1,652,392

 

Amortization of capitalized mortgage servicing rights

 

23,715,839

 

 

Originations of loans held-for-sale

 

(2,288,693,818

)

 

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

 

2,569,203,028

 

 

Payoffs and paydowns of loans held-for-sale

 

72,702

 

 

Mortgage servicing rights

 

(37,284,399

)

 

Write-off of capitalized mortgage servicing rights from payoffs

 

6,497,323

 

 

Impairment loss on real estate owned

 

2,700,000

 

11,200,000

 

Provision for loan losses (net of recoveries)

 

(2,455,653

)

29,005

 

Provision for loss sharing (net of recoveries)

 

2,211,570

 

 

Net charge-offs for loss sharing obligations

 

(1,821,718

)

 

Gain on extinguishment of debt

 

(7,116,243

)

 

Gain on sale of real estate

 

 

(11,630,687

)

Gain on sale of securities

 

 

(15,491

)

Deferred tax provision

 

937,000

 

 

Income from equity affiliates

 

(759,833

)

(6,264,543

)

Change in fair value of available-for-sale securities

 

183,453

 

 

Changes in operating assets and liabilities

 

(10,269,845

)

4,082,516

 

Net cash provided by operating activities

 

307,915,394

 

17,687,135

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(551,467,633

)

(475,924,501

)

Payoffs and paydowns of loans and investments

 

456,250,969

 

410,975,653

 

Internalization of management team

 

(25,000,000

)

 

Deferred fees

 

3,014,291

 

4,568,476

 

Investments in real estate, net

 

(433,208

)

(417,809

)

Contributions to equity affiliates

 

(650,037

)

(4,187,582

)

Distributions from equity affiliates

 

374,402

 

1,013,080

 

Proceeds from sale of real estate, net

 

 

49,029,780

 

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

 

7,966

 

 

Due to borrowers and reserves

 

(753,218

)

 

Net cash used in investing activities

 

(126,493,970

)

(13,375,696

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

4,343,816,195

 

204,046,488

 

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

 

(4,744,920,637

)

(81,620,294

)

Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities

 

(12,691,086

)

 

Paydowns and payoffs of mortgage note payable - real estate owned

 

 

(27,155,000

)

Proceeds from collateralized loan obligations

 

279,000,000

 

 

Proceeds from convertible senior unsecured notes

 

13,750,000

 

 

Change in restricted cash

 

(158,063,713

)

(111,072,901

)

Receipts on swaps and returns of margin calls from counterparties

 

429,539

 

2,250,049

 

Distributions paid on common stock

 

(19,781,265

)

(15,351,438

)

Distributions paid on noncontrolling interest

 

(7,430,769

)

 

Distributions paid on preferred stock

 

(3,776,860

)

(3,776,860

)

Distributions paid on preferred stock of private REIT

 

(7,153

)

(7,231

)

Payment of deferred financing costs

 

(5,856,716

)

(155,235

)

Proceeds from issuance of common stock

 

76,225,000

 

 

Net cash used in financing activities

 

(239,307,465

)

(32,842,422

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(57,886,041

)

(28,530,983

)

Cash and cash equivalents at beginning of period

 

138,645,430

 

188,708,687

 

Cash and cash equivalents at end of period

 

$

80,759,389

 

$

160,177,704

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

35,142,494

 

$

22,983,701

 

Cash used to pay taxes

 

$

13,451,621

 

$

112,799

 

 

 

 

 

 

 

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, 2017

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed in 2003. 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,” which was formed as a result of the acquisition of the agency platform of Arbor Commercial Mortgage, LLC (“ACM” or our “Former Manager”) in the third quarter of 2016 (the “Acquisition”), 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.

 

Prior to May 31, 2017, we were externally managed and advised by ACM. Effective May 31, 2017, we exercised our option to fully internalize our management team and terminate the existing management agreement. See Note 3 — Acquisition of Our Former Manager’s Agency Platform for further details.

