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 SeptemberJune 30, 20172018

 

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)

 

11553
(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer

o

Accelerated filer     x

Smaller reporting companyo

o

Non-accelerated filer

o

(Do (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: 61,702,62875,390,813 outstanding as of OctoberJuly 27, 2017.2018.

 

 

 



Table of Contents

 

INDEX

 

PART I. FINANCIAL INFORMATION

2

Item 1. Financial Statements (Unaudited)

2

Consolidated Balance Sheets

2

Consolidated Statements of Income

3

Consolidated Statements of Comprehensive Income

4

Consolidated Statement of Changes in Equity

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

8

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

5048

Item 3. Quantitative and Qualitative Disclosures about Market Risk

6462

Item 4. Controls and Procedures

6563

PART II. OTHER INFORMATION

6563

Item 1. Legal Proceedings

6563

Item 1A. Risk Factors

6563

Item 6. Exhibits

6663

Signatures

6765

 



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’sour 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, 20162017 (the “2016“2017 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 3, 2017February 23, 2018 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

($ in thousands, except share and per share data)

 

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

106,968

 

$

104,374

 

Restricted cash

 

173,686

 

139,398

 

Loans and investments, net

 

3,064,798

 

2,579,127

 

Loans held-for-sale, net

 

311,487

 

297,443

 

Capitalized mortgage servicing rights, net

 

257,021

 

252,608

 

Securities held-to-maturity, net

 

50,342

 

27,837

 

Investments in equity affiliates

 

24,144

 

23,653

 

Real estate owned, net

 

14,650

 

16,787

 

Due from related party

 

10,162

 

688

 

Goodwill and other intangible assets

 

118,965

 

121,766

 

Other assets

 

72,097

 

62,264

 

Total assets

 

$

4,204,320

 

$

3,625,945

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

910,504

 

$

528,573

 

Collateralized loan obligations

 

1,590,644

 

1,418,422

 

Debt fund

 

68,270

 

68,084

 

Senior unsecured notes

 

122,343

 

95,280

 

Convertible senior unsecured notes, net

 

235,431

 

231,287

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

139,909

 

139,590

 

Related party financing

 

 

50,000

 

Due to related party

 

335

 

 

Due to borrowers

 

78,159

 

99,829

 

Allowance for loss-sharing obligations

 

31,402

 

30,511

 

Other liabilities

 

83,811

 

99,813

 

Total liabilities

 

3,260,808

 

2,761,389

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

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, $38,788 aggregate liquidation preference; 1,551,500 shares issued and outstanding; 7.75% Series B, $31,500 aggregate liquidation preference; 1,260,000 shares issued and outstanding; 8.50% Series C, $22,500 aggregate liquidation preference; 900,000 shares issued and outstanding

 

89,508

 

89,508

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 68,570,617 and 61,723,387 shares issued and outstanding, respectively

 

686

 

617

 

Additional paid-in capital

 

766,933

 

707,450

 

Accumulated deficit

 

(87,128

)

(101,926

)

Accumulated other comprehensive income

 

 

176

 

Total Arbor Realty Trust, Inc. stockholders’ equity

 

769,999

 

695,825

 

Noncontrolling interest

 

173,513

 

168,731

 

Total equity

 

943,512

 

864,556

 

Total liabilities and equity

 

$

4,204,320

 

$

3,625,945

 

 

See Notes to Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

($ in thousands, except share and per share data)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Interest income

 

$

59,295

 

$

34,468

 

$

110,908

 

$

67,993

 

Interest expense

 

37,884

 

20,411

 

71,271

 

39,848

 

Net interest income

 

21,411

 

14,057

 

39,637

 

28,145

 

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

15,622

 

18,830

 

33,815

 

38,001

 

Mortgage servicing rights

 

17,936

 

17,254

 

37,571

 

37,284

 

Servicing revenue, net

 

10,871

 

6,609

 

20,418

 

11,403

 

Property operating income

 

2,964

 

2,863

 

5,874

 

6,086

 

Other income, net

 

(470

)

(821

)

2,408

 

(1,707

)

Total other revenue

 

46,923

 

44,735

 

100,086

 

91,067

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

26,815

 

21,825

 

56,309

 

41,666

 

Selling and administrative

 

8,873

 

7,835

 

17,789

 

15,529

 

Property operating expenses

 

2,856

 

2,622

 

5,652

 

5,260

 

Depreciation and amortization

 

1,845

 

1,816

 

3,691

 

3,713

 

Impairment loss on real estate owned

 

2,000

 

1,500

 

2,000

 

2,700

 

Provision for loss sharing (net of recoveries)

 

348

 

532

 

821

 

2,212

 

Provision for loan losses (net of recoveries)

 

(2,127

)

(1,760

)

(1,802

)

(2,456

)

Management fee - related party

 

 

2,673

 

 

6,673

 

Total other expenses

 

40,610

 

37,043

 

84,460

 

75,297

 

Income before gain on extinguishment of debt, income (loss) from equity affiliates and income taxes

 

27,724

 

21,749

 

55,263

 

43,915

 

Gain on extinguishment of debt

 

 

 

 

7,116

 

Income (loss) from equity affiliates

 

1,387

 

(3

)

2,132

 

760

 

(Provision for) benefit from income taxes

 

(4,499

)

(3,435

)

4,285

 

(9,536

)

Net income

 

24,612

 

18,311

 

61,680

 

42,255

 

Preferred stock dividends

 

1,888

 

1,888

 

3,777

 

3,777

 

Net income attributable to noncontrolling interest

 

5,557

 

4,494

 

14,547

 

10,935

 

Net income attributable to common stockholders

 

$

17,167

 

$

11,929

 

$

43,356

 

$

27,543

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.26

 

$

0.21

 

$

0.68

 

$

0.51

 

Diluted earnings per common share

 

$

0.25

 

$

0.21

 

$

0.66

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

65,683,057

 

56,652,334

 

63,773,306

 

54,071,085

 

Diluted

 

90,055,170

 

79,064,503

 

87,420,543

 

76,365,118

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.25

 

$

0.18

 

$

0.46

 

$

0.35

 

 

See Notes to Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)

 

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income

 

$

24,612

 

$

18,311

 

$

61,680

 

$

42,255

 

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

 

 

(147

)

 

(118

)

Reclassification of net unrealized gains on available-for-sale securities into accumulated deficit (Note 2)

 

 

 

(176

)

 

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

 

 

 

 

238

 

Comprehensive income

 

24,612

 

18,164

 

61,504

 

42,375

 

Less:

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

5,557

 

4,453

 

14,504

 

10,972

 

Preferred stock dividends

 

1,888

 

1,888

 

3,777

 

3,777

 

Comprehensive income attributable to common stockholders

 

$

17,167

 

$

11,823

 

$

43,223

 

$

27,626

 

 

See Notes to Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

Nine Months Ended September 30, 2017($ in thousands, except shares)

 

 

 

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

 

Six Months Ended June 30, 2018

 

 

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, 2017

 

24,942,269

 

$

89,508

 

61,723,387

 

$

617

 

$

707,450

 

$

(101,926

)

$

176

 

$

695,825

 

$

168,731

 

$

864,556

 

Issuance of common stock, net

 

 

 

 

 

6,452,700

 

65

 

55,842

 

 

 

 

 

55,907

 

 

 

55,907

 

Stock-based compensation

 

 

 

 

 

396,030

 

4

 

3,641

 

 

 

 

 

3,645

 

 

 

3,645

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(1,500

)

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(28,727

)

 

 

(28,727

)

 

 

(28,727

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(3,777

)

 

 

(3,777

)

 

 

(3,777

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(7

)

 

 

(7

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,765

)

(9,765

)

Net income

 

 

 

 

 

 

 

 

 

 

 

47,133

 

 

 

47,133

 

14,547

 

61,680

 

Reclassification of net unrealized gains on available-for-sale securities into accumulated deficit

 

 

 

 

 

 

 

 

 

 

 

176

 

(176

)

 

 

 

 

Balance — June 30, 2018

 

24,942,269

 

$

89,508

 

68,570,617

 

$

686

 

$

766,933

 

$

(87,128

)

$

 

$

769,999

 

$

173,513

 

$

943,512

 

 

See Notes to Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

61,680

 

$

42,255

 

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

 

 

 

 

 

Depreciation and amortization

 

3,691

 

3,713

 

Stock-based compensation

 

3,645

 

2,986

 

Amortization and accretion of interest and fees, net

 

7,658

 

1,842

 

Amortization of capitalized mortgage servicing rights

 

23,802

 

23,716

 

Originations of loans held-for-sale

 

(2,080,393

)

(2,288,694

)

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

 

2,064,486

 

2,569,203

 

Payoffs and paydowns of loans held-for-sale

 

22

 

73

 

Mortgage servicing rights

 

(37,571

)

(37,284

)

Write-off of capitalized mortgage servicing rights from payoffs

 

10,078

 

6,497

 

Impairment loss on real estate owned

 

2,000

 

2,700

 

Provision for loan losses (net of recoveries)

 

(1,802

)

(2,456

)

Provision for loss sharing (net of recoveries)

 

821

 

2,212

 

Net charge-offs for loss sharing obligations

 

70

 

(1,822

)

Deferred tax (benefit) provision

 

(13,135

)

937

 

Income from equity affiliates

 

(2,132

)

(760

)

Gain on extinguishment of debt

 

 

(7,116

)

Changes in operating assets and liabilities

 

(24,307

)

(11,240

)

Net cash provided by operating activities

 

18,613

 

306,762

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded and originated, net

 

(875,212

)

(551,468

)

Payoffs and paydowns of loans and investments

 

429,133

 

456,251

 

Internalization of management team

 

 

(25,000

)

Deferred fees

 

6,309

 

3,015

 

Investments in real estate, net

 

(220

)

(433

)

Contributions to equity affiliates

 

(2,460

)

(650

)

Distributions from equity affiliates

 

2,807

 

374

 

Purchase of securities held-to-maturity, net

 

(21,637

)

(7,838

)

Payoffs and paydowns of securities held-to-maturity

 

519

 

8

 

Proceeds from insurance settlements, net

 

1,294

 

1,014

 

Due to borrowers and reserves

 

(58,585

)

(753

)

Net cash used in investing activities

 

(518,052

)

(125,480

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements, loan participations and credit facilities

 

3,971,279

 

4,343,816

 

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

 

(3,588,443

)

(4,744,921

)

Payoffs and paydowns of collateralized loan obligations

 

(267,750

)

 

Payoffs of senior unsecured notes

 

(97,860

)

 

Payoff of related party financing

 

(50,000

)

 

Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities

 

 

(12,691

)

Proceeds from issuance of collateralized loan obligations

 

441,000

 

279,000

 

Proceeds from issuance of senior unsecured notes

 

125,000

 

 

Proceeds from issuance of convertible senior unsecured notes

 

 

13,750

 

Proceeds from issuance of common stock, net

 

55,907

 

76,225

 

Receipts on swaps and returns of margin calls from counterparties

 

 

431

 

Distributions paid on common stock

 

(28,727

)

(19,781

)

Distributions paid on noncontrolling interest

 

(9,765

)

(7,431

)

Distributions paid on preferred stock

 

(3,777

)

(3,777

)

Distributions paid on preferred stock of private REIT

 

(7

)

(7

)

Payment of deferred financing costs

 

(10,536

)

(5,857

)

Net cash provided by (used in) financing activities

 

536,321

 

(81,243

)

Net increase in cash, cash equivalents and restricted cash

 

36,882

 

100,039

 

Cash, cash equivalents and restricted cash at beginning of period

 

243,772

 

167,960

 

Cash, cash equivalents and restricted cash at end of period

 

$

280,654

 

$

267,999

 

 

See Notes to Consolidated Financial Statements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(in thousands)

 

 

Nine Months Ended September 30,

 

 

Six Months Ended June 30,

 

 

2017

 

2016

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

Cash used to pay interest

 

$

53,150,362

 

$

36,287,261

 

 

$

58,675

 

$

35,142

��

Cash used to pay taxes

 

$

14,653,499

 

$

298,654

 

 

$

10,698

 

$

13,452

 

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

Distributions accrued on 8.25% Series A preferred stock

 

$

266,664

 

$

266,664

 

 

$

267

 

$

267

 

Distributions accrued on 7.75% Series B preferred stock

 

$

203,438

 

$

203,438

 

 

$

203

 

$

203

 

Distributions accrued on 8.50% Series C preferred stock

 

$

159,375

 

$

159,375

 

 

$

159

 

$

159

 

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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (the “Company,” “we,(“we,” “us,” or “our”) is a Maryland corporation formed in 2003. ThroughWe operate through two business segments: our Structured Loan Origination and Investment Business or “Structured(“Structured Business”) and our Agency Loan Origination and Servicing Business (“Agency Business”). Through our 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. We are an approved 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.

 

Prior to May 31, 2017,We have operated the Agency Business since July 2016 when we acquired it from Arbor Commercial Mortgage, LLC (“ACM” or our “Former Manager”). We were externally managed and advised by ACM. EffectiveACM and, effective May 31, 2017, we exercised our optionterminated the existing management agreement with ACM to fully internalize our management teamteam. Refer to our 2017 Annual Report for details of our acquisition of the Agency Business (the “Acquisition”) and terminatetermination of 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 1817 — Income Taxes for details.

 

Note 2 — Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unauditedOur interim 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.10-Q.  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 20162017 Annual Report.

 

During the third quarter of 2017, we determined that the purchase price allocation relatedReclassification

Certain prior period amounts have been reclassified to conform to the Acquisition in 2016 incorrectly omitted a deferred tax liability related tocurrent period presentation. See the book-to-tax difference infollowing “Recently Adopted Accounting Pronouncements” section for the value assigned to certain assets acquired. Thecash flows impact of this omission to our 2016 consolidated financial statements was a $4.9 million understatementthe retrospective adoption of goodwillAccounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash and a corresponding understatementASU 2016-15, Statement 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.Cash Flows.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Principles of Consolidation

 

The accompanying unauditedThese 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

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 1615 — Variable Interest Entities for information about our VIEs. All significant intercompany transactions and balances have been eliminated.eliminated in consolidation.

 

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 20162017 Annual Report. There have been no significant changes in our significant accounting policies since December 31, 2016.2017.

 

Recently Adopted Accounting Pronouncements

 

Description

 

Adoption Date

 

Effect on Financial Statements

In October 2016,Since 2014, 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.

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.2018.

 

WeThe adoption of this guidance did not have evaluated the new standard and determined that substantially all ofa material impact on our revenue, including interest income, loan origination fees, servicing income and gains on sales of loans and investment securities, are not impacted.consolidated financial statements. This standard may impact the timing of gains on certain future 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 standardestate.

In November 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. This ASU requires changes in the firsttotal of cash, cash equivalents, restricted cash, and restricted cash equivalents to be shown in the statement of cash flows. Previous guidance required the change in cash and cash equivalents be shown on the statement of cash flows, with cash used to fund restricted cash and restricted cash equivalents shown as a component of operating, investing, or financing activities. Entities are now also required to reconcile the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the statement of cash flows to the related captions in the balance sheet when these balances are presented separately in the balance sheet.

First quarter of 2018 using2018.

This guidance required retrospective adoption, therefore, we adjusted the modified retrospective methodcash flow statement for any contracts that are not complete asthe comparable prior period. The following table shows the impact of the adoption date.of this guidance, as well as the adoption of ASU 2016-15 described below.

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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

Description

Adoption Date

Effect on Financial Statements

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows. This ASU provides eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.

First quarter of 2018.

This guidance required retrospective adoption, therefore, we reclassified $1.0 million of proceeds from insurance settlements from net cash provided by operating activities to net cash used in investing activities for the six months ended June 30, 2017. In addition, we chose the cummulative earnings approach for distributions received from equity method investees, which did not result in any changes in the way we account for such distributions. The following table shows the impact of the adoption of this guidance, as well as the adoption of ASU 2016-18 described above.

(in thousands)

 

Six Months Ended 
June 30, 2017

 

As previously reported under GAAP applicable at the time

 

 

 

Cash and cash equivalents at beginning of period

 

$

138,645

 

Net decrease in cash and cash equivalents

 

(57,886

)

Cash and cash equivalents at end of period

 

80,759

 

Net cash provided by operating activities: changes in operating assets and liabilities

 

(10,270

)

Net cash used in investing activities

 

(126,494

)

Net cash used in financing activities

 

(239,307

)

 

 

 

 

As currently reported under ASU 2016-18 and ASU 2016-15

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

$

167,960

 

Net increase in cash, cash equivalents and restricted cash

 

100,039

 

Cash, cash equivalents and restricted cash at end of period

 

267,999

 

Net cash provided by operating activities: changes in operating assets and liabilities

 

(11,240

)

Net cash used in investing activities

 

(125,480

)

Net cash provided by (used in) financing activities

 

(81,243

)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Consensuses of the FASB Emerging Issues Task Force. This ASU requires that unconsolidated equity investments not accounted for under the equity method be recorded at fair value, with changes in fair value recorded through net income. The accounting principles that permitted available-for-sale classification with unrealized holding gains and losses recorded in other comprehensive income for equity securities will no longer be applicable. In addition, financial liabilities measured using the fair value option will need to present any change in fair value caused by a change in instrument-specific credit risk separately in other comprehensive income.

