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, 2016

 

Or

 

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

 

For the transition period from           to

 

Commission file number: 001-32136

 

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-0057959

(State or other jurisdiction of
incorporation)

 

(I.R.S. Employer
Identification No.)

 

 

 

333 Earle Ovington Boulevard, Suite 900
Uniondale, NY
(Address of principal executive offices)

 

11553
(Zip Code)

 

(516) 506-4200

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer   x

 

 

 

Non-accelerated filer o 
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, $0.01 par value per share: 51,401,295 outstanding as of November 8, 2016.

 

 

 



Table of Contents

 

ARBOR REALTY TRUST, INC.

 

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

2

Item 1. Financial Statements

2

Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015

2

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

3

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

4

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

5

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2016 and 2015

6

Notes to Consolidated Financial Statements (Unaudited)

8

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

54

Item 3. Quantitative and Qualitative Disclosures about Market Risk

73

Item 4. Controls and Procedures

74

PART II. OTHER INFORMATION

74

Item 1. Legal Proceedings

74

Item 1A. Risk Factors

74

Item 6. Exhibits

75

Signatures

77

 



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 (“GSEs”) affecting our ability to originate loans through GSE 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, 2015 (the “2015 Annual Report”), Definitive Proxy Statement on Schedule 14A we filed with the Securities and Exchange Commission (“SEC”) on April 22, 2016 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,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

71,613,974

 

$

188,708,687

 

Restricted cash

 

176,615,179

 

48,301,244

 

Loans and investments, net

 

1,656,748,937

 

1,450,334,341

 

Loans held-for-sale, net

 

310,252,600

 

 

Capitalized mortgage servicing rights, net

 

224,297,210

 

 

Available-for-sale securities, at fair value

 

5,214,998

 

2,022,030

 

Investments in equity affiliates

 

41,962,338

 

30,870,235

 

Real estate owned, net

 

19,762,787

 

60,845,509

 

Real estate held-for-sale, net

 

 

8,669,203

 

Due from related party

 

493,412

 

8,082,265

 

Goodwill and other intangible assets

 

99,932,986

 

 

Other assets

 

43,326,307

 

29,558,430

 

Total assets

 

$

2,650,220,728

 

$

1,827,391,944

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

431,060,399

 

$

136,252,135

 

Collateralized loan obligations

 

1,007,736,720

 

758,899,661

 

Senior unsecured notes

 

94,330,797

 

93,764,994

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

157,662,855

 

157,117,130

 

Mortgage note payable - real estate owned

 

 

27,155,000

 

Related party financing

 

50,000,000

 

 

Due to related party

 

18,583,192

 

3,428,333

 

Due to borrowers

 

50,823,894

 

34,629,595

 

Allowance for loss-sharing obligations

 

31,113,413

 

 

Other liabilities

 

83,477,916

 

51,054,321

 

Total liabilities

 

1,924,789,186

 

1,262,301,169

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

 

 

 

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 and no shares issued and outstanding, respectively; 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

 

89,295,905

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 51,401,295 and 50,962,516 shares issued and outstanding, respectively

 

514,013

 

509,625

 

Additional paid-in capital

 

619,179,982

 

616,244,196

 

Accumulated deficit

 

(137,441,120

)

(136,118,001

)

Accumulated other comprehensive loss

 

(1,142,053

)

(4,840,950

)

Total Arbor Realty Trust, Inc. stockholders’ equity

 

570,619,035

 

565,090,775

 

Noncontrolling interest

 

154,812,507

 

 

Total equity

 

725,431,542

 

565,090,775

 

Total liabilities and equity

 

$

2,650,220,728

 

$

1,827,391,944

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

29,636,227

 

$

26,025,709

 

$

83,424,190

 

$

79,575,689

 

Other interest income, net

 

 

 

2,539,274

 

7,884,344

 

Interest expense

 

16,966,228

 

11,885,363

 

42,958,329

 

37,405,492

 

Net interest income

 

12,669,999

 

14,140,346

 

43,005,135

 

50,054,541

 

Other revenue:

 

 

 

 

 

 

 

 

 

Fee-based services, including gain on sales, net

 

9,693,822

 

 

9,693,822

 

 

Mortgage servicing rights

 

15,968,067

 

 

15,968,067

 

 

Servicing revenue, net

 

5,885,884

 

 

5,885,884

 

 

Property operating income

 

2,960,940

 

7,202,851

 

12,719,027

 

22,855,028

 

Other income, net

 

359,546

 

51,633

 

663,977

 

164,449

 

Total other revenue

 

34,868,259

 

7,254,484

 

44,930,777

 

23,019,477

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

14,216,679

 

4,877,059

 

22,856,433

 

14,133,403

 

Selling and administrative

 

5,903,031

 

2,063,408

 

10,277,844

 

7,442,979

 

Acquisition costs

 

6,406,258

 

1,116,126

 

10,261,902

 

1,542,169

 

Property operating expenses

 

2,819,004

 

6,028,585

 

10,991,823

 

18,381,317

 

Depreciation and amortization

 

1,808,765

 

1,250,761

 

3,129,410

 

4,137,080

 

Impairment loss on real estate owned

 

 

 

11,200,000

 

 

Provision for loss sharing

 

1,316,862

 

 

1,316,862

 

 

Provision for loan losses (net of recoveries)

 

(54,000

)

277,464

 

(24,995

)

2,353,688

 

Management fee - related party

 

3,325,000

 

2,725,000

 

8,875,000

 

8,075,000

 

Total other expenses

 

35,741,599

 

18,338,403

 

78,884,279

 

56,065,636

 

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

 

11,796,659

 

3,056,427

 

9,051,633

 

17,008,382

 

Gain on acceleration of deferred income

 

 

8,162,720

 

 

19,171,882

 

Loss on termination of swaps

 

 

(340,197

)

 

(4,629,647

)

Gain on sale of real estate

 

 

 

11,630,687

 

3,984,364

 

Income from equity affiliates

 

4,929,375

 

6,353,239

 

11,193,918

 