 

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. Certain of our assets that produce non-qualifying income, primarily within the Agency Business, are operated through taxable REIT subsidiaries (“TRS”), which is part of our TRS consolidated group (the “TRS Consolidated Group”) and is subject to U.S. federal, state and local income taxes. See Note 18 — Income Taxes for further details.

 

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 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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

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.

 

Recently Adopted Accounting Pronouncements

 

Description

 

Adoption Date

 

Effect on Financial Statements

 

 

 

 

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards 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.

 

Recently Issued Accounting Pronouncements

 

The following table is not intended to represent all recently issued accounting pronouncements that are not yet effective and which have not yet been adopted by us. This table should be read in conjunction with the recently issued accounting pronouncements section included in our 2016 Annual Report filed with the SEC.

 

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, but it is not expected to have a material impact on our consolidated financial statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

Description

 

Effective Date

 

Effect on Financial Statements

 

 

 

 

 

Since 2014, the FASB has issued several amendments to its guidance on revenue recognition. The amended guidance, among other things, introduces a new framework for a single comprehensive model that can be used when accounting for revenue and supersedes most current revenue recognition guidance, including that which pertains to specific industries. The core principle states that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods and services. It also requires expanded quantitative and qualitative disclosures that will enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Most revenue associated with financial instruments, including interest and loan origination fees, along with gains and losses on investment securities, derivatives and sales of financial instruments are excluded from the scope of the guidance.

 

First quarter of 2018 and permits the use of either the full retrospective or modified retrospective method.

 

A significant portion of our revenue, specifically interest income, loan origination fees and gains on sales of loans and investment securities, will not be impacted by this guidance. We are in the process of evaluating the impact this guidance may have on our other revenue streams to identify changes from our current method of revenue recognition, as well as changes to our footnote disclosures.

 

Note 3 — Acquisition of Our Former Manager’s Agency Platform

 

On July 14, 2016, we completed the previously announced Acquisition of the agency platform of our Former Manager pursuant to an asset purchase agreement dated February 25, 2016 (“Purchase Agreement”). 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 Acquisition date was $7.29 per share; therefore, the estimated fair value of the total consideration 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.

 

Internalization of Management Team

 

In connection with the Acquisition, we had the option to fully internalize our management team and terminate the existing management agreement with our Former Manager for $25.0 million.  On May 31, 2017, we exercised this option to fully internalize our management team, which included approximately 100 employees. We incurred expenses of less than $0.1 million in connection with this transaction. We accounted for this transaction as a business combination with the settlement of a preexisting relationship. The total purchase price of $25.0 million was assigned to goodwill since the asset transferred represented an assembled workforce. Goodwill was allocated $12.5 million each to our two reporting segments and is expected to be deductible for tax purposes.

 

Accounting guidance requires the settlement of preexisting relationships to be accounted for separately from the business combination, with the recognition of any corresponding gain or loss through the statement of income upon settlement. Any potential gain or loss is measured based on the favorable or unfavorable terms of the management agreement from the prospective of the acquirer, when compared to current market rates for similar services. Based on this guidance, we performed an analysis and determined that the terminated management agreement contained terms similar to those of arrangements with comparable companies, and therefore no such gain or loss was recorded.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

Note 4 — Loans and Investments

 

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

 

 

 

June 30, 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

 

$

1,704,157,878

 

90

%

127

 

6.08

%

16.5

 

0

%

73

%

Preferred equity investments

 

88,432,654

 

5

%

10

 

6.09

%

52.8

 

52

%

90

%

Mezzanine loans

 

74,210,873

 

4

%

10

 

7.55

%

17.4

 

24

%

58

%

Junior participation loans

 

25,256,582

 

1

%

1

 

0.00

%

1.0

 

100

%

100

%

 

 

1,892,057,987

 

100

%

148

 

6.05

%

18.0

 

5

%

73

%

Allowance for loan losses

 

(81,255,922

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(11,936,773

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,798,865,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 June 30, 2017, the UPB related to 37 loans with five different borrowers represented 13% 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 six months ended June 30, 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, and 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)

June 30, 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 June 30, 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 $147.7 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.