First quarter of 2018.

The adoption of this guidance did not have a material impact on our consolidated financial statements. In connection with the adoption of this ASU, we reclassified $0.2 million of unrealized gains on available-for-sale securities from accumulated other comprehensive income to accumulated deficit.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

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 2017 Annual Report.

Description

Effective Date

Effect on Financial Statements

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees.

First quarter of 2019.

We have evaluated ASU 2018-07 and determined the adoption of this standard will not have a significant impact on our consolidated financial statements.

Note 43 — Loans and Investments

 

The following tables set forth the composition of our structuredOur Structured Business loan and investment portfolio:portfolio consists of ($ in thousands):

 

 

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)

 

 

June 30, 2018

 

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

%

 

$

2,891,974

 

92

%

167

 

6.58

%

20.3

 

0

%

73

%

Preferred equity investments

 

155,306,620

 

7

%

11

 

6.92

%

68.3

 

62

%

88

%

 

151,604

 

5

%

10

 

8.18

%

73.7

 

60

%

85

%

Mezzanine loans

 

72,328,033

 

4

%

8

 

10.24

%

26.9

 

29

%

69

%

 

91,301

 

3

%

10

 

10.28

%

19.8

 

21

%

68

%

Junior participation loan (4)

 

25,256,582

 

1

%

1

 

 

 

100

%

100

%

 

2,094,376,123

 

100

%

149

 

6.04

%

22.7

 

7

%

74

%

 

3,134,879

 

100

%

187

 

6.76

%

22.8

 

4

%

74

%

Allowance for loan losses

 

(83,255,922

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(58,733

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(13,564,216

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,348

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,997,555,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,064,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,602,658,179

 

90

%

120

 

5.59

%

16.4

 

0

%

73

%

 

$

2,422,105

 

91

%

150

 

6.10

%

20.9

 

0

%

72

%

Preferred equity investments

 

68,120,639

 

4

%

10

 

6.83

%

23.8

 

42

%

91

%

 

142,892

 

6

%

12

 

6.47

%

68.7

 

64

%

90

%

Mezzanine loans

 

57,124,566

 

3

%

12

 

9.09

%

17.9

 

36

%

75

%

 

87,541

 

3

%

8

 

10.78

%

24.8

 

20

%

63

%

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

%

 

2,652,538

 

100

%

170

 

6.28

%

23.6

 

4

%

73

%

Allowance for loan losses

 

(83,711,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,783

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(10,716,040

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,628

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,695,732,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,579,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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 SeptemberJune 30, 2017,2018, the UPB related to 3249 loans with five different borrowers represented 15%25% of total assets.  At December 31, 2016,2017, the UPB related to 3542 loans with five different borrowers represented 16%24% of total assets. During both the ninesix months ended SeptemberJune 30, 20172018 and the year ended December 31, 2016,2017, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Effective January 1, 2017, we revised our methodology used toWe 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.highest risk. 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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

contingent upon credit rating.  That is because allAll portfolio assets are subject to, the level of scrutiny and ongoing analysis consistent with that ofat 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.reviewed, however, we maintain a higher level of scrutiny and focus on loans that we consider “high risk” and that possess deteriorating credit quality.

 

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 SeptemberJune 30, 20172018 and December 31, 2016,2017, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $147.5$128.2 million and $150.5$126.5 million, respectively, and a weighted average last dollar LTV ratio of 94%92% and 95%93%, 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.follows ($ in thousands):

 

 

September 30, 2017

 

 

June 30, 2018

 

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

 

 

UPB

 

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

%

 

$

2,389,630

 

76

%

pass/watch

 

4

%

73

%

Self Storage

 

301,830

 

10

%

pass/watch

 

0

%

72

%

Land

 

140,054,798

 

7

%

substandard

 

0

%

88

%

 

133,811

 

4

%

substandard

 

0

%

90

%

Commercial

 

133,230,000

 

6

%

pass

 

1

%

71

%

Office

 

133,143,446

 

6

%

pass/watch

 

19

%

71

%

 

123,060

 

4

%

special mention

 

0

%

64

%

Healthcare

 

92,465

 

3

%

pass

 

0

%

81

%

Hotel

 

90,725,147

 

4

%

special mention

 

39

%

83

%

 

55,975

 

2

%

pass/watch

 

23

%

74

%

Retail

 

36,483,333

 

2

%

pass/watch

 

8

%

66

%

 

36,408

 

1

%

pass/watch

 

8

%

76

%

Healthcare

 

4,625,000

 

<1

%

special mention

 

0

%

73

%

Commercial

 

1,700

 

<1

%

doubtful

 

63

%

63

%

Total

 

$

2,094,376,123

 

100

%

pass/watch

 

7

%

74

%

 

$

3,134,879

 

100

%

pass/watch

 

4

%

74

%

 

 

December 31, 2016

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,421,731,108

 

79

%

special mention

 

1

%

73

%

 

$

1,925,529

 

73

%

pass/watch

 

4

%

72

%

Self Storage

 

301,830

 

11

%

pass

 

0

%

71

%

Land

 

137,255,369

 

8

%

substandard

 

2

%

92

%

 

132,828

 

5

%

substandard

 

0

%

90

%

Commercial

 

9,205,000

 

<1

%

special mention

 

12

%

69

%

Office

 

141,710,156

 

8

%

pass/watch

 

43

%

73

%

 

107,853

 

4

%

pass/watch

 

1

%

64

%

Healthcare

 

55,615

 

2

%

pass/watch

 

0

%

74

%

Hotel

 

70,750,000

 

4

%

special mention

 

30

%

74

%

 

90,725

 

3

%

special mention

 

37

%

81

%

Retail

 

3,958,333

 

<1

%

special mention

 

81

%

91

%

 

36,458

 

1

%

pass/watch

 

8

%

66

%

Healthcare

 

5,550,000

 

<1

%

special mention

 

0

%

63

%

Commercial

 

1,700

 

<1

%

doubtful

 

63

%

63

%

Total

 

$

1,790,159,966

 

100

%

special mention

 

6

%

75

%

 

$

2,652,538

 

100

%

pass/watch

 

4

%

73

%

 

Geographic Concentration Risk

 

As of SeptemberJune 30, 2017,2018, 20%, 16%, 11%19% and 8%10% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas California and Georgia,California, respectively. As of December 31, 2016, 25%2017, 23%, 15%, 14%21% and 13%11% of the outstanding balance of our loan and investment portfolio had underlying properties in Texas, New York California, Florida and Texas,California, respectively.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

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:follows (in thousands):

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

81,255,922

 

$

83,831,575

 

$

83,711,575

 

$

86,761,575

 

 

$

63,108

 

$

83,016

 

$

62,783

 

$

83,712

 

Provision for loan losses

 

2,000,000

 

 

2,000,000

 

59,005

 

 

1,325

 

 

1,650

 

 

Charge-offs

 

 

 

 

(2,959,005

)

 

(3,173

)

 

(3,173

)

 

Recoveries of reserves

 

 

(15,000

)

(2,455,653

)

(45,000

)

 

(2,527

)

(1,760

)

(2,527

)

(2,456

)

Allowance at end of period

 

$

83,255,922

 

$

83,816,575

 

$

83,255,922

 

$

83,816,575

 

 

$

58,733

 

$

81,256

 

$

58,733

 

$

81,256

 

 

During the three and ninesix months ended SeptemberJune 30, 2017,2018, we determined that the fair value of the underlying collateral (land development project) securing a preferred equity investmentsix loans with an aggregatea carrying value of $34.8$120.9 million was less than the net carrying value of the loans, which resulted in a provision for loan losses of $1.3 million and $1.7 million, respectively.

During the three and six months ended June 30, 2018, we settled, for $31.6 million, a non-performing preferred equity investment in a hotel property with a net carrying value of $29.1 million, resulting in a $2.0reserve recovery of $2.5 million provision for loan losses.and a charge-off of $3.2 million. In addition, duringwe received a payment and recorded a recovery of $0.9 million related to a written-off junior participation interest in an office building.

During the ninethree and six months ended SeptemberJune 30, 2017, a fully reserved multifamily mezzanine loan with a UPB of $1.8 million paid off in full, which resultedresulting in a $1.8 million reserve recovery, andrecovery. In addition, during the first quarter of 2017, 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.minimus for all periods presented.

 

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 SeptemberJune 30, 20172018 and 2016.2017.

 

We have six loans with a carrying value totaling $120.5$120.9 million at June 30, 2018, which mature in September 30, 20172018, 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$111.5 million entitle us to a weighted average accrual rate of interest of 8.50%8.89%. 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 SeptemberAt June 30, 2018 and December 31, 2017, we havehad cumulative allowances for loan losses of $50.7 million and $49.1 million, respectively, 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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

A summary of our impaired loans by asset class is as follows:follows (in thousands):

 

 

September 30, 2017

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

June 30, 2018

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

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

 

 

UPB

 

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

 

$

 

 

$

132,559

 

$

125,693

 

$

55,533

 

$

131,985

 

$

 

$

131,823

 

$

 

Hotel

 

34,750,000

 

34,750,000

 

5,700,000

 

34,750,000

 

 

34,750,000

 

370,877

 

 

 

 

 

17,375

 

 

17,375

 

 

Office

 

27,549,082

 

22,764,944

 

21,972,444

 

27,551,332

 

27,728

 

27,555,832

 

79,065

 

 

2,279

 

2,279

 

1,500

 

2,281

 

31

 

2,284

 

60

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

 

1,700

 

1,700

 

1,700

 

1,700

 

 

1,700

 

 

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

 

 

$

136,538

 

$

129,672

 

$

58,733

 

$

153,341

 

$

31

 

$

153,181

 

$

60

 

 

 

December 31, 2016

 

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

 

December 31, 2017

 

Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,085,948

 

$

125,925,677

 

$

53,883,478

 

$

130,012,569

 

$

 

$

128,740,618

 

$

 

 

$

131,086

 

$

124,812

 

$

53,883

 

$

131,086

 

$

 

$

131,086

 

$

 

Hotel

 

34,750,000

 

34,496,296

 

3,700,000

 

34,750,000

 

291,542

 

34,750,000

 

857,459

 

 

34,750

 

34,750

 

5,700

 

34,750

 

60

 

34,750

 

371

 

Office

 

27,562,582

 

22,778,444

 

21,972,444

 

27,569,332

 

23,601

 

27,573,832

 

69,763

 

 

2,288

 

2,288

 

1,500

 

27,556

 

27

 

27,558

 

51

 

Commercial

 

1,700,000

 

1,700,000

 

1,700,000

 

1,700,000

 

 

1,700,000

 

 

 

1,700

 

1,700

 

1,700

 

1,700

 

 

1,700

 

 

Multifamily

 

2,542,115

 

2,450,618

 

2,455,653

 

2,654,615

 

22,937

 

5,004,615

 

134,142

 

 

 

 

 

880

 

 

1,271

 

22

 

Total

 

$

197,640,645

 

$

187,351,035

 

$

83,711,575

 

$

196,686,516

 

$

338,080

 

$

197,769,065

 

$

1,061,364

 

 

$

169,824

 

$

163,550

 

$

62,783

 

$

195,972

 

$

87

 

$

196,365

 

$

444

 

 


(1)  Represents the UPB of six and eightfour impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at Septemberboth June 30, 20172018 and December 31, 2016, respectively.2017.

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

 

At SeptemberJune 30, 2017, five2018, two loans with an aggregate net carrying value of $32.6$0.8 million, net of related loan loss reserves of $27.9$1.7 million, were classified as non-performing. At December 31, 2016, three fully reserved2017, two loans with an aggregate net carrying value of $22.9$29.1 million, net of related loan loss reserves of $7.4 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:follows (in thousands):

 

 

September 30, 2017

 

December 31, 2016

 

 

June 30, 2018

 

December 31, 2017

 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,700

 

$

 

$

1,700

 

$

1,700

 

$

 

$

1,700

 

Hotel

 

$

34,750,000

 

$

 

$

34,750,000

 

$

 

$

 

$

 

 

 

 

 

34,750

 

 

34,750

 

Office

 

20,472,444

 

 

20,472,444

 

20,472,444

 

 

20,472,444

 

 

831

 

 

831

 

 

 

 

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

 

 

$

2,531

 

$

 

$

2,531

 

$

36,450

 

$

 

$

36,450

 

 

At Septemberboth June 30, 20172018 and December 31, 2016, we did not have any 2017, there were noloans contractually past due 90 days or more that were still accruing interest.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

A summary ofThere were no loan modifications, refinancings and/or extensions by asset classduring the six months ended June 30, 2018 that wewere 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

%

Therestructurings. During the six months ended June 30, 2017, there was a $34.8 million loan whichto a hotel property that was modified during the nine months ended September 30, 2017 wasand considered a troubled debt restructuring as a result of a forbearance agreement entered into with the borrower in the second quarter of 2017 and2017. This loan was subsequently classified as non-performing asnon-performing. This loan was modified to increase the total recovery of September 30, 2017.the combined principal and interest. 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 toas a result of our troubled debt restructuring analysis forperformed during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016. These loans were modified to increase the total recovery of the combined principal and interest from the loan.2017.

 

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.  AsAt June 30, 2018, we had total interest reserves of September 30,$47.6 million on 92 loans with an aggregate UPB of $1.89 billion. At December 31, 2017, we had total interest reserves of $30.1$52.5 million on 7081 loans with an aggregate UPB of $1.09$1.57 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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Note 54 — Loans Held-for-Sale, Net

 

Loans held-for-sale, net consists of the following:following (in thousands):

 

 

September 30, 2017

 

December 31, 2016

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

185,188,000

 

$

538,189,475

 

 

$

204,658

 

$

243,717

 

Freddie Mac

 

142,312,000

 

124,102,000

 

 

102,357

 

47,545

 

FHA

 

1,033,203

 

56,247

 

 

1,119

 

987

 

 

328,533,203

 

662,347,722

 

 

308,134

 

292,249

 

Fair value of future MSR

 

5,450,662

 

13,145,814

 

 

4,754

 

5,806

 

Unearned discount

 

(715,889

)

(2,126,232

)

 

(1,401

)

(612

)

Loans held-for-sale, net

 

$

333,267,976

 

$

673,367,304

 

 

$

311,487

 

$

297,443

 

 

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 ninesix months ended SeptemberJune 30, 2017,2018, we sold $1.05$1.02 billion and $3.62$2.08 billion, respectively, of loans held-for-sale and recorded gain on sales of $16.3$14.8 million and $52.1$32.2 million, respectively. During both the three and ninesix months ended SeptemberJune 30, 2016,2017, we sold $551.8 million$1.20 billion and $2.57 billion, respectively, 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 gaingains on sales of $9.0 million.$17.6 million and $35.7 million, respectively. At SeptemberJune 30, 20172018 and December 31, 2016,2017, 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.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

Note 65 — 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%8% - 15% (representing a weighted average discount rate of 13%12%) based on our best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 7.17.3 years and 6.97.2 years at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

 

A summary of our capitalized MSR activity is as follows:follows (in thousands):

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

 

Acquired

 

Originated

 

Total

 

Acquired

 

Originated

 

Total

 

 

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

 

 

$

131,934

 

$

123,798

 

$

255,732

 

$

143,270

 

$

109,338

 

$

252,608

 

Additions

 

 

20,719,529

 

20,719,529

 

 

66,273,164

 

66,273,164

 

 

 

18,493

 

18,493

 

 

38,293

 

38,293

 

Amortization

 

(8,952,573

)

(2,758,805

)

(11,711,378

)

(29,074,057

)

(6,353,160

)

(35,427,217

)

 

(7,517

)

(4,420

)

(11,937

)

(15,512

)

(8,290

)

(23,802

)

Write-offs

 

(4,193,665

)

(22,286

)

(4,215,951

)

(10,683,635

)

(29,639

)

(10,713,274

)

Write-downs and payoffs

 

(4,400

)

(867

)

(5,267

)

(7,741

)

(2,337

)

(10,078

)

Balance at end of period

 

$

155,043,062

 

$

92,832,597

 

$

247,875,659

 

$

155,043,062

 

$

92,832,597

 

$

247,875,659

 

 

$

120,017

 

$

137,004

 

$

257,021

 

$

120,017

 

$

137,004

 

$

257,021

 

 

 

Three and Nine Months Ended September 30, 2016

 

 

Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

Balance at beginning of period

 

$

 

$

 

$

 

 

$

180,945

 

$

57,986

 

$

238,931

 

$

194,801

 

$

32,942

 

$

227,743

 

Additions

 

221,647,421

 

11,905,394

 

233,552,815

 

 

 

19,083

 

19,083

 

 

45,553

 

45,553

 

Amortization

 

(7,358,639

)

(227,885

)

(7,586,524

)

 

(9,660

)

(2,168

)

(11,828

)

(20,122

)

(3,594

)

(23,716

)

Write-offs

 

(1,669,081

)

 

(1,669,081

)

Write-downs and payoffs

 

(3,096

)

(7

)

(3,103

)

(6,490

)

(7

)

(6,497

)

Balance at end of period

 

$

212,619,701

 

$

11,677,509

 

$

224,297,210

 

 

$

168,189

 

$

74,894

 

$

243,083

 

$

168,189

 

$

74,894

 

$

243,083

 

 

We recorded write-offs relating to specific MSRs, primarily due to prepaymentscollected prepayment fees of certain loans, of $4.2$4.9 million and $10.7$8.7 million during the three and ninesix months ended SeptemberJune 30, 2017,2018, 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. During the three and six months ended June 30, 2017, we collected prepayment fees totaling $2.1 million and $4.1 million, respectively.  As of SeptemberJune 30, 20172018 and December 31, 2016,2017, 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

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

The expected amortization of capitalized MSRs recorded as of June 30, 2018 is shown in the table below. Actual amortization may vary from these estimates (in thousands).

