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Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 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

 

11553

(Address of principal executive offices)

 

(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

Smaller reporting company

o

Non-accelerated filer

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: 61,702,628 outstanding as of October 27, 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 “anticipate,” “expect,” “believe,” “intend,” “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 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

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

84,751,397

 

$

138,645,430

 

Restricted cash

 

137,138,389

 

29,314,929

 

Loans and investments, net

 

1,997,555,985

 

1,695,732,351

 

Loans held-for-sale, net

 

333,267,976

 

673,367,304

 

Capitalized mortgage servicing rights, net

 

247,875,659

 

227,742,986

 

Available-for-sale securities, at fair value

 

4,707,085

 

5,403,463

 

Securities held-to-maturity, net

 

18,851,089

 

 

Investments in equity affiliates

 

31,330,740

 

33,948,853

 

Real estate owned, net

 

17,354,720

 

19,491,805

 

Due from related party

 

12,613,313

 

1,464,732

 

Goodwill and other intangible assets

 

123,166,816

 

97,489,884

 

Other assets

 

49,564,693

 

48,184,509

 

Total assets

 

$

3,058,177,862

 

$

2,970,786,246

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

562,326,537

 

$

906,636,790

 

Collateralized loan obligations

 

1,066,230,488

 

728,441,109

 

Senior unsecured notes

 

95,088,379

 

94,521,566

 

Convertible senior unsecured notes, net

 

95,381,121

 

80,660,038

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

139,418,416

 

157,858,555

 

Related party financing

 

50,000,000

 

50,000,000

 

Due to related party

 

 

6,038,707

 

Due to borrowers

 

69,357,152

 

81,019,386

 

Allowance for loss-sharing obligations

 

30,158,464

 

32,407,554

 

Other liabilities

 

104,474,096

 

86,164,613

 

Total liabilities

 

2,212,434,653

 

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; 61,702,628 and 51,401,295 shares issued and outstanding, respectively

 

617,026

 

514,013

 

Additional paid-in capital

 

702,240,622

 

621,931,995

 

Accumulated deficit

 

(112,069,714

)

(125,134,403

)

Accumulated other comprehensive income

 

205,761

 

320,917

 

Total Arbor Realty Trust, Inc. stockholders’ equity

 

680,501,908

 

587,140,735

 

Noncontrolling interest

 

165,241,301

 

159,897,193

 

Total equity

 

845,743,209

 

747,037,928

 

Total liabilities and equity

 

$

3,058,177,862

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

42,139,576

 

$

29,636,227

 

$

110,132,866

 

$

83,424,190

 

Other interest income, net

 

 

 

 

2,539,274

 

Interest expense

 

23,849,417

 

16,966,228

 

63,697,641

 

42,958,329

 

Net interest income

 

18,290,159

 

12,669,999

 

46,435,225

 

43,005,135

 

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

17,126,106

 

9,693,822

 

55,127,004

 

9,693,822

 

Mortgage servicing rights

 

18,897,239

 

15,968,067

 

56,181,638

 

15,968,067

 

Servicing revenue, net

 

8,520,111

 

5,885,884

 

19,922,901

 

5,885,884

 

Property operating income

 

2,668,055

 

2,960,940

 

8,754,518

 

12,719,027

 

Other income, net

 

777,656

 

359,546

 

(929,893

)

663,977

 

Total other revenue

 

47,989,167

 

34,868,259

 

139,056,168

 

44,930,777

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

25,194,433

 

14,216,679

 

66,860,581

 

22,856,433

 

Selling and administrative

 

7,606,936

 

5,903,031

 

23,135,750

 

10,277,844

 

Acquisition costs

 

 

6,406,258

 

 

10,261,902

 

Property operating expenses

 

2,582,745

 

2,819,004

 

7,842,571

 

10,991,823

 

Depreciation and amortization

 

1,829,016

 

1,808,765

 

5,541,991

 

3,129,410

 

Impairment loss on real estate owned

 

 

 

2,700,000

 

11,200,000

 

Provision for loss sharing (net of recoveries)

 

(2,617,064

)

1,316,862

 

(405,494

)

1,316,862

 

Provision for loan losses (net of recoveries)

 

2,000,000

 

(54,000

)

(455,653

)

(24,995

)