 

 

 

June 30, 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

 

$

1,479,158,419

 

78

%

pass/watch

 

2

%

72

%

Land

 

131,881,255

 

7

%

substandard

 

0

%

93

%

Office

 

129,754,980

 

7

%

pass/watch

 

27

%

73

%

Hotel

 

70,750,000

 

4

%

special mention

 

29

%

81

%

Retail

 

36,508,333

 

2

%

pass/watch

 

9

%

61

%

Commercial

 

33,830,000

 

2

%

special mention

 

3

%

71

%

Healthcare

 

10,175,000

 

<1

%

pass

 

0

%

56

%

Total

 

$

1,892,057,987

 

100

%

pass/watch

 

5

%

73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

Retail

 

3,958,333

 

<1

%

special mention

 

81

%

91

%

Commercial

 

9,205,000

 

<1

%

special mention

 

12

%

69

%

Healthcare

 

5,550,000

 

<1

%

special mention

 

0

%

63

%

Total

 

$

1,790,159,966

 

100

%

special mention

 

6

%

75

%

 

Geographic Concentration Risk

 

As of June 30, 2017, 21%, 16%, 14%, 7% and 6% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas, California, Georgia and Florida, 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)

June 30, 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 June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

83,015,922

 

$

86,746,575

 

$

83,711,575

 

$

86,761,575

 

Provision for loan losses

 

 

59,005

 

 

59,005

 

Charge-offs

 

 

(2,959,005

)

 

(2,959,005

)

Recoveries of reserves

 

(1,760,000

)

(15,000

)

(2,455,653

)

(30,000

)

Allowance at end of period

 

$

81,255,922

 

$

83,831,575

 

$

81,255,922

 

$

83,831,575

 

 

During the three and six months ended June 30, 2017, a fully reserved mezzanine loan with a UPB of $1.8 million paid off in full, resulting in a $1.8 million reserve recovery. In addition, during the first quarter of 2017, we recorded a reserve recovery of $0.7 million on a multifamily bridge loan.

 

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 recoveries of reserves for all periods presented were related to multifamily loans and the ratio of net recoveries to the average loans and investments outstanding during both the three and six months ended June 30, 2017 was 0.1%. The ratio of net charge-offs to the average loans and investments outstanding during both the three and six months ended June 30, 2016 was (0.2)%.

 

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, 2017 and 2016.

 

We have six loans with a carrying value totaling $120.7 million at June 30, 2017, which mature in September 2017, which was 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 $111.4 million entitle us to a weighted average accrual rate of interest of 8.50%.  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 June 30, 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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

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

 

 

 

June 30, 2017

 

Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,551,563

 

$

53,883,478

 

$

131,085,948

 

$

 

$

131,085,948

 

$

 

Hotel

 

34,750,000

 

34,750,000

 

3,700,000

 

34,750,000

 

60,238

 

34,750,000

 

370,877

 

Office

 

27,553,582

 

22,769,444

 

21,972,444

 

27,555,832

 

26,648

 

27,558,082

 

51,337

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

Multifamily

 

 

 

 

880,000

 

 

1,271,058

 

22,063

 

Total

 

$

195,089,530

 

$

184,771,007

 

$

81,255,922

 

$

195,971,780

 

$

86,886

 

$

196,365,088

 

$

444,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,925,677

 

$

53,883,478

 

$

129,042,390

 

$

 

$

128,740,618

 

$

 

Hotel

 

34,750,000

 

34,496,296

 

3,700,000

 

34,750,000

 

283,768

 

34,750,000

 

565,917

 

Office

 

27,562,582

 

22,778,444

 

21,972,444

 

27,573,832

 

23,115

 

27,576,082

 

46,162

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

Multifamily

 

2,542,115

 

2,450,618

 

2,455,653

 

5,004,615

 

47,669

 

5,012,115

 

111,205

 

Total

 

$

197,640,645

 

$

187,351,035

 

$

83,711,575

 

$

198,070,837

 

$

354,552

 

$

197,778,815

 

$

723,284

 

 


(1)       Represents the UPB of six and eight impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at June 30, 2017 and December 31, 2016, respectively.