10,983,177

 

Provision for income taxes

 

(300,000

)

 

(300,000

)

 

Net income

 

16,426,034

 

17,232,189

 

31,576,238

 

46,518,158

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,665,290

 

Net income attributable to noncontrolling interest

 

3,649,432

 

 

3,649,432

 

 

Net income attributable to common stockholders

 

$

10,888,172

 

$

15,343,759

 

$

22,261,516

 

$

40,852,868

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.21

 

$

0.30

 

$

0.43

 

$

0.80

 

Diluted earnings per common share

 

$

0.21

 

$

0.30

 

$

0.43

 

$

0.80

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,390,467

 

50,962,516

 

51,272,795

 

50,822,444

 

Diluted

 

70,271,796

 

50,962,516

 

51,627,550

 

50,917,442

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.16

 

$

0.15

 

$

0.46

 

$

0.43

 

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,426,034

 

$

17,232,189

 

$

31,576,238

 

$

46,518,158

 

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

 

(88,184

)

(176,368

)

(117,579

)

246,973

 

Unrealized gain (loss) on derivative financial instruments, net

 

66,254

 

(349,012

)

(195,981

)

(1,255,739

)

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

 

 

340,197

 

 

4,626,192

 

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

 

1,316,157

 

1,467,673

 

4,012,457

 

4,709,173

 

Comprehensive income

 

17,720,261

 

18,514,679

 

35,275,135

 

54,844,757

 

Less:

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

3,974,327

 

 

3,974,327

 

 

Preferred stock dividends

 

1,888,430

 

1,888,430

 

5,665,290

 

5,665,290

 

Comprehensive income attributable to common stockholders

 

$

11,857,504

 

$

16,626,249

 

$

25,635,518

 

$

49,179,467

 

 

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, 2016

 

 

 

Arbor Realty Trust, Inc. Stockholders’ Equity

 

 

 

 

 

 

 

Preferred 
Stock Shares

 

Preferred Stock
Value

 

Common 
Stock Shares

 

Common 
Stock Par 
Value

 

Additional Paid-
in Capital

 

Accumulated 
Deficit

 

Accumulated 
Other 
Comprehensive
Loss

 

Total Arbor 
Realty Trust, Inc.
Stockholders’
Equity

 

Noncontrolling 
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2016

 

3,711,500

 

$

89,295,905

 

50,962,516

 

$

509,625

 

$

616,244,196

 

$

(136,118,001

)

$

(4,840,950

)

$

565,090,775

 

$

 

$

565,090,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of special voting preferred shares and operating partnership units

 

21,230,769

 

212,308

 

 

 

 

 

 

 

 

 

 

 

212,308

 

154,559,998

 

154,772,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

439,780

 

4,398

 

2,935,776

 

 

 

 

 

2,940,174

 

 

 

2,940,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(1,001

)

(10

)

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(23,573,786

)

 

 

(23,573,786

)

 

 

(23,573,786

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(5,665,290

)

 

 

(5,665,290

)

 

 

(5,665,290

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(10,849

)

 

 

(10,849

)

 

 

(10,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,396,923

)

(3,396,923

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

27,926,806

 

 

 

27,926,806

 

3,649,432

 

31,576,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(117,579

)

(117,579

)

 

 

(117,579

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative financial instruments, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(195,981

)

(195,981

)

 

 

(195,981

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

4,012,457

 

4,012,457

 

 

 

4,012,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - September 30, 2016

 

24,942,269

 

$

89,508,213

 

51,401,295

 

$

514,013

 

$

619,179,982

 

$

(137,441,120

)

$

(1,142,053

)

$

570,619,035

 

$

154,812,507

 

$

725,431,542

 

 

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,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

31,576,238

 

$

46,518,158

 

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

 

 

 

 

 

Depreciation and amortization

 

3,129,410

 

4,137,080

 

Stock-based compensation

 

2,940,174

 

2,890,581

 

Amortization and accretion of interest and fees, net

 

2,539,980

 

1,709,609

 

Amortization of capitalized mortgage servicing rights

 

7,586,524

 

 

Originations of loans held-for-sale

 

(853,935,531

)

 

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

 

975,969,372

 

 

Mortgage servicing rights

 

(15,968,067

)

 

Write-off of capitalized mortgage servicing rights from payoffs

 

1,669,081

 

 

Impairment loss on real estate owned

 

11,200,000

 

 

Provision for loan losses (net of recoveries)

 

(24,995

)

2,353,688

 

Provision for loss sharing (net of recoveries)

 

1,316,862

 

 

Gain on acceleration of deferred income

 

 

(19,171,882

)

Allowance for loss-sharing obligations (net of charge-offs)

 

(2,131,178

)

 

Loss on termination of swaps

 

 

4,629,647

 

Gain on sale of real estate

 

(11,630,687

)

(3,984,364

)

Gain on sale of securities

 

(15,491

)

 

Income from equity affiliates

 

(11,193,918

)

(10,983,177

)

Change in fair value of available-for-sale securities

 

46,021

 

 

Changes in operating assets and liabilities

 

5,894,972

 

7,500,170

 

Net cash provided by operating activities

 

148,968,767

 

35,599,510

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded, originated and purchased, net

 

(725,025,857

)

(734,651,094

)

Payoffs and paydowns of loans and investments

 

531,874,076

 

698,138,074

 

Acquisition of the Agency Business, net of cash acquired

 

(68,356,323

)

 

Deferred fees

 

7,412,018

 

3,707,798

 

Principal collection on securities, net

 

 

2,100,000

 

Investments in real estate, net

 

(611,497

)

(2,025,366

)

Contributions to equity affiliates

 

(4,641,973

)

(17,017,972

)

Distributions from equity affiliates

 

731,942

 

 

Proceeds from sale of real estate

 

49,029,780

 

18,482,352

 

Proceeds from sale of available-for-sale securities

 

1,567,207

 

 

Due to borrowers and reserves

 

128,492

 

 

Net cash used in investing activities

 

(207,892,135

)