Year

 

Amortization

 

2018 (six months ending 12/31/2018)

 

$

23,934

 

2019

 

45,327

 

2020

 

40,340

 

2021

 

33,259

 

2022

 

26,708

 

2023

 

22,303

 

Thereafter

 

65,150

 

Total

 

$

257,021

 

 

Note 76 — Mortgage Servicing

 

An analysis of the productProduct and geographic concentrations that impact our servicing revenue is shownare as follows ($ in the following tables:thousands):

 

September 30, 2017

 

June 30, 2018

June 30, 2018

 

Product Concentrations

Product Concentrations

 

Geographic Concentrations

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

UPB
Percentage

 

Product

 

UPB

 

Total

 

State

 

Total

 

 

UPB

 

Total

 

State

 

of Total

 

Fannie Mae

 

$

12,331,135,405

 

79

%

Texas

 

23

%

 

$

12,794,277

 

75

%

Texas

 

21

%

Freddie Mac

 

2,732,536,579

 

18

%

North Carolina

 

10

%

 

3,730,980

 

22

%

North Carolina

 

10

%

FHA

 

537,553,532

 

3

%

California

 

8

%

 

585,017

 

3

%

California

 

8

%

Total

 

$

15,601,225,516

 

100

%

New York

 

8

%

 

$

17,110,274

 

100

%

New York

 

8

%

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

Florida

 

5

%

 

 

 

 

 

Florida

 

6

%

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

Other (1)

 

41

%

 

 

 

 

 

Total

 

100

%

 

 

 

 

 

Total

 

100

%

 

December 31, 2016

 

December 31, 2017

December 31, 2017

 

Product Concentrations

Product Concentrations

 

Geographic Concentrations

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

UPB
Percentage

 

Product

 

UPB

 

Total

 

State

 

Total

 

 

UPB

 

Total

 

State

 

of Total

 

Fannie Mae

 

$

11,181,152,400

 

83

%

Texas

 

24

%

 

$

12,502,699

 

77

%

Texas

 

22

%

Freddie Mac

 

1,953,244,541

 

14

%

North Carolina

 

9

%

 

3,166,134

 

20

%

North Carolina

 

10

%

FHA

 

420,688,577

 

3

%

California

 

8

%

 

537,482

 

3

%

California

 

8

%

Total

 

$

13,555,085,518

 

100

%

New York

 

8

%

 

$

16,206,315

 

100

%

New York

 

8

%

 

 

 

 

 

Georgia

 

5

%

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

Other (1)

 

46

%

 

 

 

 

 

Florida

 

6

%

 

 

 

 

 

Total

 

100

%

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

Total

 

100

%

 


(1)         No other individual state represented 5%4% or more of the total.

 

At SeptemberJune 30, 20172018 and December 31, 2016,2017, our weighted average servicing fee was 48.046.9 basis points and 47.847.7 basis points, respectively. We held cash in escrow for these loans totaling $506.6$482.8 million and $401.7$477.9 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, which is not reflected in our consolidated balance sheets.  These escrows are maintained in separate accounts at twoseveral federally insured depository institutions, which may exceed FDIC insured limits.

Note 8 — Securities

Available-for-Sale

Our available-for-sale securities consist We earn interest income on these escrow deposits, generally based on a market rate of equity securitiesinterest negotiated with the financial institutions that hold the escrow deposits. Interest earned on escrows, net of interest paid to the borrower, was $2.7 million and Agency Business commercial mortgage interest-only securities (“Agency IOs”) from loans sold$4.9 million during the three and securitized undersix months ended June 30, 2018, respectively, and $1.1 million and $1.8 million during the Freddie Mac Small Balance Loan Program (“SBL Program”).

Equity Securities. We own common stock of CV Holdings, Inc., formerly Realty Finance Corporation, whichthree and six months ended June 30, 2017, respectively,  and is a commercial real estate specialty finance company. These securities are carried at their estimated fair value with unrealized gains (losses) reportedcomponent of servicing revenue, net in accumulated other comprehensivethe consolidated statements of income.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

The following is a summary of the equity securities classified as available-for-sale:Note 7 — Securities Held-to-Maturity

 

 

 

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. Priormay choose to the Acquisition and upon securitization of SBL Programhold, sell or securitize loans our Former Manager received Agency IOswe sell to them 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

 

$

4,602,722

 

$

4,786,175

 

Changes in fair value

 

(160,190

)

(343,643

)

Balance at end of period

 

$

4,442,532

 

$

4,442,532

 

 

 

Three and Nine Months
Ended September 30, 2016

 

Balance at beginning of period

 

$

 

Additions from the Acquisition

 

4,908,283

 

Changes in fair value

 

(46,021

)

Balance at end of period

 

$

4,862,262

 

The UPB of loans associated with our Agency IOs was $839.2 million and $904.4 million at September 30, 2017 and December 31, 2016, respectively, which mature between 2035 and 2036. During the three and nine months ended September 30, 2017, we recognized interest income related to these Agency IOs of $0.3 million and $0.9 million, respectively, and $0.3 million during both the three and nine months ended September 30, 2016.

Held-to-Maturity

program. As part of the securitizations under the SBL Program securitizations described above,program, we are requiredhave the option to purchase the bottom tranche bond, generally referred to as the “B Piece,” that represents the bottom 10%, or highest risk, of the securitization.  During the ninesix months ended SeptemberJune 30, 2017,2018, we purchased two B Piece bonds with an initial face value of $31.2 million, at a discount, for $21.6 million. As of June 30, 2018, we retained 49%, or $28.1$72.2 million initial face value, of twofive B Piece bonds, which were purchased at a discount for $18.3$48.8 million, and sold the remaining 51% to the third party at par.  Prior to 2017, a third party investor agreed to purchase the entire B Piece of each SBL Program securitization at par.  These held-to-maturity securities are carried at cost, net of unamortized discounts, and are collateralized by a pool of multifamily mortgage loans, bear interest at an initial weighted average variable rate of 3.55%3.63% and have an estimated weighted average maturity of 6.15.7 years. The weighted average effective interest rate was 13.38%11.42% and 12.97% at SeptemberJune 30, 2018 and December 31, 2017,

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

respectively, including the accretion of discount. Approximately $3.4$10.8 million is estimated to mature within one year, $11.3$31.0 million is estimated to mature after one year through five years, $8.1$20.4 million is estimated to mature after five years through ten years and $5.2$9.2 million is estimated to mature after ten years.

 

The following is a summary of the held-to-maturity securities we held at September 30, 2017:(in thousands):

 

 

 

Face Value

 

Carrying Value

 

Unrealized 
Gain

 

Estimated Fair 
Value

 

B Piece bonds

 

$

28,035,293

 

$

18,851,089

 

$

31,908

 

$

18,882,997

 

June 30, 2018

 

 

 

Face Value

 

Carrying Value

 

Unrealized
(Loss) Gain

 

Estimated Fair
Value

 

B Piece bonds

 

$

71,222

 

$

50,342

 

$

(189

)

$

50,153

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

B Piece bonds

 

$

40,566

 

$

27,837

 

$

602

 

$

28,439

 

 

We do not intend to sell these investments and it is not more-likely-than-not that we will be required to sell these investments before recovering the cost basis, which may be at maturity.  These securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value.  As of SeptemberJune 30, 2017,2018, no impairment was recorded on these held-to-maturity securities. During the three and ninesix months ended SeptemberJune 30, 2017,2018, we recorded interest income of $0.5 million and $0.9$1.1 million, respectively, and, during the three and six months ended June 30, 2017, we recorded interest income of $0.3 million and $0.4 million, respectively, related to these investments.

 

Note 98 — Investments in Equity Affiliates

 

We account for all investments in equity affiliates under the equity method. The following is a summary of our investments in equity affiliates:affiliates (in thousands):

 

 

 

Investments in Equity Affiliates at

 

UPB of Loans to 
Equity Affiliates at

 

Equity Affiliates

 

September 30, 2017

 

December 31, 2016

 

September 30, 2017

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

26,821,643

 

$

28,917,457

 

$

 

West Shore Café

 

2,120,347

 

2,050,347

 

1,687,500

 

Lightstone Value Plus REIT L.P.

 

1,894,727

 

1,894,727

 

 

JT Prime

 

425,000

 

425,000

 

 

East River Portfolio

 

68,923

 

83,222

 

1,705,938

 

Lexford Portfolio

 

100

 

100

 

 

Issuers of Junior Subordinated Notes

 

 

578,000

 

 

Total

 

$

31,330,740

 

$

33,948,853

 

$

3,393,438

 

Arbor Residential Investor LLC (“ARI”).  During the three and nine months ended September 30, 2017, we recorded a loss of $1.3 million and $1.9 million, respectively, and during the three and nine months ended September 30, 2016, we recorded income of $3.9 million and $8.5 million, respectively, to income from equity affiliates in our consolidated statements of income related to our investment in this residential mortgage banking business.

During the nine months ended September 30, 2017, we funded $0.6 million of additional mortgage purchases in connection with a joint venture that invests in non-qualified residential mortgages purchased from ARI’s origination platform. During the nine months ended September 30, 2017, we received cash distributions from this joint venture totaling $0.9 million (which were classified as a return of capital). During the three and nine months ended September 30, 2017 we recorded income of less than $0.1 million and $0.1 million, respectively, and during the three and nine months ended September 30, 2016, we recorded income of $0.3 million and $0.4 million, respectively, to income from equity affiliates in our consolidated statements of income related to this investment.

 

 

Investments in Equity Affiliates at

 

UPB of Loans to
Equity Affiliates at

 

Equity Affiliates

 

June 30, 2018

 

December 31, 2017

 

June 30, 2018

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

19,631

 

$

19,193

 

$

 

West Shore Café

 

2,193

 

2,140

 

1,688

 

Lightstone Value Plus REIT L.P

 

1,895

 

1,895

 

 

JT Prime

 

425

 

425

 

 

East River Portfolio

 

 

 

 

Lexford Portfolio

 

 

 

280,500

 

Total

 

$

24,144

 

$

23,653

 

$

282,188

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

The summarizedArbor Residential Investor LLC (“ARI”).  During the three and six months ended June 30, 2018, we recorded income of $0.7 million and $0.8 million, respectively, and, during both the three and six months ended June 30, 2017, we recorded a loss of $0.7 million to income (loss) from equity affiliates in our consolidated statements of operations forincome related to our investment in ARI are as follows:this residential mortgage banking business. In addition, during the first quarter of 2018, we made a $2.4 million payment for our proportionate share of a litigation settlement related to this investment, which was distributed back to us by our equity affiliate.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Statements of Operations:

 

 

 

 

 

 

 

 

 

Total revenues

 

$

32,429,382

 

$

71,040,665

 

$

108,195,846

 

$

172,929,878

 

Total expenses

 

40,214,486

 

47,256,537

 

120,232,132

 

128,120,821

 

Net (loss) income

 

$

(7,785,104

)

$

23,784,128

 

$

(12,036,286

)

$

44,809,057

 

 

 

 

 

 

 

 

 

 

 

Arbor’s share of (loss) income

 

$

(1,230,905

)

$

4,167,233

 

$

(1,844,144

)

$

8,885,528

 

During both the six months ended June 30, 2018 and 2017, we received cash distributions totaling $0.4 million (which were classified as returns of capital) in connection with a joint venture that invests in non-qualified residential mortgages purchased from ARI’s origination platform. During all periods presented, we recorded income of less than $0.1 million to income (loss) from equity affiliates in our consolidated statements of income related to this investment.

 

Lexford Portfolio. InDuring the three and ninesix months ended SeptemberJune 30, 2018, we received distributions of $0.6 million and $1.2 million, respectively, and, during the three and six months ended June 30, 2017, we received distributions of $0.7$0.6 million and $2.0 million, respectively, and in the three and nine months ended September 30, 2016, we received distributions of $0.7 million and $2.1$1.3 million, respectively, from this equity investment, which was recognized as income. See Note 1918 — Agreements and Transactions with Related Parties for details.

 

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

Equity Participation Interest.  In the third quarter of 2017, we received $1.5 million from the redemption of a 25% equity participation interest we held in a multifamily property, which is included in income from equity affiliates on the consolidated statements of income. Prior to this transaction, our basis in this investment was zero.

Note 109 — Real Estate Owned and Held-For-Sale

 

Our real estate assets at both SeptemberJune 30, 20172018 and December 31, 20162017 were comprised of a hotel property and an office building.

 

Real Estate Owned

 

 

September 30, 2017

 

December 31, 2016

 

 

June 30, 2018

 

December 31, 2017

 

 

Hotel Property

 

Office 
Building

 

Total

 

Hotel Property

 

Office 
Building

 

Total

 

(in thousands)

 

Hotel
Property

 

Office
Building

 

Total

 

Hotel
Property

 

Office
Building

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

3,293,651

 

$

4,509,000

 

$

7,802,651

 

$

3,293,651

 

$

4,509,000

 

$

7,802,651

 

 

$

3,294

 

$

4,509

 

$

7,803

 

$

3,294

 

$

4,509

 

$

7,803

 

Building and intangible assets

 

30,643,722

 

1,955,454

 

32,599,176

 

30,473,898

 

1,563,254

 

32,037,152

 

 

30,918

 

2,010

 

32,928

 

30,699

 

2,010

 

32,709

 

Less: Impairment loss

 

(13,307,354

)

 

(13,307,354

)

(11,200,000

)

 

(11,200,000

)

 

(13,307

)

(2,500

)

(15,807

)

(13,307

)

(500

)

(13,807

)

Less: Accumulated depreciation and amortization

 

(9,089,355

)

(650,398

)

(9,739,753

)

(8,658,737

)

(489,261

)

(9,147,998

)

 

(9,505

)

(769

)

(10,274

)

(9,228

)

(690

)

(9,918

)

Real estate owned, net

 

$

11,540,664

 

$

5,814,056

 

$

17,354,720

 

$

13,908,812

 

$

5,582,993

 

$

19,491,805

 

 

$

11,400

 

$

3,250

 

$

14,650

 

$

11,458

 

$

5,329

 

$

16,787

 

 

For the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, our remaining hotel property had a weighted average occupancy rate of 55%58% and 58%57%, respectively, a weighted average daily rate of $113$116 and $108,$117, respectively, and weighted average revenue per available room of $62 and $63, respectively.$67 for both periods.  The operation of a hotel property is seasonal with the majority of revenues earned in the first two quarters of the calendar year. During Of the second quarter of 2016, through site visits and discussion with market participants, we determined that thetotal impairment losses recorded on our hotel property exhibited indicators of impairment$13.3 million, $1.5 million and performed an impairment analysis. As a result of this impairment analysis, we$2.7 million were recorded an impairment loss of $11.2 million. Duringduring the first half ofthree and six months ended June 30, 2017, we received additional market analyses, including discussions with market participants, which resulted in further impairments totaling $2.7 million.respectively.

 

Our office building was fully occupied by a single tenant until April 2017 when the lease expired. The building is currently vacant.  During the three months ended June 30, 2018, based on discussions with market participants, we determined that the office building exhibited indicators of impairment and performed an impairment analysis. As a result of this impairment analysis, we recorded an impairment loss of $2.0 million.