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

 

At June 30, 2017, five loans with an aggregate net carrying value of $34.6 million, net of related loan loss reserves of $25.9 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:

 

 

 

June 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel

 

$

34,750,000

 

$

34,750,000

 

$

 

$

 

$

 

$

 

Office

 

20,472,444

 

 

20,472,444

 

20,472,444

 

 

20,472,444

 

Multifamily

 

2,601,528

 

 

2,601,528

 

680,653

 

 

680,653

 

Commercial

 

1,700,000

 

 

1,700,000

 

1,700,000

 

 

1,700,000

 

Retail

 

990,667

 

 

990,667

 

 

 

 

 

 

 

Total

 

$

60,514,639

 

$

34,750,000

 

$

25,764,639

 

$

22,853,097

 

$

 

$

22,853,097

 

 

At June 30, 2017 and December 31, 2016, we did not have any loans contractually past due 90 days or more that were still accruing interest.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

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 June 30, 2017

 

Six Months Ended June 30, 2017

 

Asset Class

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Wtd. Avg.
Rate of
Interest

 

Modified
Unpaid
Principal
Balance

 

Modified
Wtd. Avg.
Rate of
Interest

 

Asset Class

 

Number
of Loans

 

Original
Unpaid
Principal
Balance

 

Original
Wtd. Avg.
Rate of
Interest

 

Modified
Unpaid
Principal
Balance

 

Modified
Wtd. Avg.
Rate of
Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel

 

1

 

$

34,750,000

 

4.01

%

$

34,750,000

 

4.01

%

Hotel

 

1

 

$

34,750,000

 

4.01

%

$

34,750,000

 

4.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Multifamily

 

1

 

$

14,646,456

 

5.24

%

$

14,646,456

 

5.24

%

 

The loan which was modified during the three and six months ended June 30, 2017 was considered a troubled debt restructuring as a result of a forbearance agreement entered into with the borrower in the second quarter of 2017 and was classified as non-performing as of June 30, 2017. There were no other loans in which we considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of June 30, 2017 and 2016 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, 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 June 30, 2017, we had total interest reserves of $27.9 million on 84 loans with an aggregate UPB of $1.17 billion. 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:

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Fannie Mae

 

$

200,774,000

 

$

538,189,475

 

Freddie Mac

 

156,866,800

 

124,102,000

 

FHA

 

24,125,011

 

56,247

 

 

 

381,765,811

 

662,347,722

 

Fair value of future MSR

 

6,273,180

 

13,145,814

 

Unearned discount

 

(684,402

)

(2,126,232

)

Loans held-for-sale, net

 

$

387,354,589

 

$

673,367,304

 

 

Our loans held-for-sale, net are typically sold within 60 days of loan origination. At June 30, 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 and six months ended June 30, 2017, we sold $1.20 billion and $2.57 billion, respectively, of loans held-for-sale and recorded gains on sales of $17.6 million and $35.7 million, respectively, 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 and 6.9 years at June 30, 2017 and December 31, 2016, respectively.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

A summary of our capitalized MSR activity is as follows:

 

 

 

Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

 

 

Acquired

 

Originated

 

Total

 

Acquired

 

Originated

 

Total

 

Balance at beginning of period

 

$

180,945,505

 

$

57,985,663

 

$

238,931,168

 

$

194,800,754

 

$

32,942,232

 

$

227,742,986

 

Additions

 

 

19,083,989

 

19,083,989

 

 

45,553,635

 

45,553,635

 

Amortization

 

(9,659,698

)

(2,168,140

)

(11,827,838

)

(20,121,484

)

(3,594,355

)

(23,715,839

)

Write-downs and payoffs

 

(3,096,507

)

(7,353

)

(3,103,860

)

(6,489,970

)