(31,266,208

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements, credit facilities and notes payable

 

1,681,492,236

 

555,589,837

 

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

 

(1,807,884,108

)

(612,512,543

)

Proceeds from mortgage note payable - real estate owned

 

 

27,155,000

 

Paydowns and payoffs of mortgage note payable - real estate owned

 

(27,155,000

)

(30,984,357

)

Proceeds from collateralized loan obligations

 

250,250,000

 

486,625,000

 

Payoffs and paydowns of collateralized debt obligations

 

 

(312,071,055

)

Payoffs and paydowns of collateralized loan obligations

 

 

(177,000,000

)

Change in restricted cash

 

(123,982,753

)

159,223,507

 

Payments on swaps and margin calls to counterparties

 

 

(290,000

)

Receipts on swaps and returns of margin calls from counterparties

 

3,440,049

 

3,330,000

 

Distributions paid on common stock

 

(23,573,786

)

(21,850,942

)

Distributions paid on preferred stock

 

(5,665,290

)

(5,665,290

)

Distributions paid on preferred stock of private REIT

 

(10,849

)

(10,566

)

Payment of deferred financing costs

 

(5,081,844

)

(10,676,809

)

Net cash (used in) provided by financing activities

 

(58,171,345

)

60,861,782

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(117,094,713

)

65,195,084

 

Cash and cash equivalents at beginning of period

 

188,708,687

 

50,417,745

 

Cash and cash equivalents at end of period

 

$

71,613,974

 

$

115,612,829

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

36,287,261

 

$

32,665,815

 

Cash used for taxes

 

$

298,654

 

$

385,932

 

 

 

 

 

 

 

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

 

$

 

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

 

$

 

$

17,516,488

 

Loan transferred to real estate owned, net

 

$

 

$

5,900,000

 

Satisfaction of participation loan

 

$

 

$

1,300,000

 

Retirement of participation liability

 

$

 

$

1,300,000

 

 

See Notes to Consolidated Financial Statements.

 

7



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (the “Company,” “we,” “us,” or “our”) is a Maryland corporation that was formed in 2003 and is externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM” or our “Manager”).  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. In addition, we may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities. We refer to this platform as our Structured Loan Origination and Investment Business, or “Structured Business.” As a result of the acquisition of the agency platform of our Manager on July 14, 2016 (the “Acquisition”), we also now 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 (“GNMA”), Federal Housing Authority (“FHA”) and the U.S. Department of Housing and Urban Development ( together with GNMA 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. We are approved as a Fannie Mae Delegated Underwriting and Servicing (“DUS”) lender nationally, a Freddie Mac Multifamily Conventional Loan lender, seller/servicer, in New York, New Jersey and Connecticut, a Freddie Mac affordable, manufactured housing, senior housing and small balance loan (“SBL”) lender, seller/servicer, nationally and a HUD Map and Lean senior housing/healthcare lender nationally. We refer to this platform as our Agency Loan Origination and Servicing Business, or “Agency Business.” See Note 3 — Acquisition of Our Manager’s Agency Platform for further details about the Acquisition.

 

Substantially all of our operations are conducted through our operating partnership, Arbor Realty Limited Partnership (“ARLP”), and ARLP’s subsidiaries.  We organize and conduct our operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. As a result of the Acquisition, we operate in two segments: Structured Business and Agency Business. See Note 23 — Segment Information for further details.

 

Note 2 — 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 2015 Annual Report, which was filed with the SEC.

 

The accompanying unaudited consolidated financial statements include our financial statements, our wholly owned subsidiaries, and partnerships or other joint ventures in which we own a voting interest of greater than 50 percent, and variable interest entities (“VIEs”) of which we are the primary beneficiary.  VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  Current accounting guidance requires us to present (a) assets of a consolidated VIE that can be used only to settle obligations of the consolidated VIE, and (b) liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary.  Entities in which we have significant influence are accounted for primarily under the equity method.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

As a REIT, we are generally not subject to U.S. federal income tax to the extent of our distributions to stockholders and as long as certain asset, income, distribution, ownership and administrative tests are met. To maintain our qualification as a REIT, we must annually distribute at least 90% of our REIT taxable income to our stockholders and meet certain other requirements. We may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. We believe that all of the criteria to maintain our REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

 

The Agency Business is operated through a taxable REIT subsidiary (“TRS”), which is a part of our TRS consolidated group (the “TRS Consolidated Group”) and may be subject to U.S. federal, state and local income taxes.  In general, our TRS entities may hold assets that the REIT cannot hold directly and may engage in real estate or non-real estate-related business.   Our TRS Consolidated Group has federal net operating losses from prior years which will be applied against the income from the Agency Business.  In the third quarter of 2016, we recorded a tax provision of $0.3 million related to state income tax liability.  Current and deferred taxes are recorded on the portion of earnings (losses) recognized by us with respect to our interest in TRSs. Deferred income tax assets and liabilities are calculated based on temporary differences between our U.S. GAAP consolidated financial statements and the federal, state, local tax basis of assets and liabilities as of the consolidated balance sheets.  We recorded a deferred tax liability of $14.8 million in connection with the Acquisition, which is included in Other liabilities on the consolidated balance sheets. The deferred tax liability is primarily attributable to the seller financing portion of the consideration paid for the Acquisition. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook.

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that could materially affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

 

Significant Accounting Policies

 

See Item 8Financial Statements and Supplementary Data in our 2015 Annual Report for a description of our significant accounting policies. In connection with the Acquisition, we have adopted the following additional significant accounting policies.

 

Loans Held-for-Sale, Net

 

Loans held-for-sale, net represents commercial real estate loans originated in our Agency Business, which are generally transferred or sold within 60 days from the date that the mortgage loan is funded. Such loans are reported at the lower of cost or market on an aggregate basis and include the value allocated to the associated future mortgage servicing rights. During the period prior to its sale, interest income on a loan held-for-sale is calculated in accordance with the terms of the individual loan and the loan origination fees and direct loan origination costs are deferred until the loan is sold.