Management fee - related party

 

 

3,325,000

 

6,673,260

 

8,875,000

 

Total other expenses

 

36,596,066

 

35,741,599

 

111,893,006

 

78,884,279

 

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

 

29,683,260

 

11,796,659

 

73,598,387

 

9,051,633

 

Gain on extinguishment of debt

 

 

 

7,116,243

 

 

Gain on sale of real estate

 

 

 

 

11,630,687

 

Income from equity affiliates

 

995,312

 

4,929,375

 

1,755,145

 

11,193,918

 

Provision for income taxes

 

(6,708,000

)

(300,000

)

(16,244,000

)

(300,000

)

Net income

 

23,970,572

 

16,426,034

 

66,225,775

 

31,576,238

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,665,290

 

Net income attributable to noncontrolling interest

 

5,661,184

 

3,649,432

 

16,596,415

 

3,649,432

 

Net income attributable to common stockholders

 

$

16,420,958

 

$

10,888,172

 

$

43,964,070

 

$

22,261,516

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.27

 

$

0.21

 

$

0.78

 

$

0.43

 

Diluted earnings per common share

 

$

0.26

 

$

0.21

 

$

0.77

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

61,582,796

 

51,390,467

 

56,602,504

 

51,272,795

 

Diluted

 

83,918,117

 

70,271,796

 

78,942,919

 

51,627,550

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.18

 

$

0.16

 

$

0.53

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net income

 

$

23,970,572

 

$

16,426,034

 

$

66,225,775

 

$

31,576,238

 

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

 

(235,158

)

(88,184

)

(352,735

)

(117,579

)

Unrealized gain (loss) on derivative financial instruments, net

 

 

66,254

 

202

 

(195,981

)

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

 

 

1,316,157

 

237,377

 

4,012,457

 

Comprehensive income

 

23,735,414

 

17,720,261

 

66,110,619

 

35,275,135

 

Less:

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

5,601,567

 

3,974,327

 

16,574,284

 

3,974,327

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,665,290

 

Comprehensive income attributable to common stockholders

 

$

16,245,417

 

$

11,857,504

 

$

43,871,045

 

$

25,635,518

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

Nine Months Ended September 30, 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

 

 

 

 

 

806,524

 

8,065

 

3,825,296

 

 

 

 

 

3,833,361

 

 

 

3,833,361

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(5,191

)

(52

)

52

 

 

 

 

 

 

 

 

 

Issuance of convertible senior unsecured notes, net

 

 

 

 

 

 

 

 

 

353,279

 

 

 

 

 

353,279

 

 

 

353,279

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(30,888,612

)

 

 

(30,888,612

)

 

 

(30,888,612

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(5,665,290

)

 

 

(5,665,290

)

 

 

(5,665,290

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(10,769

)

 

 

(10,769

)

 

 

(10,769

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,252,307

)

(11,252,307

)

Net income

 

 

 

 

 

 

 

 

 

 

 

49,629,360

 

 

 

49,629,360

 

16,596,415

 

66,225,775

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(352,735

)

(352,735

)

 

 

(352,735

)

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 — September 30, 2017

 

24,942,269

 

$

89,508,213

 

61,702,628

 

$

617,026

 

$

702,240,622

 

$

(112,069,714

)

$

205,761

 

$

680,501,908

 

$

165,241,301

 

$

845,743,209

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

Operating activities:

 

 

 

 

 

Net income

 

$

66,225,775

 

$

31,576,238

 

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

 

 

 

 

 

Depreciation and amortization

 

5,541,991

 

3,129,410

 

Stock-based compensation

 

3,833,361

 

2,940,174

 

Amortization and accretion of interest and fees, net

 

3,296,464

 

2,539,980

 

Amortization of capitalized mortgage servicing rights

 

35,427,217

 

7,586,524

 

Originations of loans held-for-sale

 

(3,287,578,091

)

(853,935,531

)

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

 

3,621,276,437

 

975,969,372

 

Payoffs and paydowns of loans held-for-sale

 

116,174

 

 

Mortgage servicing rights

 

(56,181,638

)

(15,968,067

)

Write-off of capitalized mortgage servicing rights from payoffs

 

10,713,274

 

1,669,081

 

Impairment loss on real estate owned

 

2,700,000

 