Our real estate owned assets had restricted cash balances totaling $0.8 million and $0.7 million at June 30, 2018 and December 31, 2017, respectively, due to escrow requirements.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

Our real estate assets had restricted cash balances due to escrow requirements totaling $0.7 million at both September 30, 2017 and December 31, 2016.

Real Estate Held-For-Sale

In 2016, we sold our three remaining multifamily properties and a hotel property for a total of $50.7 million and recognized a gain of $11.6 million. A portion of the sales proceeds were used to payoff the outstanding debt on the multifamily properties of $27.1 million.

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

 

 

Nine Months Ended
September 30, 2016

 

 

 

 

 

Revenue:

 

 

 

Property operating income

 

$

2,845,231

 

Expenses:

 

 

 

Property operating expenses

 

1,994,346

 

Depreciation

 

334,631

 

Net income

 

$

516,254

 

There were no properties classified as held-for-sale during the nine months ended September 30, 2017.

 

Note 1110 — Debt Obligations

 

Credit Facilities and Repurchase Agreements

 

The following table outlines borrowings under our credit facilities and repurchase agreements:agreements ($ in thousands):

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

Current
Maturity

 

Extended
Maturity

 

Note Rate

 

Debt Carrying
Value (1)

 

Collateral
Carrying Value

 

Wtd.
Avg. Note
Rate

 

Debt Carrying
Value (1)

 

Collateral
Carrying Value

 

Wtd. Avg.
Note Rate

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current
Maturity

 

Extended
Maturity

 

Note Rate

 

Debt Carrying
Value (1)

 

Collateral
Carrying Value

 

Wtd.
Avg. Note
Rate

 

Debt Carrying
Value (1)

 

Collateral
Carrying Value

 

Wtd. Avg.
Note Rate

 

Structured Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million repurchase facility

 

Oct. 2018

 

Oct. 2019

 

L + 2.25% to 3.50%

 

$

149,157,816

 

$

253,150,000

 

3.63

%

$

106,051,080

 

$

183,827,574

 

3.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$375 million repurchase facility

 

Mar. 2020

 

Mar. 2021

 

L + 1.75% to 3.50%

 

$

258,712

 

$

354,500

 

4.39

%

$

102,350

 

$

145,850

 

3.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million repurchase facility

 

June 2019

 

N/A

 

L + 2.00%

 

2,407,564

 

6,600,000

 

3.28

%

21,598,322

 

34,850,000

 

2.96

%

 

June 2019

 

June 2020

 

L + 1.75% to 2.00%

 

79,764

 

111,317

 

3.92

%

2,445

 

6,600

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

Dec. 2017

 

N/A

 

L + 2.125% to 2.50%

 

12,096,267

 

28,088,500

 

3.40

%

38,703,886

 

63,158,500

 

2.94

%

 

Dec. 2018

 

N/A

 

L + 1.75% to 2.50%

 

24,901

 

36,799

 

3.89

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

June 2018

 

N/A

 

L + 2.00%

 

16,206,619

 

42,300,000

 

3.28

%

23,276,773

 

31,725,000

 

2.81

%

 

June 2019

 

N/A

 

L + 2.00%

 

2,894

 

4,700

 

4.15

%

8,999

 

16,000

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Feb. 2018

 

Feb. 2019

 

L + 2.00%

 

25,000,000

 

31,250,000

 

3.28

%

46,373,641

 

58,000,000

 

2.81

%

 

Feb. 2019

 

N/A

 

L + 2.00%

 

28,555

 

35,700

 

4.15

%

32,538

 

40,700

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Sept. 2019

 

Sept. 2021

 

L + 2.50% to 3.25%

 

3,563,565

 

4,625,000

 

4.54

%

7,956,000

 

9,885,000

 

4.08

%

 

Sept. 2019

 

Sept. 2021

 

L + 2.50% to 3.25%

 

 

 

 

3,581

 

4,625

 

4.88

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$25.5 million credit facility

 

Oct. 2019

 

N/A

 

L + 2.50%

 

13,909,625

 

18,753,364

 

3.78

%

 

 

 

 

Oct. 2019

 

N/A

 

L + 2.50%

 

15,742

 

34,000

 

4.65

%

13,920

 

18,753

 

4.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$10 million credit facility

 

Mar. 2018

 

N/A

 

L + 2.50%

 

10,000,000

 

 

3.78

%

 

 

 

$25 million working capital facility

 

June 2019

 

N/A

 

L + 2.25%

 

25,000

 

 

4.40

%

10,000

 

 

4.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$23.2 million credit facility

 

Feb. 2020

 

Feb. 2021

 

L + 2.30%

 

23,085

 

30,900

 

4.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$20 million credit facility

 

Mar. 2020

 

Mar. 2021

 

L + 2.50%

 

19,900

 

41,650

 

4.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$17.4 million credit facility

 

June 2020

 

June 2021

 

L + 2.40%

 

12,374

 

15,844

 

4.55

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$7.5 million credit facility

 

Aug. 2018

 

N/A

 

L + 2.75%

 

7,461

 

9,340

 

4.91

%

7,432

 

9,340

 

4.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase facility - securities (2)

 

N/A

 

N/A

 

L + 2.50% to 3.50%

 

101,327

 

 

4.80

%

53,938

 

 

4.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$3 million master security agreement

 

Oct. 2020

 

N/A

 

2.96% to 3.42%

 

1,997,894

 

 

3.21

%

2,532,966

 

 

3.21

%

 

Oct. 2020

 

N/A

 

2.96% to 3.42%

 

1,504

 

 

3.20

%

1,834

 

 

3.21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

234,339,350

 

$

384,766,864

 

3.58

%

$

246,492,668

 

$

381,446,074

 

3.02

%

$2.2 million master security agreement

 

Mar. 2021

 

N/A

 

4.60%

 

1,629

 

 

4.66

%

 

 

 

Structured Business total

 

 

 

 

 

 

 

$

602,848

 

$

674,750

 

4.30

%

$

237,037

 

$

241,868

 

4.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$500 million ASAP agreement

 

N/A

 

N/A

 

L + 1.05%

 

$

49,508,743

 

$

49,508,743

 

2.28

%

$

142,556,962

 

$

142,556,962

 

1.65

%

$500 million ASAP agreement (3)

 

N/A

 

N/A

 

L + 1.05%

 

$

47,593

 

$

47,593

 

3.14

%

$

121,880

 

$

121,880

 

2.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million credit facility (2)

 

Jan. 2018

 

N/A

 

L + 1.40%

 

80,709,289

 

80,786,203

 

2.63

%

268,530,211

 

268,571,797

 

2.05

%

$150 million credit facility

 

Jan. 2019

 

N/A

 

L + 1.30%

 

126,965

 

127,100

 

3.39

%

21,802

 

21,821

 

2.96

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$150 million credit facility (3)

 

July 2018

 

N/A

 

L + 1.35%

 

131,409,000

 

131,559,000

 

2.64

%

210,009,449

 

210,138,900

 

2.05

%

$150 million credit facility

 

Aug. 2018

 

N/A

 

L + 1.30%

 

111,669

 

111,678

 

3.39

%

99,242

 

99,357

 

2.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million credit facility (4)

 

June 2018

 

N/A

 

L + 1.30%

 

64,881,000

 

64,881,000

 

2.53

%

39,047,500

 

39,047,500

 

1.95

%

 

June 2019

 

N/A

 

L + 1.25%

 

9,190

 

9,190

 

3.39

%

23,785

 

23,785

 

2.86

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million repurchase facility

 

Aug. 2018

 

N/A

 

L + 1.35%

 

1,479,155

 

1,542,000

 

2.58

%

 

 

 

 

Aug. 2018

 

N/A

 

L + 1.35%

 

12,239

 

12,250

 

3.44

%

24,827

 

24,873

 

2.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

327,987,187

 

$

328,276,946

 

2.56

%

$

660,144,122

 

$

660,315,159

 

1.96

%

Agency Business total

 

 

 

 

 

 

 

$

307,656

 

$

307,811

 

3.35

%

$

291,536

 

$

291,716

 

2.78

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated total

 

 

 

 

 

 

 

$

562,326,537

 

$

713,043,810

 

2.99

%

$

906,636,790

 

$

1,041,761,233

 

2.25

%

 

 

 

 

 

 

 

$

910,504

 

$

982,561

 

3.98

%

$

528,573

 

$

533,584

 

3.34

%

 


(1)              The debt carrying value for the Structured Business at SeptemberJune 30, 20172018 and December 31, 20162017 was net of unamortized deferred finance costs of $1.6$3.1 million and $1.9$2.2 million, respectively. The debt carrying value for the Agency Business at both SeptemberJune 30, 20172018 and December 31, 20162017 was net of unamortized deferred finance costs of $0.3$0.2 million.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

(2)              The committed amount under theAs of June 30, 2018 and December 31, 2017, this facility was temporarily increased to $200.0collateralized by CLO bonds retained by us with a principal balance of $114.2 million which expired in April 2017, and again to $225.0$61.0 million, which expired in August 2017.respectively, and B Piece bonds with a carrying value of $50.3 million and $27.8 million, respectively.

(3)              The committed amountnote rate under the facility was temporarily increasedthis agreement is subject to $350.0 million, which expired in February 2017.a LIBOR Floor of 35 basis points.

(4)              The committed amount under the facility was temporarily increased to $250.0 million, which expiresexpired in January 2018.

 

Structured Business

 

At SeptemberJune 30, 20172018 and December 31, 2016,2017, the weighted average interest rate for the credit facilities and repurchase agreements of our Structured Business, noted in the above table, was 3.58% and 3.02%, respectively. Includingincluding certain fees and costs, such as structuring, commitment, non-use and warehousing fees, the weighted average interest rate was 4.06%4.72% and 3.42% at September 30, 2017 and December 31, 2016,4.51%, respectively. The leverage on our loans and investment portfolio financed through our credit facilities and repurchase agreements, excluding the $10.0 millionsecurities repurchase facility, working capital line of credit and the $3.0 million master security agreementagreements used to finance leasehold and capital expenditure improvements at our corporate office, was 58%71% and 64%72% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

In October 2017,June 2018, we entered into a $17.4 million credit facility to finance a multifamily bridge loan. The facility bears interest at a rate of 240 basis points over LIBOR and matures in June 2020, with a one-year extension option.

In June 2018, we amended our $150.0$10.0 million working capital facility to increase the committed amount by $15.0 million to $25.0 million, reduce the interest rate by 25 basis points and extend the maturity date to June 2019.

In April 2018, we amended our $100.0 million repurchase facility increasingadjusting the interest rate from 200 basis points over LIBOR to an interest rate range of 175 basis points to 200 basis points over LIBOR, depending on the class of loan financed.

In April 2018, we amended our $75.0 million credit facility adjusting the interest rate from 200 basis points to 250 basis points over LIBOR to an interest rate range of 175 basis points to 250 basis points over LIBOR, depending on the type of loan financed.

In March 2018, we amended our $225.0 million repurchase facility to increase the committed amount by $75.0 million to $225.0 million.$300.0 million, reduce the interest rates by 50 basis points and extend the maturity date to March 2020 with a one-year extension option. In June 2018, we also temporarily increased the committed amount by $75.0 million to $375.0 million, which expires in December 2018.

 

In September 2017,March 2018, we entered into a $25.5$20.0 million credit facility to finance a multifamilyhealthcare facility bridge loan. The facility bears interest at a rate of 250 basis points over LIBOR and matures in October 2019.March 2020, with a one-year extension option.

 

In June 2017,March 2018, we replacedentered into a $100.0master security agreement that was used to finance certain capital expenditures. We have a $2.2 million note payable under this agreement which bears interest at a fixed rate of 4.60%, requires monthly amortization payments and matures in 2021.

In February 2018, we entered into a $23.2 million credit facility withto finance a $100.0 million repurchase facility with the same financial institution which matures in June 2019 and bears interest at 200 basis points over LIBOR, representing a 15 basis point rate decrease.self storage bridge loan. The facility has a maximum advance rate of 75%.

In June 2017, we extended the maturity date of our $75.0 million credit facility that bears interest at a rate of 200 basis points over LIBOR to June 2018.

In March 2017, we entered into a $10.0 million unsecured working capital line of credit that bears interest at a rate of 250 basis points over LIBOR. This line of credit is scheduled to mature in March 2018 and is renewable annually.

Agency Business

In July 2017, we amended one of our $150.0 million credit facilities to provide a short term extension to the maturity date and reduce the interest rate 5 basis points to 135 basis points over LIBOR. In September 2017, we extended the maturity date to July 2018.

In August 2017, we entered into a $100.0 million repurchase facility that bears interest at a rate of 135230 basis points over LIBOR and matures in August 2018. The financial institution that provided this facility hasFebruary 2020, with a security interest in the underlying mortgage notes that serve as collateral for this facility.one-year extension option.

Agency Business

 

In June 2017,April 2018, we amended our $100.0$150.0 million credit facility to extend the maturity date to June 2018 and reducedreducing the interest rate 5 basis points to 130 basis points over LIBOR. The amended agreement also provided us with the option of temporarily increasing the committed amount to $250.0 million subject to prior written notice. In July 2017,2018, we exercised our optiontemporarily extended the maturity date to August 2018 and increasedare currently in negotiations to amend the committed amount to $250.0 million, which expires in January 2018.agreement and extend its maturity.

 

We have a $500.0In January 2018, we amended our $150.0 million Multifamily As Soon as Pooled ® Plus (“ASAP”) agreement with Fannie Mae, which, in March 2017, was increased from $400.0 million. The ASAP agreement is not a committed line, has no expiration date and bearswarehouse facility reducing the interest at a rate of 10510 basis points to 130 basis points over LIBOR (with a LIBOR Floor of 0.35%and extending the maturity date one year to January 2019.

Collateralized Loan Obligations (“CLOs”). ASAP provides us with a warehousing credit facility

We account for mortgage loans thatour CLO transactions on our consolidated balance sheet as financing facilities.  Our CLOs are VIEs for which we are the primary beneficiary and are consolidated in our financial statements.  The investment grade tranches are treated as secured financings, and are non-recourse to be sold to Fannie Mae and serviced under the Fannie Mae DUS program.us.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

In September 2017, we simultaneously terminated our then existing $30.0 million letter of credit facility and entered into a new $50.0 million letter of credit facility with a different financial institution. The new facility bears interest at a fixed rate of 2.875%, representing a 12.5 basis point decrease from the prior facility, matures in September 2020 and is primarily collateralized by our servicing revenue as approved by Fannie Mae and Freddie Mac. The letter of credit facility includes a $5.0 million sublimit for an obligation under the Freddie Mac SBL Program. At September 30, 2017, the letters of credit outstanding include $42.0 million for the Fannie Mae DUS program and $5.0 million for the Freddie Mac SBL Program.

Collateralized Loan Obligations (“CLOs”)

 

The following table outlines borrowings and the corresponding collateral under our CLOs:CLOs ($ in thousands):

 

 

 

 

 

 

 

 

Collateral (3)

 

 

Debt

 

Collateral (3)

 

 

Debt

 

Loans

 

Cash

 

 

 

 

 

 

 

 

Loans

 

Cash

 

September 30, 2017

 

Face Value

 

Carrying Value
(1)

 

Wtd. Avg.
Rate (2)

 

Unpaid
Principal

 

Carrying Value

 

Restricted
Cash (4)

 

June 30, 2018

 

Face Value

 

Carrying Value
(1)

 

Wtd. Avg.
Rate (2)

 

UPB

 

Carrying Value

 

Restricted
Cash (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO X

 

$

441,000

 

$

435,885

 

3.59

%

$

502,781

 

$

500,646

 

$

49,554

 

CLO IX

 

356,400

 

351,625

 

3.50

%

460,925

 

459,562

 

75

 

CLO VIII

 

$

282,874,000

 

$

278,296,193

 

2.58

%

$

324,190,963

 

$

322,527,190

 

$

40,809,037

 

 

282,874

 

279,221

 

3.45

%

330,112

 

329,213

 

26,288

 

CLO VII

 

279,000,000

 

275,035,774

 

3.27

%

313,857,643

 

312,693,431

 

35,142,358

 

 

279,000

 

275,919

 

4.14

%

318,684

 

317,773

 

36,134

 

CLO VI

 

250,250,000

 

247,207,545

 

3.76

%

303,821,532

 

302,750,497

 

21,178,468

 

 

250,250

 

247,994

 

4.63

%

297,133

 

296,065

 

25,491

 

CLO V

 

267,750,000

 

265,690,976

 

3.72

%

312,933,082

 

311,904,481

 

37,066,918

 

Total CLOs

 

$

1,079,874,000

 

$

1,066,230,488

 

3.32

%

$

1,254,803,220

 

$

1,249,875,599

 

$

134,196,781

 

 

$

1,609,524

 

$

1,590,644

 

3.80

%

$

1,909,635

 

$

1,903,259

 

$

137,542

 

 

December 31, 2016

 

Face Value

 

Carrying Value
(1)

 

Wtd. Avg.
Rate

 

Unpaid
Principal

 

Carrying Value

 

Restricted
Cash (3)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO IX

 

$

356,400

 

$

351,042

 

2.97

%

$

372,350

 

$

371,236

 

$

88,650

 

CLO VIII

 

282,874

 

278,606

 

2.92

%

364,838

 

363,339

 

162

 

CLO VII

 

279,000

 

275,331

 

3.61

%

346,524

 

345,220

 

13,476

 

CLO VI

 

$

250,250,000

 

$

246,442,883

 

3.30

%

$

324,569,105

 

$

323,350,928

 

$

430,895

 

 

250,250

 

247,470

 

4.10

%

314,382

 

313,582

 

10,618

 

CLO V

 

267,750,000

 

264,864,114

 

3.26

%

344,679,286

 

343,747,570

 

5,320,715

 

 

267,750

 

265,973

 

4.06

%

347,797

 

346,803

 

2,203

 

CLO IV

 

219,000,000

 

217,134,112

 

3.06

%

291,319,123

 

290,429,019

 

8,680,878

 

Total CLOs

 

$

737,000,000

 

$

728,441,109

 

3.21

%

$

960,567,514

 

$

957,527,517

 

$

14,432,488

 

 

$

1,436,274

 

$

1,418,422

 

3.48

%

$

1,745,891

 

$

1,740,180

 

$

115,109

 

 


(1)   Debt carrying value is net of $13.6$18.9 million and $8.6$17.9 million of deferred financing fees at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

(2)   At SeptemberJune 30, 20172018 and December 31, 2016,2017, the aggregate weighted average note rate for our CLOs, including certain fees and costs, was 3.88%4.34% and 3.71%4.08%, respectively.