 

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated, put presumptively beyond the reach of the entity, even in bankruptcy, (2) the transferee (or if the transferee is an entity whose sole purpose is to engage in securitization and the entity is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the transferred financial assets, and (3) we or our agents does not maintain effective control over the transferred financial assets or third-party beneficial interest related to those transferred assets through an agreement to repurchase them before their maturity. We have determined that all loans sold have met these specific conditions and accounts for all transfers of mortgage loans as completed sales.

 

Capitalized Mortgage Servicing Rights

 

We recognize, as separate assets, rights to service mortgage loans for others, including such rights that are created by the origination of mortgage loans that are sold with the servicing rights retained by the originator. Income from mortgage servicing rights (“MSRs”) is recognized when we record a derivative asset upon the commitment to originate a loan with a borrower and sell the loan to an investor. This commitment asset is recognized at fair value, which reflects the estimated fair value of the expected net cash flows associated with the servicing of the loan. When a mortgage loan is sold, we retain the right to service the loan and recognize the MSR at the initial capitalized valuation. We amortize MSRs using the amortization method, which requires the MSRs to be amortized in proportion to and over the period of estimated net servicing

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

income or net servicing loss and that the servicing assets or liabilities be assessed for impairment, or increased obligation, based on the fair value at each reporting date. Amortization of MSRs is recorded as a reduction of servicing revenues, net on the consolidated statements of income. The following assumptions were used in calculating each loan’s MSR for the periods presented:

 

Key rates:   We used discount rates ranging from 8% to 18%, representing a weighted average discount rate of 13%, based on management’s best estimate of market discount rates to determine the present value of MSRs. The inflation rate used for adequate compensation was 3%.

 

Servicing Cost:   The estimated future cost to service the loan for the estimated life of the MSR is subtracted from the estimated future cash flows.

 

Estimated Life:   We estimate the life of our MSRs based upon the stated yield maintenance and/or prepayment protection term of the underlying loan and may be reduced by 6 to 12 months based upon the expiration of various types of prepayment penalty and/or lockout provisions prior to that stated maturity date.

 

We carry MSRs at the lower of amortized cost or fair value and evaluate the carrying value for impairment on a portfolio basis quarterly. Fair values are estimated considering market prices for similar MSRs, when available, and by estimating the present value of the future net cash flows of the capitalized MSRs, net of adequate compensation for servicing. Adequate compensation is based on the market rate of similar servicing contracts. We estimate the terms of commercial servicing for each loan by assuming that servicing would not end prior to the yield maintenance date, if applicable, at which point the prepayment penalty expires. MSRs are amortized in proportion to and over the period of estimated net servicing income. We engage an independent third party to assist in determining an estimated fair value of our MSR portfolio on a quarterly basis.

 

We measure the impairment of MSRs based on the difference between the aggregate carrying amount of the MSRs and their aggregate fair value. For purposes of impairment evaluation, the MSRs are stratified based on predominant risk characteristics of the underlying loans, which we have identified as loan type, note rate and yield maintenance provisions. To the extent that the carrying value of the MSRs exceeds fair value, a valuation allowance is established.

 

We record write-offs of MSRs related to the loans that were repaid prior to the expected maturity and loans that have defaulted and determined to be unrecoverable. When this occurs, the write-off is recorded as a direct write-down to the carrying value of MSRs and is included as a component of servicing revenue, net on the statements of income. This direct write-down permanently reduces the carrying value of the MSRs, precluding recognition of subsequent recoveries.

 

Derivative Assets and Liabilities

 

Our rate lock and forward sales commitments associated with the Agency Business meet the definition of a derivative and are recorded at fair value in our consolidated balance sheets. The estimated fair value of rate lock commitments includes the effects of interest rate movements as well as the fair value of the expected net cash flows associated with the servicing of the loan which is recorded as income from mortgage servicing rights on the consolidated statements of income. The estimated fair value of forward sale commitments includes the effects of interest rate movements between the trade date and balance sheet date. Adjustments to the fair value are reflected as a component of other income, net on the consolidated statements of income.

 

Business Combinations

 

Business combinations are accounted for under the acquisition method of accounting, under which the purchase price is allocated to the fair value of the assets acquired and liabilities assumed at the acquisition date. The excess of the purchase price over the amount allocated to the assets acquired and liabilities assumed is recorded as goodwill. Adjustments to the assets acquired and liabilities assumed made during the measurement period are recorded in the period in which the adjustment is identified, with a corresponding adjustment to goodwill. If any adjustments are made subsequent to the measurement period, which could be up to one year after the acquisition date, these adjustments are recorded to the consolidated statements of income. Acquisition related costs are expensed as incurred.

 

Goodwill and Other Intangible Assets

 

Significant judgement is required to estimate the fair value of intangible assets and in assigning their respective estimated useful lives. Accordingly, we typically seek the assistance of independent third party valuation specialists for significant intangible assets. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

We generally use an income based valuation method to estimate the fair value of intangible assets, which discounts expected future cash flows to present value using estimates and assumptions determined and deemed reasonable by management. For intangible assets related to acquired technology, we use the replacement cost method to determine fair value.

 

Determining the estimated useful lives of intangible assets also requires judgment. Certain intangible assets, such as GSE licenses, have been deemed to have indefinite lives while other intangible assets, such as broker and borrower relationships, above/below market rent and acquired technology have been deemed to have finite lives. Our assessment as to which intangible assets are deemed to have finite or indefinite lives is based on several factors including economic barriers of entry for the acquired product lines, scarcity of available GSE licenses, technology life cycles, retention trends and our operating plans, among other factors.

 

Goodwill and indefinite-lived intangible assets are not amortized, while finite-lived intangible assets are amortized over the estimated useful lives of the assets on a straight-line basis.  Indefinite-lived intangible assets, including goodwill, are tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, with respect to goodwill, an impairment analysis is performed at least annually. We have elected to make the first day of our fiscal fourth quarter the annual impairment assessment date for goodwill. We first assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying value. If, based on that assessment, we believe it is more likely than not that the fair value is less than the carrying value, then a two-step goodwill impairment test is performed.