11,200,000

 

Provision for loan losses (net of recoveries)

 

(455,653

)

(24,995

)

Provision for loss sharing (net of recoveries)

 

(405,494

)

1,316,862

 

Net charge-offs for loss sharing obligations

 

(1,843,596

)

(2,131,178

)

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

 

15,000

 

 

Income from equity affiliates

 

(1,755,145

)

(11,193,918

)

Change in fair value of available-for-sale securities

 

343,642

 

46,021

 

Changes in operating assets and liabilities

 

(6,252,023

)

5,894,972

 

Net cash provided by operating activities

 

387,901,452

 

148,968,767

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded and originated, net

 

(1,051,445,805

)

(725,025,857

)

Payoffs and paydowns of loans and investments

 

758,138,665

 

531,874,076

 

Internalization of management team

 

(25,000,000

)

 

Deferred fees

 

7,213,824

 

7,412,018

 

Investments in real estate, net

 

(562,025

)

(611,497

)

Contributions to equity affiliates

 

(692,536

)

(4,641,973

)

Distributions from equity affiliates

 

2,340,710

 

731,942

 

Acquisition of the Agency Business, net of cash acquired

 

 

(68,356,323

)

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

 

(18,339,271

)

 

Payoffs and paydowns of securities held-to-maturity

 

76,300

 

 

Due to borrowers and reserves

 

(22,571,250

)

128,492

 

Net cash used in investing activities

 

(350,841,388

)

(207,892,135

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

6,073,385,393

 

1,681,492,236

 

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

 

(6,417,833,725

)

(1,807,884,108

)

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

 

561,874,000

 

250,250,000

 

Payoffs and paydowns of collateralized loan obligations

 

(219,000,000

)

 

Proceeds from convertible senior unsecured notes

 

13,750,000

 

 

Change in restricted cash

 

(107,793,983

)

(123,982,753

)

Receipts on swaps and returns of margin calls from counterparties

 

429,539

 

3,440,049

 

Distributions paid on common stock

 

(30,888,612

)

(23,573,786

)

Distributions paid on noncontrolling interest

 

(11,252,307

)

 

Distributions paid on preferred stock

 

(5,665,290

)

(5,665,290

)

Distributions paid on preferred stock of private REIT

 

(10,769

)

(10,849

)

Payment of deferred financing costs

 

(11,482,257

)

(5,081,844

)

Proceeds from issuance of common stock

 

76,225,000

 

 

Net cash used in financing activities

 

(90,954,097

)

(58,171,345

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(53,894,033

)

(117,094,713

)

Cash and cash equivalents at beginning of period

 

138,645,430

 

188,708,687

 

Cash and cash equivalents at end of period

 

$

84,751,397

 

$

71,613,974

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

53,150,362

 

$

36,287,261

 

Cash used to pay taxes

 

$

14,653,499

 

$

298,654

 

 

 

 

 

 

 

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

 

Distributions accrued on special voting preferred shares

 

$

 

$

3,396,923

 

Related party financing

 

$

 

$

50,000,000

 

Payment due on the acquisition of the Agency Business

 

$

 

$

11,416,610

 

Working capital adjustment on the acquisition of the Agency Business

 

$

 

$

7,982,584

 

Issuance of special voting preferred shares and operating partnership units in connection with the Acquisition

 

$

 

$

154,772,306

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 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 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 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 our opinion, 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 financial statements should be read in conjunction with our financial statements and notes thereto included in our 2016 Annual Report.

 

During the third quarter of 2017, we determined that the purchase price allocation related to the Acquisition in 2016 incorrectly omitted a deferred tax liability related to the book-to-tax difference in the value assigned to certain assets acquired. The impact of this omission to our 2016 consolidated financial statements was a $4.9 million understatement of goodwill and a corresponding understatement of other liabilities in our consolidated balance sheets. This omission had no impact on our results of operations and was corrected in the third quarter of 2017, resulting in a $4.9 million increase to goodwill and a corresponding increase in other liabilities.

 

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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

have a significant influence are accounted for under the equity method. See Note 16 — Variable Interest Entities for information about our VIEs. All significant intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us 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 October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-17, Consolidation: Interests Held through Related Parties That Are under Common Control. This ASU alters how a decision maker needs to consider indirect interests in a VIE held through an entity under common control and requires consideration of only an entity’s proportionate indirect interest in a VIE held through a common control party.