(3)   As of SeptemberJune 30, 20172018 and December 31, 2016,2017, there was no collateral at risk of default or deemed to be a “credit risk” as defined by the CLO indenture.

(4)   Represents restricted cash held for principal repayments as well as for reinvestment in the CLOs.  Does not include restricted cash related to interest payments, delayed fundings and expenses.

 

CLO VIIIX — In August 2017,June 2018, we completed a collateralized securitization vehicle (“CLO VIII”X”), issuing sixseven tranches of CLO notes through two newly-formed wholly-owned subsidiaries totaling $312.1$494.2 million. Of the total CLO notes issued, $282.9$441.0 million were investment grade notes issued to third party investors and $29.2$53.2 million were below investment grade notes retained by us. As of the CLO closing date, the notes were secured by a portfolio of loan obligations with a face value of $293.7$501.9 million, consisting primarily of bridge loans that were contributed from our existing loan portfolio.  The financing has a three-yearfour-year replacement period that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture.  Thereafter, the outstanding debt balance will be reduced as loans are repaid.  Initially, the proceeds of the issuance of the securities also included $71.3$58.1 million for the purpose of acquiring additional loan obligations for a period of up to 120 days from the CLO closing date. Subsequently, the issuer will own loan obligations with a face value of $365.0 million.$560.0 million, representing leverage of 79%.  We retained a residual interest in the portfolio with a notional amount of $82.1$119.0 million, including the $29.2$53.2 million below investment grade notes.  The notes had an initial weighted average interest rate of 1.31%1.45% plus one-month LIBOR and interest payments on the notes are payable monthly.

 

CLO VIIV — In AprilJune 2018, we completed the unwind of CLO V, redeeming $267.8 million of outstanding notes which were repaid primarily from the refinancing of the remaining assets within our existing financing facilities (including CLO X), as well as with cash held by CLO V, and expensed $1.3 million of deferred financing fees into interest expense on the consolidated statements of income.

Luxembourg Debt Fund

In November 2017, we completed CLO VII, issuingformed a $100.0 million Luxembourg commercial real estate debt fund (“Debt Fund”) and issued $70.0 million of floating rate notes to third party investors three trancheswhich bear an initial interest rate of investment grade CLOs through two newly-formed wholly-owned subsidiaries totaling $279.0 million. As of4.15% over LIBOR. The notes mature in 2025 and we retained a $30.0 million equity interest in the CLO closing date,Debt Fund. The Debt Fund is a VIE for which we are the notes wereprimary beneficiary and is consolidated in our financial statements. The Debt Fund is secured by a portfolio of loan obligations with a face value of $296.2$100.0 million, consisting primarily ofwhich includes first mortgage bridge loans, that were contributedsenior participation interests in first mortgage bridge loans, subordinate participation interest in first mortgage bridge loans and participation interests in mezzanine loans. The Debt Fund allows, for a period of three years, principal proceeds from our existing loan portfolio.  The financing has a three-yearportfolio assets to be reinvested in qualifying replacement assets, subject to certain conditions.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

period that allowsBorrowings and the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvestedcorresponding collateral under our Debt Fund are as follows ($ in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture.  Thereafter, the outstanding debt balance will be reduced as loans are repaid.  Initially, the proceeds of the issuance of the securities also included $63.8 million for the purpose of acquiring additional loan obligations for a period of up to 120 days from the CLO closing date, which were subsequently utilized prior to the end of the second quarter of 2017 resulting in the issuer owning loan obligations with a face value of $360.0 million.  We retained a residual interest in the portfolio with a notional amount of $81.0 million.  The notes had an initial weighted average interest rate of 1.99% plus one-month LIBOR and interest payments on the notes are payable monthly.thousands):

 

June 30, 2018

 

Debt

 

Collateral (3)

 

 

 

 

 

 

 

Loans

 

Cash

 

Face Value

 

Carrying
Value (1)

 

Wtd. Avg.
Rate (2)

 

UPB

 

Carrying Value

 

Restricted
Cash (4)

 

$

70,000

 

$

68,270

 

6.33

%

$

97,700

 

$

97,323

 

$

 

CLO IV — In September 2017, we completed the unwind

December 31, 2017

 

$

70,000

 

$

68,084

 

5.79

%

$

96,995

 

$

96,564

 

$

3,005

 


(1)         Debt carrying value is net of CLO IV, redeeming $219.0$1.7 million of our outstanding notes which were repaid primarily from the refinancing of the remaining assets within our existing financing facilities (including CLO VIII), as well as with cash held by CLO IV, and expensed $1.1$1.9 million of deferred financing fees intoat June 30, 2018 and December 31, 2017, respectively.

(2)         At June 30, 2018 and December 31, 2017, the aggregate weighted average note rate, including certain fees and costs, was 6.84% and 6.05%, respectively.

(3)         At both June 30, 2018 and December 31, 2017, there was no collateral at risk of default or deemed to be a “credit risk.”

(4)         Represents restricted cash held for reinvestment.  Excludes restricted cash related to interest expense on the consolidated statements of income.

We account for our CLO transactions on our consolidated balance sheet as financing facilities. Our CLOs are VIEs for which we are the primary beneficiarypayments, delayed fundings and are consolidated in our financial statements.  The investment grade tranches are treated as secured financings, and are non-recourse to us.expenses.

 

Senior Unsecured Notes

 

In March 2018, we issued $100.0 million aggregate principal amount of 5.625% senior unsecured notes due in May 2023 (the “Initial Notes”) in a private placement, and, in May 2018, we issued an additional $25.0 million (the “Reopened Notes” and, together with the Initial Notes, the “5.625% Notes,”) which brought the aggregate outstanding principal amount to $125.0 million. The Reopened Notes are fully fungible with, and rank equally in right of payment with the Initial Notes. We received total proceeds of $122.3 million from the issuances, after deducting the underwriting discount and other offering expenses. We used the net proceeds from the Initial Notes to fully redeem our 7.375% senior unsecured notes due in 2021 (the “7.375% Notes”) totaling $97.9 million and the net proceeds from the Reopened Notes to make investments and for general corporate purposes.  The 5.625% Notes are unsecured and can be redeemed by us at any time prior to April 1, 2023, at a redemption price equal to 100% of the aggregate principal amount, plus a “make-whole” premium and accrued and unpaid interest. We have the right to redeem the 5.625% Notes on or after April 1, 2023, at a redemption price equal to 100% of the aggregate principal amount, plus accrued and unpaid interest. The interest is paid semiannually in May and November starting in November 2018. At June 30, 2018, the debt carrying value of our senior unsecured notes at September 30, 2017 and December 31, 2016 were $95.1the 5.625% Notes was $122.3 million, and $94.5 million, respectively, which were net of $2.8$2.7 million and $3.3 million, respectively, of deferred financing fees. The notes are due in 2021; however, they became eligible for redemption by us on May 16, 2017.  Including certain fees, and costs, the weighted average note rate was 8.16%6.08%, including certain fees and 8.15% at September 30, 2017 andcosts.

At December 31, 2016, respectively.2017, the debt carrying value of our 7.375% Notes was $95.3 million, which was net of $2.6 million of deferred financing fees, and the weighted average note rate was 8.16%.

 

Convertible Senior Unsecured Notes

 

In OctoberNovember 2017, we issued $143.8 million aggregate principal amount of 5.375% convertible senior unsecured notes (the “5.375% Convertible Notes). We received total proceeds of $139.2 million from the offering, net of deferred financing fees, which is amortized through interest expense over the life of the 5.375% Convertible Notes. The initial conversion rate was 107.7122 shares of common stock per $1,000 principal amount of 5.375% Convertible Notes and represents a conversion price of $9.28 per share of common stock. At June 30, 2018, the 5.375% Convertible Notes had a conversion rate of 108.6502 shares of common stock per $1,000 principal amount of 5.375% Convertible Notes, which represented a conversion price of $9.20 per share of common stock. The 5.375% Convertible Notes pay interest semiannually in arrears. The 5.375% Convertible Notes have a scheduled maturity in November 2020. See Subsequent Events section below for details of our repurchase of substantially all of the 5.375% Convertible Notes.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

In 2016, we issued $86.3 million aggregate principal amount of 6.50% convertible senior unsecured notes including the underwriter’s over-allotment option of $11.3 million,(the “6.50% Convertible Notes”) and, in January 2017, we issued an additional $13.8 million which brought the aggregate outstanding principal amount of the notes to $100.0 million. The additional issuance in January 2017 is fully fungible with, and ranks equally in right of payment with, the initial issuance. The notes pay interest semiannually in arrears.6.50% Convertible Notes. We received total proceeds of $95.8 million from the offerings, net of deferred financing fees, which are being amortized through interest expense over the life of the notes.6.50% Convertible Notes. The initial conversion rate was 119.3033 shares of common stock per $1,000 principal amount of 6.50% Convertible Notes and represented a conversion price of $8.38 per share of common stock. At June 30, 2018, the 6.50% Convertible Notes had a conversion rate of 122.3263 shares of common stock per $1,000 principal amount of notes, mature onwhich represented a conversion price of $8.17 per share of common stock. The 6.50% Convertible Notes pay interest semiannually in arrears. The 6.50% Convertible Notes have a scheduled maturity in October 1, 2019, unless earlier converted or repurchased by2019. See Subsequent Events section below for details of our repurchase of substantially all of the holders pursuant to their terms, and6.50% Convertible Notes.

Our convertible senior unsecured notes are not redeemable by us prior to maturity.

The notestheir maturities and are convertible into, at our election, cash, shares of our common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate isrates are subject to adjustment upon the occurrence of certain specified events and the holders may require us to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if we undergo a fundamental change as specified in the agreement. The initial conversion rate was 119.3033 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $8.38 per share of common stock. At September 30, 3017, the notes had a conversion rate of 120.0428 shares of common stock per $1,000 principal amount of notes, which represented a conversion price of $8.33 per share of common stock.agreements.

 

Accounting guidance requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component reflects the present value of the discounted cash flows using the nonconvertible debt borrowing rate of 7.50% at the time of the issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is being accreted back to the notes principal amount through interest expense over the term of the notes, which was 2.001.92 years and 2.752.41 years at SeptemberJune 30, 20172018 and December 31, 2016, respectively.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017, respectively, on a weighted average basis.

 

The principal balance,UPB, unamortized discount and net carrying valueamount of the liability and equity components of the convertible notes were as follows:follows (in thousands):

 

 

 

Liability

 

Equity

 

 

 

Component

 

Component

 

Period

 

Principal
Balance

 

Unamortized Debt
Discount

 

Unamortized Deferred
Financing Fees

 

Net Carrying
Value

 

Net Carrying
Value

 

September 30, 2017

 

$

100,000,000

 

$

1,809,470

 

$

2,809,409

 

$

95,381,121

 

$

2,531,926

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

$

86,250,000

 

$

2,119,436

 

$

3,470,526

 

$

80,660,038

 

$

2,178,647

 

 

 

Liability

 

Equity

 

 

 

Component

 

Component

 

Period

 

UPB

 

Unamortized Debt
Discount

 

Unamortized Deferred
Financing Fees

 

Net Carrying
Value

 

Net Carrying
Value

 

June 30, 2018

 

$

243,750

 

$

4,568

 

$

3,751

 

$

235,431

 

$

6,733

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

$

243,750

 

$

5,742

 

$

6,721

 

$

231,287

 

$

6,733

 

 

During the three months ended SeptemberJune 30, 2018, we incurred total interest expense on the notes of $6.1 million, of which $3.2 million, $2.3 million and $0.6 million related to the cash coupon, amortization of the deferred financing fees and of the debt discount, respectively. During the six months ended June 30, 2018, we incurred total interest expense on the notes of $11.0 million, of which $6.8 million, $3.0 million and $1.2 million related to the cash coupon, amortization of the deferred financing fees and of the debt discount, respectively. During the three months ended June 30, 2017, we incurred total interest expense on the notes of $2.2 million, of which $1.6 million, $0.4 million and $0.2 million related to the 6.50% cash coupon, accretionamortization of the deferred financing fees and of the debt discount, respectively. During the ninesix months ended SeptemberJune 30, 2017, we incurred total interest expense on the notes of $6.6$4.3 million, of which $4.8$3.2 million, $1.1$0.7 million and $0.7$0.4 million related to the 6.50% cash coupon, accretionamortization of the deferred financing fees and of the debt discount, respectively. Including the amortization of the deferred financing fees and debt discount, our weighted average total cost of the notes is 8.68%7.96% per annum.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Subsequent Events

In July 2018, we completed the issuance and sale of $245.0 million in aggregate principal amount of 5.25% convertible senior notes (the “5.25% Convertible Notes”) through two private placements, including $15.0 million of the initial purchaser’s over-allotment option. The average priceinitial purchasers of the 5.25% Convertible Notes have the option to purchase up to an additional $19.5 million of these notes solely to cover over-allotments. The 5.25% Convertible Notes mature in July 2021, unless earlier converted or repurchased by the holders pursuant to their terms, and pay interest semiannually in arrears.  We received proceeds totaling $237.2 million, net of the underwriter’s discount and fees from these offerings. We used the net proceeds to exchange $99.8 million of our 6.50% Convertible Notes and $127.6 million of our 5.375% Convertible Notes for a combination of $219.8 million in cash (which includes accrued interest) and 6.8 million shares of our common stock during the second quarter of 2017 exceeded the conversion price, as calculated in accordance with the terms of the indenture. Therefore, the notes impacted our diluted earnings per shareto settle such exchanges. The remaining net proceeds were used for the nine months ended September 30, 2017. Diluted earnings per share was not impacted for any other period presented. See Note 18 — Equity for details.general corporate purposes.

 

Junior Subordinated Notes

 

In the first quarter of 2017, we purchased, at a discount, $20.9 million of our junior subordinated notes with a carrying value of $19.8 million and recorded a gain on extinguishment of debt of $7.1 million. As a result, we settled our related equity investment and extinguished $21.5 million of notes. The carrying value of borrowings under our junior subordinated notes was $139.4$139.9 million and $157.9$139.6 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, which is net of a deferred amount of $12.7$12.3 million and $14.9$12.5 million, respectively, (which is being amortized into interest expense over the life of the notes) and deferred financing fees of $2.2 million and $3.1 million, respectively, of deferred financing fees.in both periods.  These notes have maturities ranging from March 2034 through April 2037 and pay interest quarterly at a fixed or floating rate of interest based on three-month LIBOR. The current weighted average note rate was 4.17%5.18% and 3.82%4.53% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.  Including certain fees and costs, the weighted average note rate was 4.27%5.28% and 3.94%4.63% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

 

Related Party Financing

 

In connection with the Acquisition, we entered into a five year $50.0 million preferred equity interest financing agreement with ACM to finance a portion of the aggregate purchase price. The debt has a five year term with a preferred return of 7% throughAt December 31, 2016, increasing by 1% per annum thereafter, with a maximum rate of 12%. In addition, after eighteen months, the principal balance due is scheduled to increase over time with $62.5 million due if the debt remained outstanding until the end of the five-year term. Interest expense associated with this financing is recorded using the effective yield method. At both September 30, 2017, and December 31, 2016, the outstanding principal balance was $50.0 million. In January 2018, we paid $50.0 million in full satisfaction of this debt. During the six months ended June 30, 2018, we recorded interest expense of $0.3 million and, during the three and ninesix months ended SeptemberJune 30, 2017, we recorded interest expense related to this financing of $1.0 million and $2.9$1.9 million, respectively, and $0.8 million during both the three and nine months ended September 30, 2016.respectively.