 

Allowance for Loss-Sharing Obligations

 

When a loan is sold under the Fannie Mae DUS program, we undertake an obligation to partially guarantee the performance of the loan. Generally, we are responsible for losses equal to the first 5% of the unpaid principal balance (“UPB”) and a portion of any additional losses to an overall maximum of 20% of the original principal balance. Fannie Mae bears any remaining loss. In addition, under the terms of the master loss-sharing agreement with Fannie Mae, we are responsible for funding 100% of mortgage delinquencies (principal and interest) and servicing advances (taxes, insurance and foreclosure costs) until the amounts advanced exceeds 5% of the UPB at the date of default. Thereafter, we may request interim loss-sharing adjustments which allow us to fund 25% of such advances until final settlement.

 

At inception, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized. In determining the fair value of the guaranty obligation, we consider the risk profile of the collateral and the historical loss experience in our portfolio. The guaranty obligation is removed only upon either the expiration or settlement of the guaranty.

 

We evaluate the allowance for loss-sharing obligations by monitoring the performance of each loss-sharing loan for events or conditions which may signal a potential default. Historically, initial loss recognition occurs at or before a loan becomes 60 days delinquent. In instances where payment under the guaranty on a specific loan is determined to be probable and estimable (as the loan is probable of foreclosure or is in foreclosure), we record a liability for the estimated allowance for loss-sharing (a “specific reserve”) by transferring the guarantee obligation recorded on the loan to the specific reserve with any adjustments to this reserve amount recorded in provision for loss sharing in the statements of income, along with a write-off of the associated loan-specific MSR. The amount of the allowance considers our assessment of the likelihood of repayment by the borrower or key principal(s), the risk characteristics of the loan, the loan’s risk rating, historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. We regularly monitor the specific reserves on all applicable loans and update loss estimates as current information is received.

 

Revenue Recognition

 

Fee-based services related to our Agency Business includes commitment fees, broker fees, loan assumption fees, loan origination fees and gains on sale of loans. In some instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, net of any direct loan origination costs incurred, which is

 

11



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

recognized upon sale of the loan. Revenue recognition occurs when the related services are performed, unless significant contingencies exist, and for the sale of loans, when all the incidence of ownership passes to the buyer. Interest income is recognized on the accrual basis as it is earned from loans held-for-sale.

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) amended its guidance to reflect eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for us beginning in the first quarter of 2018 and requires adoption on a retrospective basis, unless it is impracticable for us to apply, in which case, we would be required to apply the amendment prospectively as of the earliest date practicable.  We are currently evaluating the impact this guidance may have on our consolidated statement of cash flows.

 

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

 

In March 2016, the FASB amended its guidance on stock compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for the first quarter of 2017 and we do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In March 2016, the FASB amended its guidance on accounting for equity method investments. Among other things, the amended guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance is effective for the first quarter of 2017 and we do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

 

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

 

In January 2016, the FASB amended its guidance on the recognition and measurement of financial assets and liabilities.  The amended guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair

 

12



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

value recognized in net income. This update also, among other things, eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is effective for the first quarter of 2018 and we are currently evaluating the impact it may have on our consolidated financial statements.

 

In May 2014, the FASB amended its revenue recognition guidance. Among other things, the amended guidance outlines a framework for a single comprehensive model that entities can use when accounting for revenue and supersedes most current revenue recognition guidance, including that which pertains to specific industries such as homebuilding (e.g., sales of real estate, etc.). 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 the users of an entity’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for the first quarter of 2018. We are currently evaluating the impact this guidance may have on our consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

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

 

In February 2015, the FASB amended its guidance on the consolidation analysis of VIEs.  The guidance was effective for the first quarter of 2016 and it did not have a material impact on our consolidated financial statements. See Note 15 — Variable Interest Entities for further details.

 

Note 3 — Acquisition of Our Manager’s Agency Platform

 

On July 14, 2016, we completed the previously announced Acquisition pursuant to an asset purchase agreement (“Purchase Agreement”) dated February 25, 2016. The aggregate purchase price was $275.8 million, which was paid with $138.0 million in stock, $87.8 million in cash and with the issuance of a $50.0 million seller financing instrument. The equity component of the purchase price was paid with 21,230,769 operating partnership units (“OP Units”), which was based on a stock price of $6.50 per share. The closing price of our common stock on the day of the Acquisition was $7.29 per share; therefore, the estimated fair value of the total consideration given to our Manager was $292.5 million.  Each of these OP Units are paired with one share of our Special Voting Preferred Shares, which provides ACM with one vote per share on any matter submitted to a vote of our stockholders. The OP Units are entitled to receive distributions if and when our Board of Directors authorizes and declares future common stock distributions. The OP Units are also redeemable for cash, or at our option, for shares of our common stock on a one-for-one basis. See Note 12 — Debt Obligations for further details about the seller financing and Note 18 — Equity for further details about the OP Units.

 

All ACM employees directly related to the Agency Business (approximately 235) have become our employees as of the Acquisition date. In addition, pursuant to the Purchase Agreement, we have a two year option to purchase the existing management agreement and fully internalize our management structure for $25.0 million (increasing to $27.0 million in the second year). The exercise of this option is at the discretion of the special committee of our Board of Directors, which has no obligation to exercise its option.