 

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 2016-09, 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.

 

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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

Description

 

Effective Date

 

Effect on 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.

 

 

 

 

 

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.

 

We have evaluated the new standard and determined that substantially all of our revenue, including interest income, loan origination fees, servicing income and gains on sales of loans and investment securities, are not impacted. This standard may impact the timing of gains on certain sales of real estate, however, we have determined that this standard will not materially impact our total revenues or footnote disclosures. We will adopt this standard in the first quarter of 2018 using the modified retrospective method for any contracts that are not complete as of the adoption date.

 

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 details about the seller financing and Note 17 — Equity for 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. See Note 2 — Basis of Presentation and Significant Accounting Policies for details of an adjustment made to the purchase price allocation in the third quarter of 2017.

 

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 that option and fully internalized 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)

September 30, 2017

 

Note 4 — Loans and Investments

 

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

 

 

 

September 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

 

$

1,841,484,888

 

88

%

129

 

5.89

%

19.0

 

0

%

72

%

Preferred equity investments

 

155,306,620

 

7

%

11

 

6.92

%

68.3

 

62

%

88

%

Mezzanine loans

 

72,328,033

 

4

%

8

 

10.24

%

26.9

 

29

%

69

%

Junior participation loan (4)

 

25,256,582

 

1

%

1

 

 

 

100

%

100

%

 

 

2,094,376,123

 

100

%

149

 

6.04

%

22.7

 

7

%

74

%

Allowance for loan losses

 

(83,255,922

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(13,564,216

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,997,555,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

(4)               This loan is currently past its maturity and is fully reserved.

 

Concentration of Credit Risk

 

We are subject to concentration risk in that, at September 30, 2017, the UPB related to 32 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 nine months ended September 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

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

contingent upon credit rating.  That is because all portfolio assets are subject to the level of scrutiny and ongoing analysis consistent with that of a “high-risk” loan.  Assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed.

 

Generally speaking, given our typical loan 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 September 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 $147.5 million and $150.5 million, respectively, and a weighted average last dollar LTV ratio of 94% and 95%, respectively.

 

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 converted to reflect the revised methodology described above.

 

 

 

September 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

 

$

1,556,114,399

 

75

%

pass/watch

 

5

%

73

%

Land

 

140,054,798

 

7

%

substandard

 

0

%

88

%

Commercial

 

133,230,000

 

6

%

pass

 

1

%

71

%

Office

 

133,143,446

 

6

%

pass/watch

 

19

%

71

%

Hotel

 

90,725,147

 

4

%

special mention

 

39

%

83

%

Retail

 

36,483,333

 

2

%

pass/watch

 

8

%

66

%

Healthcare

 

4,625,000

 

<1

%

special mention

 

0

%

73

%

Total

 

$

2,094,376,123

 

100

%

pass/watch

 

7

%

74

%

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,421,731,108

 

79

%

special mention

 

1

%

73

%

Land

 

137,255,369

 

8

%

substandard

 

2

%

92

%

Commercial

 

9,205,000

 

<1

%

special mention

 

12

%

69

%

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

%

Healthcare

 

5,550,000

 

<1

%

special mention

 

0

%

63

%

Total

 

$

1,790,159,966

 

100

%

special mention

 

6

%

75

%

 

Geographic Concentration Risk

 

As of September 30, 2017, 20%, 16%, 11% and 8% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas, California and Georgia, 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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

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 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

September 30,

 

Nine Months Ended

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

81,255,922

 

$

83,831,575

 

$

83,711,575

 

$

86,761,575

 

Provision for loan losses

 

2,000,000

 

 

2,000,000

 

59,005

 

Charge-offs

 

 

 

 

(2,959,005

)

Recoveries of reserves

 

 

(15,000

)

(2,455,653

)

(45,000

)

Allowance at end of period

 

$

83,255,922

 

$

83,816,575

 

$

83,255,922

 

$

83,816,575

 

 

During the three and nine months ended September 30, 2017, we determined that the fair value of the underlying collateral securing a preferred equity investment with an aggregate carrying value of $34.8 million was less than the net carrying value of the investment, resulting in a $2.0 million provision for loan losses. In addition, during the nine months ended September 30, 2017, a fully reserved mezzanine loan with a UPB of $1.8 million paid off in full, which resulted in a $1.8 million reserve recovery, and we recorded a reserve recovery of $0.7 million on a multifamily bridge loan.