 

Debt Covenants

 

Credit Facilities and Repurchase Agreements. The credit facilities and repurchase agreements contain various financial covenants, including, but not limited to, minimum liquidity requirements, minimum net worth

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

requirements, as well as certain other debt service coverage ratios, debt to equity ratios and minimum servicing portfolio tests.  We were in compliance with all financial covenants and restrictions at SeptemberJune 30, 2017.2018.

 

CLOs. Our CLO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments.  If we fail these covenants in any CLO,of our CLOs, all cash flows from suchthe applicable CLO would be diverted to repay principal and interest on the outstanding CLO bonds and we would not receive any residual payments until that CLO regained compliance with such tests.  Our CLOs were in compliance with all such covenants as of SeptemberJune 30, 2017,2018, as well as on the most recent determination dates in October 2017.July 2018.  In the event of a breach of the CLO covenants that could not be cured in the near-term, we would be required to fund our non-CLO expenses, including employee costs, distributions required to maintain our REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CLO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, or (v) accessing the equity or debt capital markets, if available.  We have the right to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CLOs. However, we may not have sufficient liquidity available to do so at such time.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

A summary of our CLO compliance tests as of the most recent determination dates in October 2017July 2018 is as follows:

 

Cash Flow Triggers

 

CLO V

 

CLO VI

 

CLO VII

 

CLO VIII

 

 

CLO VI

 

CLO VII

 

CLO VIII

 

CLO IX

 

CLO X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overcollateralization (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

130.72%

 

129.87%

 

129.03%

 

129.03%

 

 

129.87

%

129.03

%

129.03

%

134.68

%

126.98

%

 

 

 

 

 

 

 

 

 

Limit

 

129.72%

 

128.87%

 

128.03%

 

128.03%

 

 

128.87

%

128.03

%

128.03

%

133.68

%

125.98

%

 

 

 

 

 

 

 

 

 

Pass / Fail

 

Pass

 

Pass

 

Pass

 

Pass

 

 

Pass

 

Pass

 

Pass

 

Pass

 

Pass

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Coverage (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

211.97%

 

240.15%

 

287.79%

 

360.90%

 

 

191.10

%

216.08

%

252.91

%

255.51

%

201.62

%

 

 

 

 

 

 

 

 

 

Limit

 

120.00%

 

120.00%

 

120.00%

 

120.00%

 

 

120.00

%

120.00

%

120.00

%

120.00

%

120.00

%

 

 

 

 

 

 

 

 

 

Pass / Fail

 

Pass

 

Pass

 

Pass

 

Pass

 

 

Pass

 

Pass

 

Pass

 

Pass

 

Pass

 

 


(1)         The overcollateralization ratio divides the total principal balance of all collateral in the CLO by the total principal balance of the bonds associated with the applicable ratio.  To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies.  Rating downgrades of CLO collateral will generally not have a direct impact on the principal balance of a CLO asset for purposes of calculating the CLO overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CLO vehicle.

(2)         The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.

 

A summary of ourOur CLO overcollateralization ratios as of the determination dates subsequent to each quarter isare as follows:

 

Determination (1)

 

CLO V

 

CLO VI

 

CLO VII

 

CLO VIII

 

 

CLO VI

 

CLO VII

 

CLO VIII

 

CLO IX

 

CLO X

 

July 2018

 

129.87

%

129.03

%

129.03

%

134.68

%

126.98

%

April 2018

 

129.87

%

129.03

%

129.03

%

134.69

%

 

January 2018

 

129.87

%

129.03

%

129.03

%

134.68

%

 

October 2017

 

130.72

%

129.87

%

129.03

%

129.03

%

 

129.87

%

129.03

%

129.03

%

 

 

July 2017

 

130.72

%

129.87

%

129.03

%

 

 

129.87

%

129.03

%

 

 

 

April 2017

 

130.72

%

129.87

%

 

 

January 2017

 

130.72

%

129.87

%

 

 

October 2016

 

130.72

%

129.87

%

 

 

 


(1) The table above represents the quarterly trend of our overcollateralization ratio, however, the CLO determination dates are monthly and we were in compliance with this test for all periods presented.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

 

The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CLOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs.  No payment due under the junior subordinated indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee.  The junior subordinated indentures are also cross-defaulted with each other.

 

Note 1211 — Allowance for Loss-Sharing Obligations

 

A summary of ourOur allowance for loss-sharing obligations related to the Fannie Mae DUS program is as follows:follows (in thousands):

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

Beginning balance

 

$

32,797,406

 

$

 

$

32,407,554

 

$

 

 

$

31,097

 

$

32,219

 

$

30,511

 

$

32,407

 

Allowance for loss-sharing obligations assumed in the Acquisition

 

 

32,616,821

 

 

32,616,821

 

Provisions for loss sharing (net of recoveries)

 

(2,617,064

)

1,316,862

 

(405,494

)

1,316,862

 

Provisions for loss sharing

 

1,134

 

1,890

 

2,339

 

4,145

 

Provisions reversal for loan repayments

 

(785

)

(1,358

)

(1,518

)

(1,933

)

Charge-offs, net

 

(21,878

)

(2,820,270

)

(1,843,596

)

(2,820,270

)

 

(44

)

46

 

70

 

(1,822

)

Ending balance

 

$

30,158,464

 

$

31,113,413

 

$

30,158,464

 

$

31,113,413

 

 

$

31,402

 

$

32,797

 

$

31,402

 

$

32,797

 

 

When we settle a loss under the DUS loss-sharing model, the net loss is charged-off against the previously recorded loss-sharing obligation. The settled loss is often net of any previously advanced principal and interest payments in accordance with the DUS program, which are reflected as reductions to the proceeds needed to settle losses. At both September 30, 2017 and December 31, 2016,2017, we had outstanding advances of $0.3$0.1 million, which were netted against the allowance for loss-sharing obligations.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

At SeptemberJune 30, 20172018 and December 31, 2016,2017, the maximum quantifiable liability associated with our guarantees under the Fannie Mae DUS agreement was $2.23$2.30 billion and $2.04$2.24 billion, respectively. The maximum quantifiable liability is not representative of the actual loss we would incur. We would be liable for this amount only if all of the loans we service for Fannie Mae, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.

 

Note 1312 — Derivative Financial Instruments

 

Structured Business. During the first quarter of 2017, our remaining two qualifying LIBOR cap hedges, with a notional value of $55.6 million, and our remaining two qualifying interest rate swap cash flow hedges, with a notional value of $41.5 million, matured. We entered into the LIBOR cap hedges due to certain CLO agreements requiring a LIBOR cap of 2% and 3% and we entered into the interest rate swaps to hedge the variable cash flows associated with existing variable-rate debt. As of September 30, 2017, the Structured Business did not have any derivative financial instruments. At December 31, 2016, the fair value of our LIBOR cap hedges and interest rate swaps was less than $0.1 million and $(0.2) million, respectively.

The following table presents the effect of our qualifying derivative financial instruments on the statements of income (dollars in thousands):

 

 

Loss Recognized In Other
Comprehensive Income (Effective
Portion) For the Nine Months Ended
September 30,

 

Loss Reclassified from Accumulated
Other Comprehensive Income into
Interest Expense (Effective Portion)
For the Nine Months Ended
September 30,

 

Derivative

 

2017

 

2016

 

2017

 

2016

 

Interest Rate Swaps/Cap

 

$

 

$

196

 

$

(237

)

$

(4,012

)

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

As of December 31, 2016, the cumulative amount of other comprehensive income (loss) related to net unrealized losses on derivatives designated as qualifying hedges were de minimis.

Agency Business. The following is a summary of our non-qualifying derivative financial instruments:instruments held by our Agency Business ($ in thousands):

 

 

September 30, 2017

 

 

June 30, 2018

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

Fair Value

 

Derivative

 

Count

 

Notional Value

 

Balance Sheet
Location

 

Derivative
Assets

 

Derivative
Liabilities

 

 

Count

 

Notional
Value

 

Balance Sheet
Location

 

Derivative
Assets

 

Derivative
Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate Lock Commitments

 

7

 

$

30,179,000

 

Other Assets/ Other Liabilities

 

$

419,758

 

$

(64,378

)

 

10

 

$

72,653

 

Other Assets/ Other Liabilities

 

$

606

 

$

(295

)

Forward Sale Commitments

 

81

 

358,712,203

 

Other Assets/ Other Liabilities

 

68,989

 

(1,817,072

)

 

63

 

380,786

 

Other Assets/ Other Liabilities

 

1,515

 

(61

)

 

 

 

$

388,891,203

 

 

 

$

488,747

 

$

(1,881,450

)

 

 

 

$

453,439

 

 

 

$

2,121

 

$

(356

)

 

 

December 31, 2016

 

 

December 31, 2017

 

Rate Lock Commitments

 

12

 

$

156,685,400

 

Other Assets/ Other Liabilities

 

$

2,816,132

 

$

(764,429

)

 

3

 

$

38,578

 

Other Assets/ Other Liabilities

 

$

276

 

$

(278

)

Forward Sale Commitments

 

105

 

819,033,129

 

Other Assets/ Other Liabilities

 

2,798,858

 

(1,535,150

)

 

75

 

330,827

 

Other Assets/ Other Liabilities

 

408

 

(1,028

)

 

 

 

$

975,718,529

 

 

 

$

5,614,990

 

$

(2,299,579

)

 

 

 

$

369,405

 

 

 

$

684

 

$

(1,306

)

 

We enter into contractual commitments to originate and sell mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrower “rate locks” a specified interest rate within time frames established by us. All potential borrowers are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, we enter into a forward sale commitment with the investor simultaneous with the rate lock commitment with the borrower. The forward sale contract locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.

 

These commitments meet the definition of a derivative and are recorded at fair value, including the effects of interest rate movements which are reflected as a component of other income, net in the consolidated statements of income. The estimated fair value of rate lock commitments also includes the fair value of the expected net cash flows associated with the servicing of the loan which is recorded as income from MSRs in the consolidated statements of income. During the three and ninesix months ended SeptemberJune 30, 2017,2018, we recorded a net gainsloss of $0.2$0.6 million and a net losses gain

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

of $2.3$2.1 million, respectively, from changes in the fair value of these derivatives in other income, net and $18.9$17.9 million and $56.2$37.6 million, respectively, of income from MSRs. During both the three and ninesix months ended SeptemberJune 30, 2016,2017, we recorded $0.2$1.6 million and $2.5 million, respectively, of net gainslosses from changes in the fair value of these derivatives in other income, net and $16.0$17.3 million and $37.3 million, respectively, of income from MSRs. See Note 1413 — Fair Value for details.

 

Note 1413 — Fair Value

 

Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the principal amounts, carrying values and the estimated fair values of our financial instruments:

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017instruments (in thousands):

 

 

September 30, 2017

 

December 31, 2016

 

 

June 30, 2018

 

December 31, 2017

 

 

Principal /
Notional Amount

 

Carrying Value

 

Estimated
Fair Value

 

Principal /
Notional Amount

 

Carrying Value

 

Estimated
Fair Value

 

 

Principal /
Notional Amount

 

Carrying
Value

 

Estimated
Fair Value

 

Principal /
Notional Amount

 

Carrying
Value

 

Estimated
Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

2,094,376,123

 

$

1,997,555,985

 

$

2,056,020,469

 

$

1,790,159,966

 

$

1,695,732,351

 

$

1,749,130,232

 

 

$

3,134,879

 

$

3,064,798

 

$

3,149,044

 

$

2,652,538

 

$

2,579,127

 

$

2,652,520

 

Loans held-for-sale, net

 

333,983,865

 

333,267,976

 

338,766,761

 

675,493,536

 

673,367,304

 

683,833,449

 

 

308,134

 

311,487

 

316,815

 

292,249

 

297,443

 

302,883

 

Capitalized mortgage servicing rights, net

 

n/a

 

247,875,659

 

293,807,076

 

n/a

 

227,742,986

 

245,455,881

 

 

n/a

 

257,021

 

302,698

 

n/a

 

252,608

 

286,073

 

Available-for-sale securities

 

58,789

 

4,707,085

 

4,707,085

 

58,789

 

5,403,463

 

5,403,463

 

Securities held-to-maturity, net

 

28,035,293

 

18,851,089

 

18,882,997

 

 

 

 

 

71,222

 

50,342

 

50,153

 

40,566

 

27,837

 

28,439

 

Derivative financial instuments

 

100,898,203

 

488,747

 

488,747

 

550,117,700

 

5,614,990

 

5,614,990

 

 

372,967

 

2,121

 

2,121

 

77,984

 

684

 

684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit and repurchase facilities

 

$

564,231,866

 

$

562,326,537

 

$

563,366,477

 

$

908,680,198

 

$

906,636,790

 

$

907,882,886

 

 

$

913,774

 

$

910,504

 

$

911,893

 

$

530,938

 

$

528,573

 

$

529,992

 

Collateralized loan obligations

 

1,079,874,000

 

1,066,230,488

 

1,080,228,695

 

737,000,000

 

728,441,109

 

728,642,500

 

 

1,609,524

 

1,590,644

 

1,613,801

 

1,436,274

 

1,418,422

 

1,436,871

 

Debt fund

 

70,000

 

68,270

 

70,133

 

70,000

 

68,084

 

70,000

 

Senior unsecured notes

 

97,860,025

 

95,088,379

 

99,817,226

 

97,860,025

 

94,521,566

 

99,034,345

 

 

125,000

 

122,343

 

124,813

 

97,860

 

95,280

 

99,582

 

Convertible senior unsecured notes, net

 

100,000,000

 

95,381,121

 

105,438,000

 

86,250,000

 

80,660,038

 

86,586,375

 

 

243,750

 

235,431

 

275,595

 

243,750

 

231,287

 

254,335

 

Junior subordinated notes

 

154,336,000

 

139,418,416

 

93,833,687

 

175,858,000

 

157,858,555

 

105,649,537

 

 

154,336

 

139,909

 

95,052

 

154,336

 

139,590

 

94,215

 

Related party financing

 

50,000,000

 

50,000,000

 

53,270,857

 

50,000,000

 

50,000,000

 

55,119,744

 

 

 

 

 

50,000

 

50,000

 

49,682

 

Derivative financial instruments

 

287,993,000

 

1,881,450

 

1,881,450

 

522,650,829

 

2,451,422

 

2,451,422

 

 

80,472

 

356

 

356

 

291,421

 

1,306

 

1,306

 

 

Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:

 

Level 1 — 1—Inputs are unadjusted and quoted prices exist in active markets for identical assets or liabilities, such as government, agency and equity securities.

 

Level 2 — 2—Inputs (other than quoted prices included in Level 1) are observable for the asset or liability through correlation with market data. Level 2 inputs may include quoted market prices for a similar asset or liability, interest rates and credit risk. Examples include non-government securities, certain mortgage and asset-backed securities, certain corporate debt and certain derivative instruments.

 

Level 3 — 3—Inputs reflect our best estimate of what market participants would use in pricing the asset or liability and are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Examples include certain mortgage and asset-backed securities, certain corporate debt and certain derivative instruments.

 

Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate our hierarchy disclosures each quarter.

 

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Loans and investments, net.    Fair values of loans and investments that are not impaired are estimated using Level 3 inputs based on direct capitalization rate and discounted cash flow methodologies using discount rates, which, in our opinion, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Fair values of impaired loans and investments are estimated using Level 3 inputs that require significant judgments, which include assumptions regarding discount rates, capitalization rates, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan and other factors.

 

Loans held-for-sale, net.    Consists of originated loans that are generally transferred or sold within 60 days of loan funding, and are valued using pricing models that incorporate observable inputs from current market assumptions or a hypothetical securitization model utilizing observable market data from recent securitization spreads and observable pricing of loans with similar characteristics (Level 2). Fair value includes the fair value allocated to the associated future MSRs and is calculated pursuant to the valuation techniques described below for capitalized mortgage servicing rights, net (Level 3).

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

 

Capitalized mortgage servicing rights, netnet..    Fair values are estimated using Level 3 inputs based on discounted future net cash flow methodology. The fair value of MSRs carried at amortized cost are estimated using a process that involves the use of independent third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. The key inputs used in estimating fair value include the contractually specified servicing fees, prepayment speed of the underlying loans, discount rate, annual per loan cost to service loans, delinquency rates, late charges and other economic factors.