 

We performed a preliminary allocation of the purchase price to the underlying assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition date, with the excess of the purchase price allocated to goodwill. We have not finalized the analysis of certain acquired assets and liabilities assumed. However, we are continuing our review of these items during the measurement period and any further changes to the preliminary purchase price allocation will be recognized as the valuations are finalized, which could change the amount of the purchase price allocated to goodwill. The preliminary purchase price allocations are summarized as follows:

 

13



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

Purchase Price:

 

 

 

Issuance of 21,230,769 OP Units at $7.29 per share
(based on the closing stock price at the date of Acquisition)

 

$

154,772,306

 

Cash on hand

 

87,755,517

 

Borrowings from seller financing - related party

 

50,000,000

 

Total consideration

 

$

292,527,823

 

 

 

 

 

Allocated to:

 

 

 

Cash and cash equivalents

 

$

7,982,584

 

Restricted cash

 

5,000,000

 

Loans held-for-sale, net

 

424,796,318

 

Available-for-sale securities, at fair value

 

4,908,283

 

Capitalized mortgage servicing rights, net

 

221,647,421

 

Fixed assets

 

5,216,972

 

Other assets

 

10,752,173

 

Finite-lived intangible assets

 

44,310,000

 

Infinite-lived intangible assets

 

29,000,000

 

Credit facilities and repurchase agrements

 

(420,889,886

)

Allowance for loss-sharing obligations

 

(32,616,821

)

Other liabilities

 

(35,369,251

)

Goodwill

 

27,790,030

 

Net assets acquired

 

$

292,527,823

 

 

In connection with the Acquisition, we recorded goodwill as a result of the total consideration exceeding the fair value of the assets acquired and liabilities assumed. The Goodwill was attributed to our Agency Business as it relates to the assets we acquired in the Acquisition. See Note 4 — Goodwill and Other Intangible Assets for further details about the identified intangible assets.

 

The total revenues and pre-tax income associated with the Agency Business from the date of Acquisition, which is included in the consolidated statements of income for both the three and nine months ended September 30, 2016, were $34.5 million and $14.3 million, respectively.

 

The following unaudited pro forma financial information presents the revenues and earnings of the combined entity, as if the Acquisition occurred as of January 1, 2015. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported had the Acquisition been completed as of January 1, 2015 and should not be taken as indicative of our future consolidated results of operations.

 

 

 

Nine Months Ended September 30,

 

Supplementary Pro Forma Information

 

2016

 

2015

 

Revenues

 

$

212,136,723

 

$

198,178,465

 

Net income attributable to noncontrolling interest

 

$

18,262,614

 

$

17,338,814

 

Net income attributable to common stockholders

 

$

40,329,043

 

$

41,543,271

 

Diluted earnings per common share

 

$

0.78

 

$

0.82

 

 

In connection with the Acquisition, we incurred legal and advisory fees totaling $6.4 million and $10.3 million during the three and nine months ended September 30, 2016, respectively, and fees totaling $14.7 million to date. We do not expect to recognize any significant additional fees in connection with the Acquisition.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

Note 4 — Goodwill and Other Intangible Assets

 

Goodwill

 

The following table sets forth the goodwill activity for the nine months ended September 30, 2016:

 

 

 

As of and for the 
Nine Months Ended 
September 30, 2016

 

Beginning balance

 

$

 

Additions from the Acquisition

 

27,790,030

 

Impairment

 

 

Ending balance

 

$

27,790,030

 

 

Other Intangible Assets

 

The following table sets forth the other intangible assets activity for the nine months ended September 30, 2016:

 

 

 

Gross Carrying Value

 

Accumulated Amortization

 

 

 

December 31,
2015

 

Additions

 

September 30,
2016

 

December 31,
2015

 

Additions

 

September 30,
2016

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Broker relationships

 

$

 

$

25,000,000

 

$

25,000,000

 

$

 

$

651,042

 

$

651,042

 

Borrower relationships

 

 

14,400,000

 

14,400,000

 

 

300,000

 

300,000

 

Below market leases

 

 

4,010,000

 

4,010,000

 

 

153,502

 

153,502

 

Acquired technology

 

 

900,000

 

900,000

 

 

62,500

 

62,500

 

Infinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae DUS license

 

 

17,100,000

 

17,100,000

 

 

 

 

Freddie Mac Program Plus license

 

 

8,700,000

 

8,700,000

 

 

 

 

FHA license

 

 

3,200,000

 

3,200,000

 

 

 

 

 

 

$

 

$

73,310,000

 

$

73,310,000

 

$

 

$

1,167,044

 

$

1,167,044

 

 

The finite-lived intangible assets recorded in connection with the Acquisition have the following useful lives: broker relationships — 8 years; borrower relationships — 10 years; below market leases — 3.5-10.6 years and acquired technology — 3 years.

 

The weighted average remaining lives of our amortizable finite-lived intangible assets as of September 30, 2016 and the estimated amortization expense for each of the succeeding five years are as follows:

 

 

 

Weighted 

 

Estimated Amortization Expense

 

 

 

Average 
Remaining 

 

Three Months 
Ended December 31,

 

Years Ending December 31,

 

 

 

Life (in years)

 

2016

 

2017

 

2018

 

2019

 

2020

 

2021

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broker relationships

 

7.8

 

$

781,250

 

$

3,125,000

 

$

3,125,000

 

$

3,125,000

 

$

3,125,000

 

$

3,125,000

 

Borrower relationships

 

9.8

 

360,000

 

1,440,000

 

1,440,000

 

1,440,000

 

1,440,000

 

1,440,000

 

Below market leases

 

6.3

 

184,203

 

736,811

 

736,811

 

736,811

 

684,137

 

126,118

 

Acquired technology

 

2.8

 

75,000

 

300,000

 

300,000

 

162,500

 

 

 

 

 

8.2

 

$

1,400,453

 

$

5,601,811

 

$

5,601,811

 

$

5,464,311

 

$

5,249,137

 

$

4,691,118

 

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

Note 5 — Loans and Investments

 

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

 

 

 

September 30, 2016

 

Percent of 
Total

 

Loan 
Count

 

Wtd. Avg. 
Pay Rate (1)

 

Wtd. Avg. 
Remaining 
Months to 
Maturity

 

Wtd. Avg. 
First Dollar 
LTV Ratio (2)

 

Wtd. Avg. 
Last Dollar 
LTV Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,566,037,772

 

89

%

120

 

5.34

%

17.1

 

0

%

74

%

Mezzanine loans

 

51,181,279

 

3

%

11

 

8.84

%

20.3

 

36

%

78

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

7.0

 

83

%

84

%

Preferred equity investments

 