(7,353

)

(6,497,323

)

Balance at end of period

 

$

168,189,300

 

$

74,894,159

 

$

243,083,459

 

$

168,189,300

 

$

74,894,159

 

$

243,083,459

 

 

During the three and six months ended June 30, 2017, we recorded $3.1 million and $6.5 million, respectively, of write-offs relating to specific MSRs, primarily due to prepayments of certain loans. During the three and six months ended June 30, 2017, prepayment fees totaling $2.1 million and $4.1 million, respectively, were collected and are included as a component of servicing revenue, net on the consolidated statements of income. As of June 30, 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 June 30, 2017 is shown in the table below. Actual amortization may vary from these estimates.

 

Year

 

Amortization

 

2017 (six months ended 12/31/2017)

 

$

23,539,829

 

2018

 

44,515,585

 

2019

 

39,968,221

 

2020

 

33,376,062

 

2021

 

26,364,048

 

2022

 

20,442,749

 

Thereafter

 

54,876,965

 

Total

 

$

243,083,459

 

 

Note 7 — Mortgage Servicing

 

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

 

June 30, 2017

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

Percent of

 

Product

 

UPB

 

Total

 

State

 

Total

 

Fannie Mae

 

$

12,034,573,069

 

80

%

Texas

 

23

%

Freddie Mac

 

2,458,529,999

 

16

%

North Carolina

 

10

%

FHA

 

525,943,848

 

4

%

California

 

9

%

Total

 

$

15,019,046,916

 

100

%

New York

 

8

%

 

 

 

 

 

 

Florida

 

5

%

 

 

 

 

 

 

Georgia

 

5

%

 

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

 

Total

 

100

%

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

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 June 30, 2017 and December 31, 2016, our weighted average servicing fee was 47.4 basis points and 47.8 basis points, respectively. We held cash in escrow for these loans totaling $469.6 million and $401.7 million at June 30, 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.

 

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:

 

 

 

June 30, 2017

 

 

 

Amortized
Cost

 

Cummulative
Unrealized Gain

 

Carrying Value /
Estimated Fair
Value

 

 

 

 

 

 

 

 

 

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

 

$

58,789

 

$

440,922

 

$

499,711

 

 

 

 

 

 

 

 

 

 

 

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 Former Manager received Agency IOs under the SBL Program, which 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.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

A summary of our Agency IOs activity is as follows:

 

 

 

Three Months Ended
June 30, 2017

 

Six Months Ended
June 30, 2017

 

Balance at beginning of period

 

$

4,660,820

 

$

4,786,175

 

Changes in fair value

 

(58,098

)

(183,453

)

Balance at end of period

 

$

4,602,722

 

$

4,602,722

 

 

The UPB of our Agency IOs was $869.4 million and $904.4 million at June 30, 2017 and December 31, 2016, respectively, which mature between 2035 and 2036. During the three and six months ended June 30, 2017, we recognized $0.3 million and $0.6 million, respectively, 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 six months ended June 30, 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 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 $1.8 million is estimated to mature after ten years.

 

The following is a summary of the held-to-maturity securities we held at June 30, 2017:

 

 

 

Face Value

 

Carrying Value

 

Unrealized
Gain

 

Estimated Fair
Value

 

 

 

 

 

 

 

 

 

 

 

B Piece bonds

 

$

12,062,041

 

$

8,083,435

 

$

179,063

 

$

8,262,498

 

 

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 June 30, 2017, no impairment was recorded on these held-to-maturity securities. During the three and six months ended June 30, 2017, we recorded interest income of $0.3 million and $0.4 million, respectively, related to this investment.

 

18



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017

 

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

 

June 30, 2017

 

December 31, 2016

 

June 30, 2017

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

28,503,797

 

$

28,917,457

 

$

 

West Shore Café

 

2,095,347

 

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

 

73,924

 

83,222

 

1,705,938

 

Lexford Portfolio

 

100

 

100

 

 

Issuers of Junior Subordinated Notes

 

 

578,000