Available-for-sale securities.  Fair values are estimated based on current market quotes received from active markets or financial sources that trade such securities.  The fair values of available-for-sale equity securities traded in active markets are estimated using Level 1 inputs. The fair values of available-for-sale debt securities are estimated using the recent purchase price and subsequent sales price of the securities, which are deemed Level 2 inputs. The fair value of our Agency IOs were estimated using Level 3 inputs and are derived from third party proprietary models using discounted cash flows based on the underlying contractual cash flows and require significant judgements, including assumptions on discount rates and constant prepayment rates.

 

Securities held-to-maturity, net.    Fair values are approximated using Level 3 inputs based on current market quotes received from financial sources that trade such securities and are based on prevailing market data and, in some cases, are derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.

 

Derivative financial instruments.    The fair values of rate lock and forward sale commitments are estimated using valuation techniques, which include internally-developed models developed based on changes in the U.S. Treasury rate and other observable market data (Level 2). The fair value of rate lock commitments includes the fair value of the expected net cash flows associated with the servicing of the loans, see capitalized mortgage servicing rights, net above for details on the applicable valuation technique (Level 3). We also consider the impact of counterparty non-performance risk when measuring the fair value of these derivatives. Given the credit quality of our counterparties, the short duration of interest rate lock commitments and forward sale contracts, and our historical experience, the risk of nonperformance by our counterparties is not significant.

 

Credit facilities and repurchase agreements.    Fair values for credit facilities and repurchase agreements of the Structured Business are estimated at Level 3 using discounted cash flow methodology, using discount rates, which, in our opinion, best reflect current market interest rates for financing with similar characteristics and credit quality. The majority of our credit facilities and repurchase agreement for the Agency Business bear interest at rates that are similar to those available in the market currently and the fair values are estimated using Level 2 inputs. For these facilities, the fair values approximate their carrying values.

 

Collateralized loan obligations, Debt Fund, junior subordinated notes and related party financing.    Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield that reflects current market interest rates and credit spreads.

 

Senior unsecured notes.    Fair values are estimated at Level 1 based onwhen current market quotes received from active markets are available. If quotes from active markets are unavailable, then the fair values are estimated at Level 2 utilizing current market quotes received from inactive markets.

 

Convertible senior unsecured notes, net.Fair values are estimated at Level 2 based on current market quotes received from inactive markets.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidatedCONSOLIDATED FINANCIAL statements STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

We measure certain financial assets and financial liabilities at fair value on a recurring basis. The fair valuevalues of these financial assets and liabilities waswere determined using the following input levels as of SeptemberJune 30, 2017:2018 (in thousands):

 

 

Carrying

 

 

 

Fair Value Measurements Using Fair
Value Hierarchy

 

 

Carrying

 

 

 

Fair Value Measurements Using Fair
Value Hierarchy

 

 

Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

4,707,085

 

$

4,707,085

 

$

264,553

 

$

 

$

4,442,532

 

Derivative financial instruments

 

488,747

 

488,747

 

 

68,989

 

419,758

 

 

$

2,121

 

$

2,121

 

$

 

$

1,515

 

$

606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

1,881,450

 

$

1,881,450

 

$

 

$

1,881,450

 

$

 

 

$

356

 

$

356

 

$

 

$

356

 

$

 

 

See Note 8 — Securities for a roll-forward of our available-for-sale securities fair valued using Level 3 inputs.

We measure certain financial and non-financial assets at fair value on a nonrecurring basis. The fair values of these financial and non-financial assets were determined using the following input levels as of SeptemberJune 30, 2017:2018 (in thousands):

 

 

 

Net Carrying

 

 

 

Fair Value Measurements Using Fair
Value Hierarchy

 

 

 

Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans, net (1)

 

$

101,284,128

 

$

101,284,128

 

$

 

$

 

$

101,284,128

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-financial assets:

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets (2)

 

$

11,540,664

 

$

11,540,664

 

$

 

$

 

$

11,540,664

 

 

 

Net Carrying

 

 

 

Fair Value Measurements Using Fair
Value Hierarchy

 

 

 

Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans, net (1)

 

$

70,939

 

$

70,939

 

$

 

$

 

$

70,939

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-financial assets:

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets (2)

 

$

14,650

 

$

14,650

 

$

 

$

 

$

14,650

 

 


(1)         We had an allowance for loan losses of $83.3$58.7 million relating to sixfour loans with an aggregate carrying value, before loan loss reserves, of $184.5$129.7 million at SeptemberJune 30, 2017.2018.

(2)         During the second quarter of 2016, we determined thatWe recorded a real estate owned hotel property exhibited indicators of impairment and an impairment analysis was performed, which resulted in an$2.0 million impairment loss of $11.2 million. Duringduring the first half of 2017,three months ended June 30, 2018 on the office building we received additional market analyses which resulted in a further impairment loss of $2.7 million.own. See Note 9 — Real Estate Owned for details.

 

Loan impairment assessmentsassessments.. Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses, when such loan or investment is deemed to be impaired. We consider a loan impaired when, based upon current information, it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. We evaluate our loans to determine if the value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance and corresponding charge to the provision for loan losses. These valuations require significant judgments, which include assumptions regarding capitalization and discount rates, revenue growth rates, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan and other factors. The table above and below includes all impaired loans, regardless of the period in which the impairment was recognized.

 

Long-lived assets:assets. We review our real estate owned assets when events or circumstances change, indicating that the carrying amount of an asset may not be partially or fully recoverable. In the evaluation of a real estate owned asset for impairment, many factors are considered, including broker quotes, estimated current and expected operating cash flows from the asset during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the asset in the ordinary course of business. We first compare the undiscounted cash flows to be generated by the asset and broker quotes, if any, to the carrying value of such asset. If the undiscounted cash flows and/or broker quotes are less than the carrying value, we recognize an impairment based on discounted cash flows.loss by comparing the carrying value of the asset to its fair value.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidatedCONSOLIDATED FINANCIAL statements STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

Quantitative information about Level 3 fair value measurements at SeptemberJune 30, 20172018 were as follows:follows ($ in thousands):

 

 

 

 

 

Valuation

 

 

 

 

 

 

 

Fair Value

 

Techniques

 

Significant Unobservable Inputs

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Impaired loans (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

11.00%

 

Office

 

$

792,500

 

Discounted cash flows

 

Capitalization rate

 

8.10%

 

 

 

 

 

 

 

Revenue growth rate

 

2.50%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

15.00%

 

Land

 

71,441,628

 

Discounted cash flows

 

Capitalization rate

 

7.25%

 

 

 

 

 

 

 

Revenue growth rate

 

3.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

9.00%

 

Hotel

 

29,050,000

 

Discounted cash flows

 

Capitalization rate

 

7.00%

 

 

 

 

 

 

 

Revenue growth rate

 

3.30%

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate lock commitments

 

419,758

 

Discounted cash flows

 

W/A discount rate

 

10.22%

 

 

 

 

 

 

 

 

 

 

 

Non-financial assets:

 

 

 

 

 

 

 

 

 

Long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

11.75%

 

Hotel

 

11,540,664

 

Discounted cash flows

 

Capitalization rate

 

9.75%

 

 

 

 

 

 

 

Revenue growth rate

 

3.50%

 

 

 

 

 

 

 

Hold period

 

3 years

 


(1) Includes all impaired loans regardless of the period in which a loan loss provision was recorded.

 

 

Fair Value 

 

Valuation
Techniques

 

Significant Unobservable Inputs

 

  

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

Land

 

$

70,160

 

Discounted cash flows

 

Discount rate

 

15.00

%

 

 

 

 

 

 

Capitalization rate

 

7.25

%

 

 

 

 

 

 

Revenue growth rate

 

3.00

%

 

 

 

 

 

 

 

 

 

 

Office

 

779

 

Discounted cash flows

 

Discount rate

 

10.53

%

 

 

 

 

 

 

Capitalization rate

 

8.53

%

 

 

 

 

 

 

Revenue growth rate

 

2.63

%

  

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Rate lock commitments

 

606

 

Discounted cash flows

 

W/A discount rate

 

8.77

%

  

 

 

 

 

 

 

 

 

 

Non-financial assets:

 

 

 

 

 

 

 

 

 

Long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Building

 

$

3,250

 

Broker quotes

 

N/A

 

N/A

 

 

The derivative financial instruments using Level 3 inputs are outstanding for short periods of time (generally less than 60 days). A roll-forward of Level 3 derivative instruments were as follows:follows (in thousands):

 

 

Fair Value Measurements Using Significant Unobservable Inputs

 

 

Fair Value Measurements Using Significant Unobservable Inputs

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

2018

 

2017

 

2018

 

2017

 

Derivative assets and liabilities, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,419,530

 

$

 

$

2,816,132

 

$

 

 

$

717

 

$

381

 

$

276

 

$

2,816

 

Additions from the Acquisition

 

 

4,528,640

 

 

4,528,640

 

Settlements

 

(18,897,011

)

(15,286,185

)

(57,578,012

)

(15,286,185

)

 

(18,047

)

(16,216

)

(37,240

)

(35,865

)

Realized gains recorded in earnings

 

17,477,481

 

10,757,545

 

54,761,880

 

10,757,545

 

 

17,330

 

15,835

 

36,964

 

33,049

 

Unrealized gains recorded in earnings

 

419,758

 

681,882

 

419,758

 

681,882

 

 

606

 

1,420

 

606

 

1,420

 

Balance at end of period

 

$

419,758

 

$

681,882

 

$

419,758

 

$

681,882

 

 

$

606

 

$

1,420

 

$

606

 

$

1,420

 

 

The following table presents the components of fair value and other relevant information associated with our rate lock commitments, forward sales commitments and the estimated fair value of cash flows from servicing on loans held-for-sale.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017held-for-sale were as follows (in thousands):

 

 

Notional/
Principal Amount

 

Fair Value of
Servicing Rights

 

Interest Rate
Movement Effect

 

Total Fair Value
Adjustment

 

September 30, 2017

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Notional/
Principal Amount

 

Fair Value of
Servicing Rights

 

Interest Rate
Movement Effect

 

Total Fair Value
Adjustment

 

Rate lock commitments

 

$

30,179,000

 

$

419,758

 

$

(64,378

)

$

355,380

 

 

$

72,653

 

$

606

 

$

(295

)

$

311

 

Forward sale commitments

 

358,712,203

 

 

64,378

 

64,378

 

 

380,786

 

 

295

 

295

 

Loans held-for-sale, net (1)

 

328,533,203

 

5,450,662

 

 

5,450,662

 

 

308,134

 

4,754

 

 

4,754

 

Total

 

 

 

$

5,870,420

 

$

 

$

5,870,420

 

 

 

 

$

5,360

 

$

 

$

5,360

 

 


(1)   Loans held-for-sale, net are recorded at the lower of cost or market on an aggregate basis and includes fair value adjustments related to estimated cash flows from mortgage servicing rights.MSRs.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

We measure certain assets and liabilities for which fair value is only disclosed. The fair value of these assets and liabilities was determined using the following input levels as of SeptemberJune 30, 2017:2018 (in thousands):

 

 

 

 

 

 

Fair Value Measurements Using Fair Value Hierarchy

 

 

 

 

 

 

Fair Value Measurements Using Fair Value Hierarchy

 

 

Carrying Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

Carrying Value

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

1,997,555,985

 

$

2,056,020,469

 

$

 

$

 

$

2,056,020,469

 

 

$

3,064,798

 

$

3,149,044

 

$

 

$

 

$

3,149,044

 

Loans held-for-sale, net

 

333,267,976

 

338,766,761

 

 

333,316,099

 

5,450,662

 

 

311,487

 

316,815

 

 

312,061

 

4,754

 

Capitalized mortgage servicing rights, net

 

247,875,659

 

293,807,076

 

 

 

293,807,076

 

 

257,021

 

302,698

 

 

 

302,698

 

Securities held-to-maturity, net

 

18,851,089

 

18,882,997

 

 

 

18,882,997

 

 

50,342

 

50,153

 

 

 

50,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit and repurchase facilities

 

$

562,326,537

 

$

563,366,477

 

$

 

$

327,987,187

 

$

235,379,290

 

 

$

910,504

 

$

911,893

 

$

 

$

307,656

 

$

604,237

 

Collateralized loan obligations

 

1,066,230,488

 

1,080,228,695

 

 

 

1,080,228,695

 

 

1,590,644

 

1,613,801

 

 

 

1,613,801

 

Debt fund

 

68,270

 

70,133

 

 

 

70,133

 

Senior unsecured notes

 

95,088,379

 

99,817,226

 

99,817,226

 

 

 

 

122,343

 

124,813

 

124,813

 

 

 

Convertible senior unsecured notes, net

 

95,381,121

 

105,438,000

 

 

105,438,000

 

 

 

235,431

 

275,595

 

 

275,595

 

 

Junior subordinated notes

 

139,418,416

 

93,833,687

 

 

 

93,833,687

 

 

139,909

 

95,052

 

 

 

95,052

 

Related party financing

 

50,000,000

 

53,270,857

 

 

 

53,270,857

 

 

Note 1514 — Commitments and Contingencies

 

Debt Obligations.  Our debt obligations have maturities of $400.9$441.6 million for the remainder of 2017, $484.5 million in 2018, $355.5$572.7 million in 2019, $427.1 million$1.08 billion in 2020, $236.4$457.4 million in 2021, $179.4 million in 2022 and $154.3$380.7 million thereafter.

 

Agency Business Commitments. TheOur Agency Business is subject to supervision by certain regulatory agencies. Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, and compliance with reporting requirements. Our adjusted net worth and liquidity required by the agencies for all periods presented exceeded these requirements.

 

As of SeptemberJune 30, 2017,2018, we were required to maintain at least $12.1$12.6 million of liquid assets in one of our subsidiaries to meet our operational liquidity requirements for Fannie Mae and we had operational liquidity in excess of this requirement.

 

We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program and are required to secure this obligation by assigning restricted cash balances and/or a letter of credit to Fannie Mae. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level by a Fannie Mae assigned tier which considers the loan balance, risk level of the loan, age of the loan and level of risk-sharing. Fannie Mae requires restricted liquidity for Tier 2 loans of 75 basis points, 15 basis points for Tier 3 loans and 5 basis points for Tier 4 loans, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. A significant portion of our Fannie Mae DUS serviced loans for which we have risk sharing are Tier 2 loans. As of SeptemberJune 30, 2017,2018, we met the restricted liquidity requirement with a $42.0 million letter of credit.credit and $0.7 million of cash collateral.

 

As of SeptemberJune 30, 2017,2018, reserve requirements for the Fannie Mae DUS loan portfolio will require us to fund $27.4$28.4 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns,

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

prepayments, or defaults within our at-risk portfolio. Fannie Mae periodically reassesses these collateral requirements and may make changes to these requirements in the future. We generate sufficient cash flow from our operations to meet these capital standards and do not expect any changes to have a material impact on our future operations; however, future changes to collateral requirements may adversely impact our available cash.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

We are subject to various capital requirements in connection with seller/servicer agreements that we have entered into with secondary market investors. Failure to maintain minimum capital requirements could result in our inability to originate and service loans for the respective investor and, therefore, could have a direct material effect on our consolidated financial statements. As of SeptemberJune 30, 2017,2018, we met all of Fannie Mae’s quarterly capital requirements and our Fannie Mae adjusted net worth was in excess of the required net worth. We are not subject to capital requirements on a quarterly basis for Ginnie Mae or FHA, as such requirements for these investors are only required on an annual basis.

 

As an approved designated seller/servicer under Freddie Mac’s SBL Program,program, we are required to post collateral equal to $5.0 million to ensure that we are able to meet certain purchase and loss obligations required by this program. At September 30, 2017,Under the SBL program, we had an outstanding letter of credit ofare required to post collateral equal to $5.0 million, in satisfaction of our requirements under this program.

See Note 11 — Debt Obligations for details about the $50.0which is satisfied with a $5.0 million letter of credit agreement we entered into for our restricted cash requirements for the Fannie Mae DUS and Freddie Mac SBL Programs.credit.

 

We enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 13 — 12—Derivative Financial Instruments and Note 14 — 13—Fair Value.

 

Unfunded Commitments.  In accordance with certain structured loans and investments, we have outstanding unfunded commitments of $68.1$73.3 million as of SeptemberJune 30, 20172018 that we are obligated to fund as borrowers meet certain requirements. Specific requirements include, but are not limited to, property renovations, building construction and conversions based on criteria met by the borrower in accordance with the loan agreements.