71,596,941

 

4

%

10

 

6.79

%

26.4

 

43

%

92

%

 

 

1,751,072,574

 

100

%

143

 

5.47

%

17.2

 

6

%

75

%

Unearned revenue

 

(10,507,062

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(83,816,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,656,748,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Percent of 
Total

 

Loan 
Count

 

Wtd. Avg. 
Pay Rate (1)

 

Wtd. Avg. 
Remaining 
Months to 
Maturity

 

Wtd. Avg. 
First Dollar 
LTV Ratio (2)

 

Wtd. Avg. 
Last Dollar 
LTV Ratio (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,353,132,435

 

88

%

105

 

5.48

%

16.7

 

0

%

75

%

Mezzanine loans

 

40,390,905

 

3

%

11

 

8.19

%

32.9

 

35

%

83

%

Junior participation loans

 

62,256,582

 

4

%

2

 

4.50

%

11.2

 

85

%

87

%

Preferred equity investments

 

89,346,123

 

5

%

10

 

7.52

%

30.5

 

43

%

80

%

 

 

1,545,126,045

 

100

%

128

 

5.63

%

17.7

 

7

%

76

%

Unearned revenue

 

(8,030,129

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(86,761,575

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,450,334,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1) “Weighted Average Pay Rate” is a weighted average, based on the UPB of each loan in our portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements.  Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.

 

(2) The “First Dollar LTV Ratio” is calculated by comparing the total of our senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will absorb a total loss of our position.

 

(3) The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.

 

During the first quarter of 2015, we acquired a $116.0 million defaulted first mortgage, at par, that paid off in the subsequent quarter resulting in the recognition of income totaling $6.7 million, net of fees and expenses. The $6.7 million of income consisted of other interest income totaling $7.9 million, partially offset by $1.2 million of expenses related to this transaction that were recorded in employee compensation and benefits. In the second quarter of 2016, additional funds held in escrow from the note payoff were released following an arbitration proceeding and we recognized income totaling $1.9 million, net of fees and expenses. The $1.9 million of income consisted of other interest income totaling $2.5 million, partially offset by $0.6 million of expenses related to the transaction that were recorded in employee compensation and benefits.

 

Concentration of Credit Risk

 

Commercial mortgage loans and investments can potentially subject us to concentrations of credit risk.  We are subject to concentration risk in that, at September 30, 2016, the UPB related to 34 loans with five different borrowers represented 18% of total assets.  At December 31, 2015, the UPB related to 22 loans with five different borrowers represented 22% of total assets.  We measure our relative loss position for our mezzanine loans, junior participation loans, and preferred equity investments by determining the point where we will be exposed to losses

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

based on our position in the capital stack as compared to the fair value of the underlying collateral.  We determine our loss position on both a first dollar loan-to-value (“LTV”) and a last dollar LTV basis.

 

We assign a credit risk rating to each loan and investment.  Individual ratings range from one to five, with one being the lowest risk and five being the highest.  Each credit risk rating has benchmark guidelines that pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves.  Other factors such as guarantees, market strength, remaining loan term, and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan.  This metric provides a helpful snapshot of portfolio quality and credit risk.  Given our asset management approach, however, the risk rating process does not result in differing levels of diligence contingent upon credit rating.  That is because all portfolio assets are subject to the level of scrutiny and ongoing analysis consistent with that of a “high-risk” loan.  Assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed.  Generally speaking, given our typical loan and investment profile, a risk rating of three suggests that we expect the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired.  A risk rating of four indicates we anticipate that the loan will require a modification of some kind.  A risk rating of five indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal.  Ratings of 3.5 and 4.5 generally indicate loans that have characteristics of both the immediately higher and lower classifications.  Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, condition of the market of the underlying collateral, additional collateral or other credit enhancements, or loan terms, may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

 

As a result of the loan review process at September 30, 2016 and December 31, 2015, we identified loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $152.1 million and $154.7 million, respectively, and a weighted average last dollar LTV ratio of 94% and 99%, respectively.

 

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

 

 

 

September 30, 2016

 

Asset Class

 

Unpaid Principal
Balance

 

Percentage of
Portfolio

 

Wtd. Avg. 
Internal 
Risk Rating

 

Wtd. Avg. 
First Dollar 
LTV Ratio

 

Wtd. Avg.
 Last Dollar 
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,404,683,724

 

80

%

2.9

 

1

%

74

%

Office

 

135,716,939

 

8

%

3.4

 

44

%

71

%

Land

 

136,341,553

 

8

%

3.9

 

4

%

92

%

Hotel

 

55,592,025

 

3

%

3.8

 

38

%

81

%

Other

 

18,738,333

 

1

%

3.2

 

23

%

72

%

Total

 

$

1,751,072,574

 

100

%

3.0

 

6

%

75

%

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,083,822,788

 

70

%

3.0

 

2

%

75

%

Office

 

198,829,086

 

13

%

3.0

 

27

%

75

%

Land

 

164,410,838

 

11

%

3.8

 

5

%

90

%

Hotel

 

66,250,000

 

4

%

3.5

 

32

%

80

%

Other

 

31,813,333

 

2

%

3.1

 

13

%

67

%

Total

 

$

1,545,126,045

 

100

%

3.1

 

7

%

76

%

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

Geographic Concentration Risk

 

As of September 30, 2016, 26%, 15%, 15% and 13% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Florida, California and Texas, respectively.  As of December 31, 2015, 34%, 14%, 14% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Florida, California and Texas, respectively.

 

Impaired Loans and Allowance for Loan Losses

 

We perform an evaluation of the loan portfolio quarterly to assess the performance of our loans and whether a reserve for impairment should be recorded.  We consider a loan impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due for both principal and accrued interest according to the contractual terms of the loan agreement.