 

During the nine months ended September 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 the nine months ended September 30, 2017 was 0.1%. The ratio of net charge-offs to the average loans and investments outstanding during the three and nine months ended September 30, 2016 were de minimis and (0.2)%, respectively.

 

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of September 30, 2017 and 2016.

 

We have six loans with a carrying value totaling $120.5 million at September 30, 2017 that are collateralized by a land development project. These loans were scheduled to mature in September 2017 and were extended to September 2018. The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $111.2 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.  As of September 30, 2017, we have cumulative allowances for loan losses of $49.1 million related to these loans.  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)

September 30, 2017

 

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

 

 

 

September 30, 2017

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 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

 

$

125,325,106

 

$

53,883,478

 

$

131,085,948

 

$

 

$

131,085,948

 

$

 

Hotel

 

34,750,000

 

34,750,000

 

5,700,000

 

34,750,000

 

 

34,750,000

 

370,877

 

Office

 

27,549,082

 

22,764,944

 

21,972,444

 

27,551,332

 

27,728

 

27,555,832

 

79,065

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

Multifamily

 

 

 

 

 

 

1,271,058

 

22,063

 

Total

 

$

195,085,030

 

$

184,540,050

 

$

83,255,922

 

$

195,087,280

 

$

27,728

 

$

196,362,838

 

$

472,005

 

 

 

 

December 31, 2016

 

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,925,677

 

$

53,883,478

 

$

130,012,569

 

$

 

$

128,740,618

 

$

 

Hotel

 

34,750,000

 

34,496,296

 

3,700,000

 

34,750,000

 

291,542

 

34,750,000

 

857,459

 

Office

 

27,562,582

 

22,778,444

 

21,972,444

 

27,569,332

 

23,601

 

27,573,832

 

69,763

 

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

 

2,654,615

 

22,937

 

5,004,615

 

134,142

 

Total

 

$

197,640,645

 

$

187,351,035

 

$

83,711,575

 

$

196,686,516

 

$

338,080

 

$

197,769,065

 

$

1,061,364

 

 


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

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

 

At September 30, 2017, five loans with an aggregate net carrying value of $32.6 million, net of related loan loss reserves of $27.9 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:

 

 

 

September 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

 

$

 

$

60,514,639

 

$

22,853,097

 

$

 

$

22,853,097

 

 

At September 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)

September 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 September 30, 2017

 

Nine Months Ended September 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

 

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

%

 

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

1

 

$

14,646,456

 

5.33

%

$

14,646,456

 

5.33

%

1

 

$

14,646,456

 

5.33

%

$

14,646,456

 

5.33

%

Office

 

1

 

2,315,000

 

4.03

%

2,315,000

 

4.03

%

1

 

2,315,000

 

4.03

%

2,315,000

 

4.03

%

 

 

2

 

$

16,961,456

 

5.15

%

$

16,961,456

 

5.15

%

2

 

$

16,961,456

 

5.15

%

$

16,961,456

 

5.15

%

 

The loan which was modified during the nine months ended September 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 September 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 September 30, 2017 and 2016 and no additional loans were considered to be impaired due to our troubled debt restructuring analysis for the three and nine months ended September 30, 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 September 30, 2017, we had total interest reserves of $30.1 million on 70 loans with an aggregate UPB of $1.09 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:

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Fannie Mae

 

$

185,188,000

 

$

538,189,475

 

Freddie Mac

 

142,312,000

 

124,102,000

 

FHA

 

1,033,203

 

56,247

 

 

 

328,533,203

 

662,347,722

 

Fair value of future MSR

 

5,450,662

 

13,145,814

 

Unearned discount

 

(715,889

)

(2,126,232

)

Loans held-for-sale, net

 

$

333,267,976

 

$

673,367,304

 

 

Our loans held-for-sale, net are typically sold within 60 days of loan origination and the gain on sales are included in gain on sales, including fee-based services, net in the consolidated statements of income. During the three and nine months ended September 30, 2017, we sold $1.05 billion and $3.62 billion, respectively, of loans held-for-sale and recorded gain on sales of $16.3 million and $52.1 million, respectively. During both the three and nine months ended September 30, 2016, we sold $551.8 million of loans held-for-sale, excluding $418.2 million of sales related to loans that were acquired on July 14, 2016 as part of the Acquisition, and recorded gain on sales of $9.0 million. At September 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.