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

83,831,575

 

$

117,563,544

 

$

86,761,575

 

$

115,487,320

 

Provision for loan losses

 

 

982,453

 

59,005

 

3,093,082

 

Charge-offs

 

 

(32,000,000

)

(2,959,005

)

(32,000,000

)

Charge-off on loan reclassification to real estate owned, net

 

 

(2,500,000

)

 

(2,500,000

)

Recoveries of reserves

 

(15,000

)

(685,489

)

(45,000

)

(719,894

)

Allownace at end of period

 

$

83,816,575

 

$

83,360,508

 

$

83,816,575

 

$

83,360,508

 

 

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

 

The provision for loan losses recorded in the three and nine months ended September 30, 2015 was comprised of two loans and four loans, respectively, with aggregate carrying values before reserves of $117.2 million and $130.2 million, respectively. The provision for loan losses recorded in the nine month period included a loan that was transferred to real estate owned with a carrying value before reserves of $8.3 million.

 

During the three and nine months ended September 30, 2015, we charged-off $32.0 million of previously recorded reserves due to the write-off of a fully reserved junior participation loan. We also charged-off $2.5 million in connection with the transfer of an office building by deed in lieu of foreclosure to real estate owned, net.

 

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

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Hotel

 

$

 

$

32,000,000

 

$

 

$

32,000,000

 

Office

 

 

2,500,000

 

 

2,500,000

 

Multifamily

 

 

 

2,959,005

 

 

Total

 

$

 

$

34,500,000

 

$

2,959,005

 

$

34,500,000

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Multifamily

 

$

(15,000

)

$

(685,489

)

$

(45,000

)

$

(719,894

)

Total

 

$

(15,000

)

$

(685,489

)

$

(45,000

)

$

(719,894

)

 

 

 

 

 

 

 

 

 

 

Net Recoveries (Charge-offs)

 

$

15,000

 

$

(33,814,511

)

$

(2,914,005

)

$

(33,780,106

)

 

 

 

 

 

 

 

 

 

 

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

 

0.0

%

(2.0

)%

(0.2

)%

(2.1

)%

 

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, 2016 and 2015.

 

We have six loans with a carrying value totaling $120.2 million at September 30, 2016, which mature in September 2017, that are collateralized by a land development project.  The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $110.9 million entitle us to a weighted average accrual rate of interest of 8.18%.  We suspended the recording of the accrual rate of interest on these loans, as these loans were impaired and we deemed the collection of this interest to be doubtful.  We have recorded cumulative allowances for loan losses of $49.1 million related to these loans as of September 30, 2016.  The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development’s outputs upon completion of the project, and litigation risk.  Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

 

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

 

 

 

September 30, 2016

 

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

Asset Class

 

Unpaid 
Principal 
Balance

 

Carrying Value
(1)

 

Allowance for
Loan Losses

 

Average Recorded
Investment (2)

 

Interest Income
Recognized

 

Average Recorded
Investment (2)

 

Interest Income
Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

2,647,115

 

$

2,555,618

 

$

2,560,653

 

$

2,654,615

 

$

22,937

 

$

5,004,615

 

$

134,142

 

Office

 

27,567,082

 

22,782,944

 

21,972,444

 

27,569,332

 

23,601

 

27,573,832

 

69,763

 

Land

 

130,012,569

 

125,011,860

 

53,883,478

 

130,012,569

 

 

128,740,618

 

 

Hotel

 

34,750,000

 

34,400,000

 

3,700,000

 

34,750,000

 

291,542

 

34,750,000

 

857,459

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

Total

 

$

196,676,766

 

$

186,450,422

 

$

83,816,575

 

$

196,686,516

 

$

338,080

 

$

197,769,065

 

$

1,061,364

 

 

 

 

December 31, 2015

 

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

7,362,115

 

$

7,350,764

 

$

5,505,653

 

$

23,291,302

 

$

109,115

 

$

23,308,505

 

$

253,096

 

Office

 

27,580,582

 

22,796,444

 

21,972,444

 

31,835,832

 

1,225,877

 

31,835,832

 

1,782,922

 

Land

 

127,468,667

 

122,875,774

 

53,883,478

 

124,865,743

 

 

123,742,628

 

 

Hotel

 

34,750,000

 

34,486,433

 

3,700,000

 

34,750,000

 

264,898

 

34,750,000

 

782,926

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

 

 

 

 

Total

 

$

198,861,364

 

$

189,209,415

 

$

86,761,575

 

$

214,742,877

 

$

1,599,890

 

$

213,636,965

 

$

2,818,944

 

 


(1) Represents the UPB of impaired loans less unearned revenue and other holdbacks and adjustments by asset class and was comprised of nine loans at both September 30, 2016 and December 31, 2015.

 

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

 

19



Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

 

As of September 30, 2016, four loans with an aggregate net carrying value of $1.7 million, net of related loan loss reserves on the loans of $22.9 million, were classified as non-performing.  As of December 31, 2015, three loans with an aggregate net carrying value of less than $0.1 million, net of related loan loss reserves on the loans of $22.9 million, were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis only to the extent it is received.  Full income recognition will resume when the loan becomes contractually current and performance has recommenced.

 

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

 

 

 

September 30, 2016

 

December 31, 2015

 

Asset Class

 

Carrying 
Value

 

Less Than 90 
Days Past Due

 

Greater Than 
90 Days Past 
Due

 

Carrying 
Value

 

Less Than 90 
Days Past Due

 

Greater Than 
90 Days Past 
Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

770,653

 

$

 

$

770,653

 

$

765,799

 

$

 

$

765,799

 

Office

 

22,170,795

 

 

22,170,795

 

20,472,444

 

 

20,472,444

 

Commercial

 

1,700,000

 

 

1,700,000

 

1,700,000

 

 

1,700,000

 

Total

 

$

24,641,448

 

$

 

$

24,641,448

 

$

22,938,243

 

$

 

$

22,938,243

 

 

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

 

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

 

 

 

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

Asset Class

 

Number 
of Loans

 

Original 
Unpaid 
Principal 
Balance

 

Original 
Weighted 
Average 
Rate of 
Interest

 

Extended 
Unpaid 
Principal 
Balance

 

Extended 
Weighted 
Average 
Rate of 
Interest