 

15



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

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 our best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 7.1 years and 6.9 years at September 30, 2017 and December 31, 2016, respectively.

 

A summary of our capitalized MSR activity is as follows:

 

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

 

Acquired

 

Originated

 

Total

 

Acquired

 

Originated

 

Total

 

Balance at beginning of period

 

$

168,189,300

 

$

74,894,159

 

$

243,083,459

 

$

194,800,754

 

$

32,942,232

 

$

227,742,986

 

Additions

 

 

20,719,529

 

20,719,529

 

 

66,273,164

 

66,273,164

 

Amortization

 

(8,952,573

)

(2,758,805

)

(11,711,378

)

(29,074,057

)

(6,353,160

)

(35,427,217

)

Write-offs

 

(4,193,665

)

(22,286

)

(4,215,951

)

(10,683,635

)

(29,639

)

(10,713,274

)

Balance at end of period

 

$

155,043,062

 

$

92,832,597

 

$

247,875,659

 

$

155,043,062

 

$

92,832,597

 

$

247,875,659

 

 

 

 

Three and Nine Months Ended September 30, 2016

 

Balance at beginning of period

 

$

 

$

 

$

 

Additions

 

221,647,421

 

11,905,394

 

233,552,815

 

Amortization

 

(7,358,639

)

(227,885

)

(7,586,524

)

Write-offs

 

(1,669,081

)

 

(1,669,081

)

Balance at end of period

 

$

212,619,701

 

$

11,677,509

 

$

224,297,210

 

 

We recorded write-offs relating to specific MSRs, primarily due to prepayments of certain loans, of $4.2 million and $10.7 million during the three and nine months ended September 30, 2017, respectively, and $1.7 million during both the three and nine months ended September 30, 2016. We collected prepayment fees of $3.8 million and $7.9 million during the three and nine months ended September 30, 2017, respectively, and $1.5 million during both the three and nine months ended September 30, 2016, which are included as a component of servicing revenue, net on the consolidated statements of income. As of September 30, 2017 and December 31, 2016, we had no valuation allowance recorded on any of our MSRs.

 

The expected amortization of capitalized MSRs recorded as of September 30, 2017 is shown in the table below. Actual amortization may vary from these estimates.

 

Year

 

Amortization

 

2017 (three months ended 12/31/2017)

 

$

11,925,780

 

2018

 

45,577,306

 

2019

 

41,680,988

 

2020

 

35,461,494

 

2021

 

28,170,144

 

2022

 

22,176,139

 

Thereafter

 

62,883,808

 

Total

 

$

247,875,659

 

 

16



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

Note 7 — Mortgage Servicing

 

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

 

September 30, 2017

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

Percent of

 

Product

 

UPB

 

Total

 

State

 

Total

 

Fannie Mae

 

$

12,331,135,405

 

79

%

Texas

 

23

%

Freddie Mac

 

2,732,536,579

 

18

%

North Carolina

 

10

%

FHA

 

537,553,532

 

3

%

California

 

8

%

Total

 

$

15,601,225,516

 

100

%

New York

 

8

%

 

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

 

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 September 30, 2017 and December 31, 2016, our weighted average servicing fee was 48.0 basis points and 47.8 basis points, respectively. We held cash in escrow for these loans totaling $506.6 million and $401.7 million at September 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 (losses) reported in accumulated other comprehensive income.

 

17



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

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

 

 

 

September 30, 2017

 

 

 

Amortized 
Cost

 

Cummulative 
Unrealized Gain

 

Carrying Value / 
Estimated Fair 
Value

 

 

 

 

 

 

 

 

 

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

 

$

58,789

 

$

205,764

 

$

264,553

 

 

 

 

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.

 

A summary of our Agency IOs activity is as follows:

 

 

 

Three Months Ended 
September 30, 2017

 

Nine Months Ended 
September 30, 2017

 

Balance at beginning of period