 

Litigation. We are currently neither subject to any material litigation nor, to the best of our knowledge, threatened by any material litigation other than the following:

 

In June 2011, three related lawsuits were filed by the Extended Stay Litigation Trust (the “Trust”), a post-bankruptcy litigation trust alleged to have standing to pursue claims that previously had been held by Extended Stay, Inc. and the Homestead Village L.L.C. family of companies (together “ESI”) (formerly Chapter 11 debtors, together the “Debtors”) that have emerged from bankruptcy. Two of the lawsuits were filed in the U.S. Bankruptcy Court for the Southern District of New York, and the third in the Supreme Court of the State of New York, New York County. There were 73 defendants in the three lawsuits, including 55 corporate and partnership entities and 18 individuals. A subsidiary of ours and certain other entities that are affiliates of ours are included as defendants. The New York State Court action has been removed to the Bankruptcy Court. Our affiliates filed a motion to dismiss the three lawsuits.

 

The lawsuits all allege, as a factual basis and background certain facts surrounding the June 2007 leveraged buyout of ESI from affiliates of Blackstone Capital. Our subsidiary, Arbor ESH II, LLC, had a $115.0 million investment in the Series A1 Preferred Units of a holding company of Extended Stay, Inc. The New York State Court action and one of the two federal court actions name as defendants, Arbor ESH II, LLC, ACM and ABT-ESI LLC, an entity in which we have a membership interest, among the broad group of defendants. These two actions were commenced by substantially identical complaints. The defendants are alleged in these complaints, among other things, to have breached fiduciary and contractual duties by causing or allowing the Debtors to pay illegal dividends or other improper distributions of value at a time when the Debtors were insolvent. These two complaints also allege that the defendants aided and abetted, induced, or participated in breaches of fiduciary duty, waste, and unjust enrichment (“(“Fiduciary Duty Claims”) and name a director of ours, and a former general counsel of ACM, each of whom had

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

served on the Board of Directors of ESI for a period of time. We are defending these two defendants and paying the costs of such defense. On the basis of the foregoing allegations, the Trust has asserted claims under a number of common law theories, seeking the return of assets transferred by the Debtors prior to the Debtors’ bankruptcy filing.

 

In the third action, filed in Bankruptcy Court, the same plaintiff, the Trust, has named ACM and ABT-ESI LLC, together with a number of other defendants and asserts claims, including constructive and fraudulent conveyance claims under state and federal statutes, as well as a claim under the Federal Debt Collection Procedure Act.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

In June 2013, the Trust filed a motion to amend the lawsuits, to, among other things, (i) consolidate the lawsuits into one lawsuit, (ii) remove 47 defendants, none of whom are related to us, from the lawsuits so that there are 26 remaining defendants, including 16 corporate and partnership entities and 10 individuals, and (iii) reduce the counts within the lawsuits from over 100 down to 17. The remaining counts in the amended complaint against our affiliates are principally state law claims for breach of fiduciary duties, waste, unlawful dividends and unjust enrichment, and claims under the Bankruptcy Code for avoidance and recovery actions, among others. The bankruptcy court granted the motion and the amended complaint has been filed. The amended complaint seeks approximately $139.0 million in the aggregate, plus interest from the date of the alleged unlawful transfers, from director designees, portions of which are also sought from our affiliates as well as from unaffiliated defendants. We have moved to dismiss the referenced actions and intend to vigorously defend against the claims asserted therein. During a status conference held in March 2014, the Court heard oral argument on the motion to dismiss and adjourned the case pending a ruling. Subsequent to that hearing, a new judge was assigned to the case and, in November 2016, the new judge entered an order directing the parties to file supplemental briefs addressing new cases decided since the last round of briefing. Oral arguments regarding the motion to dismiss were heard at a hearing held in January 2017. The Court reserved decision at that hearing.

 

We have not made a loss accrual for this litigation because we believe that it is not probable that a loss has been incurred and an amount cannot be reasonably estimated.

 

Due to Borrowers. Due to borrowers represents borrowers’ funds held by us to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans.  While retained, these balances earn interest in accordance with the specific loan terms they are associated with.

 

Subsequent Event. In July 2018, we received approximately $11 million from the settlement of a litigation related to a prior investment. We will record a gain of approximately $11 million in the third quarter of 2018 related to this settlement.

Note 1615 — Variable Interest Entities

 

Our involvement with VIEs primarily affects our financial performance and cash flows through amounts recorded in interest income, interest expense, provision for loan losses and through activity associated with our derivative instruments.

 

Consolidated VIEs. We have determined that our operating partnership, ARLP, and our CLO subsidiaries,and Debt Fund entities, which are owned by ARLP,we consolidate, are VIEs. ARLP is already consolidated in our financial statements, therefore, the identification of this entity as a VIE had no impact on our consolidated financial statements.

 

Our CLO subsidiariesand Debt Fund consolidated entities invest in real estate and real estate-related securities and are financed by the issuance of CLO debt securities. We, or one of our affiliates, are named collateral manager, servicer, and special servicer for all CLO collateral assets held in CLOs, which we believe gives us the power to direct the most significant economic activities of the entity.those entities. We also have exposure to CLO losses to the extent of our equity interests and also have rights to waterfall payments in excess of required payments to CLO bond investors. As a result of consolidation, equity interests in these CLOs have been eliminated, and the consolidated balance sheets reflect both the assets held and debt issued by the CLOs and Debt Fund to third parties. Our operating results and cash flowsflows include the gross amounts related to CLO and Debt Fund assets and liabilities as opposed to our net economic interests in the CLOthose entities.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidatedCONSOLIDATED FINANCIAL statements STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

The assets and liabilities related to these consolidated CLOs and Debt Fund are as follows:follows (in thousands):

 

 

September 30, 2017

 

December 31, 2016

 

 

June 30, 2018

 

December 31, 2017

 

Assets:

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

$

136,408,829

 

$

15,542,304

 

 

$

172,169

 

$

138,736

 

Loans and investments, net

 

1,249,875,600

 

957,527,492

 

 

2,000,582

 

1,836,744

 

Due from related party

 

11,397,903

 

 

Other assets

 

9,441,853

 

6,982,452

 

 

15,711

 

14,011

 

Total assets

 

$

1,407,124,185

 

$

980,052,248

 

 

$

2,188,462

 

$

1,989,491

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Collateralized loan obligations

 

$

1,066,230,488

 

$

728,441,109

 

 

$

1,590,644

 

$

1,418,422

 

Debt fund

 

68,270

 

68,084

 

Other liabilities

 

2,185,528

 

1,645,426

 

 

3,408

 

2,046

 

Total liabilities

 

$

1,068,416,016

 

$

730,086,535

 

 

$

1,662,322

 

$

1,488,552

 

 

Assets held by the CLOs and Debt Fund are restricted and can only be used only to settle obligations of the CLOs.CLOs and Debt Fund, respectively. The liabilities of the CLOs and Debt Fund are non-recourse to us and can only be satisfied from each CLOs respective asset pool. See Note 11 — 10—Debt Obligations for details.

We are not obligated to provide, have not provided, and do not intend to provide financial support to any of the consolidated CLOs.CLOs or Debt Fund.

 

Unconsolidated VIEs. We determined that we are not the primary beneficiary of 2024 VIEs in which we have a variable interest as of SeptemberJune 30, 20172018 because we do not have the ability to direct the activities of the VIEs that most significantly impact each entity’s economic performance.

 

The following is a summary of our variable interests in identified VIEs, of which we are not the primary beneficiary, as of SeptemberJune 30, 2017:2018 (in thousands):

 

Type

 

Carrying Amount (1)

 

 

 

 

Carrying Amount (1)

 

Loans

 

$

281,608,227

 

 

 

 

 

$

345,288

 

B Piece bonds

 

18,851,089

 

 

 

 

50,342

 

Agency IOs

 

4,442,532

 

 

 

Agency interest only strips

 

3,617

 

Equity investments

 

2,120,447

 

 

 

 

2,193

 

Total

 

$

307,022,295

 

 

 

 

 

$

401,440

 

 


(1) Represents the carrying amount of loans and investments before reserves. At SeptemberJune 30, 2017, $182.82018, $128.0 million of loans to VIEs had corresponding loan loss reserves of $81.6$57.0 million.  See Note 43 — Loans and Investments for details. In addition, the maximum loss exposure as of SeptemberJune 30, 20172018 would not exceed the carrying amount of our investment.

 

These unconsolidated VIEs have exposure to real estate debt of approximately $2.07$3.09 billion at SeptemberJune 30, 20201817..

 

Note 1716 — Equity

 

Preferred Stock.The Series A and B preferred stock became redeemable by us in February 2018 and May 2018, respectively. The Series C preferred stock may not be redeemed by us before February 2018, May 2018 and February 2019, respectively.2019.

 

Common Stock. In May 2017,2018, we completed a public offering in which we sold 9,500,0005,500,000 shares of our common stock for $8.05$8.72 per share, and received net proceeds of $76.2$47.8 million after deducting the underwritingunderwriter’s discount and other offering expenses. We used $25.0 million of theThe proceeds to exercise our option to fully internalize our management team and terminate the existing management agreement with our Former Manager and the remaining amount waswere used to make investments and for general corporate purposes.

We have an “At-The-Market” equity offering sales agreement with JMP Securities LLC (“JMP,”) which entitles us to issue and sell up to 7,500,000 shares of our common stock through JMP. Sales of the shares are made by means of ordinary brokers’ transactions or otherwise at market prices prevailing at the time of sale, or at negotiated prices.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidatedCONSOLIDATED FINANCIAL statements STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

During the six months ended June 30, 2018, we sold 952,700 shares for net proceeds of $8.1 million. As of SeptemberJune 30, 2017, there were 7,500,000 common2018, we had approximately 6,500,000 shares available under an “At-The-Market” equity offering with JMP Securities LLC.this agreement.

 

As of September 30, 2017,In June 2018, we had $323.5 million available under our $500.0 millionfiled, and the SEC declared effective, a new shelf registration statement that was declared effective by the SEC in July 2016.

Accumulated Other Comprehensive Income. At September 30, 2017, accumulated other comprehensive income was $0.2 million and represents an unrealized gain related to available-for-sale securities. At December 31, 2016, accumulated other comprehensive income was $0.3 million and consisted of a $0.6 million unrealized gain related to available-for-sale securities, partially offset by $0.2for $500.0 million of net unrealized losses on derivatives designated as cash flow hedgesdebt securities, common stock, preferred stock, depositary shares and less than $0.1 million of net deferred losses on terminated interest swaps. See Note 13 — Derivative Financial Instruments for the reclassifications out of accumulated other comprehensive income and into earnings.warrants.

 

Noncontrolling Interest.  Noncontrolling interest relates to the 21,230,769 operating partnership units (“OP UnitsUnits”) issued to ACM to satisfy a portion of the Acquisition purchase price. The value of these OP unitsUnits at the Acquisition date was $154.8 million. Each of these OP Units are paired with one share of our Special Voting Preferred Sharesspecial voting preferred shares having a par value of $0.01 per share and is entitled to one vote each on any matter submitted for stockholder approval, which represents approximately 25.6%23.6% of the voting power of our outstanding stock at SeptemberJune 30, 2017.2018. The OP Units are entitled to receive distributions if and when our Board of Directors authorizes and declares 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.

 

Distributions. The following table presents dividendsDividends declared (on a per share basis) during the ninesix months ended SeptemberJune 30, 2017:2018 were as follows:

 

Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

Dividend (1)

 

Declaration Date

 

Dividend

 

Declaration Date

 

Series A

 

Series B

 

Series C

 

August 2, 2017

 

$

0.18

 

August 2, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

May 3, 2017

 

$

0.18

 

May 3, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

March 1, 2017

 

$

0.17

 

February 3, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

Dividend (1)

 

Declaration Date

 

Dividend

 

Declaration Date

 

Series A

 

Series B

 

Series C

 

February 21, 2018

 

$

0.21

 

February 2, 2018

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

May 2, 2018

 

$

0.25

 

May 2, 2018

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

 


(1)         The dividend declared on AugustMay 2, 2017 was for June 1, 2017 through August 31, 2017, the dividend declared on May 3, 20172018 was for March 1, 20172018 through May 31, 20172018 and the dividend declared on February 3, 20172, 2018 was for December 1, 20162017 through February 28, 2017.2018.

 

Common Stock — On NovemberAugust 1, 2017,2018, the Board of Directors declared a cash dividend of $0.19$0.25 per share of common stock.  The dividend is payable on November 30, 2017August 31, 2018 to common stockholders of record as of the close of business on NovemberAugust 15, 2017.2018.

 

Preferred Stock — On NovemberAugust 1, 2017,2018, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock; a cash dividend of $0.484375 per share of 7.75% Series B preferred stock; and a cash dividend of $0.53125 per share of 8.50% Series C preferred stock.  These amounts reflect dividends from SeptemberJune 1, 20172018 through November 30, 2017August 31, 2018 and are payable on November 30, 2017August 31, 2018 to preferred stockholders of record on NovemberAugust 15, 2017.2018.

 

Deferred Compensation.  In March 2017,2018, we issued 299,750265,444 shares of restricted common stock under the 20142017 Amended Omnibus Stock Incentive Plan (the “2014“2017 Plan”) to certain employees of ours and our Former Manager with a total grant date fair value of $2.4$2.3 million and recorded $0.4$0.8 million to employee compensation and benefits and $0.5 million to selling and administrative expense in our consolidated statements of income.  One third of the shares vested as of the grant date, of grant, one third will vest in March 2018,2019, and the remaining third will vest in March 2019.  In connection with the full integration of our management team and termination of the existing management contract, effective May 31, 2017, all stock compensation previously granted to employees that transferred from our Former Manager (non-employees prior to May 31, 2017) will be recorded to employee compensation and benefits based on

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

the remeasured fair value on May 31, 2017 over the remaining requisite service period.2020. In March 2017,2018, we also issued 74,37558,620 shares of fully vested common stock to the independent members of the Board of Directors under the 20142017 Plan and recorded $0.6$0.5 million to selling and administrative expense in our consolidated statements of income.

 

We entered into an amended and restated annual incentive agreement (the “2017 annual incentive agreement”) with our chief executive officer, effective January 1, 2017. The chief executive officer’s annual cash bonus and value of his annual long-term equity awards under the 2017 annual incentive agreement each increased 10% as a result of the Company meeting the equity capitalization growth goals in his previous incentive agreement. In addition, the chief executive officer is also eligible to receive a $3.0 million performance-based award of restricted stock annually for five years subject to meeting certain goals related to the integration of the Acquisition. Each $3.0 million award vests in full three years after the grant date and are subject to the chief executive officer’s continued employment. In August 2017, we granted our chief executive officer 357,569 shares of performance-based restricted stock as a result of the Company meeting the goals related to the integration of the Acquisition. The awards had a grant date fair value of $2.7 million and we recorded $0.1 million to employee compensation and benefits in our consolidated statements of income. All other terms of the 2017 incentive agreement are consistent with the chief executive officer’s previous incentive agreement.

During the first quarter of 2017,2018, we issued 74,83063,584 shares of restricted common stock to our chief executive officer under his 2017 annual incentive agreement with a grant date fair value of $0.6 million and recorded $0.1 million to employee compensation and benefits in our consolidated statements of income.  One quarter of the shares vested as of the grant date of grant and one quarter will vest on each of the first, second and third anniversaries of the date of grant.grant date. Our chief executive officer was also granted up to 448,980381,503 performance-based restricted stock units that vest at the end of a four-year performance period based on our achievement of certain total stockholder return objectives. The restricted stock units had a grant date fair value of $1.0$0.8 million and we recorded less than $0.1 million to employee compensation and benefits in our consolidated statements of income.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

 

Earnings Per Share (“EPS”).  Basic EPS is calculated by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period inclusive of unvested restricted stock with full dividend participation rights. Diluted EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period using the treasury stock method. Our common stock equivalents include the weighted average dilutive effect of performance-based restricted stock units granted to our chief executive officer, OP Units issued in connection with the Acquisition and convertible senior unsecured notes.

 

The following tables reconcile the numerator and denominator of our basic and diluted EPS computations:computations ($ in thousands, except share and per share data):

 

 

 

Three Months Ended September 30, 2017

 

Three Months Ended September 30, 2016

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders (1)

 

$

16,420,958

 

$

16,420,958

 

$

10,888,172

 

$

10,888,172

 

Net income attributable to noncontrolling interest (2)

 

 

5,661,184

 

 

3,649,432

 

Net income attributable to common stockholders and nocontrolling interest

 

$

16,420,958

 

$

22,082,142

 

$

10,888,172

 

$

14,537,604

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

61,582,796

 

61,582,796

 

51,390,467

 

51,390,467

 

Dilutive effect of OP Units (2)

 

 

21,230,769

 

 

18,230,769

 

Dilutive effect of restricted stock units (3)

 

 

1,104,552

 

 

650,560

 

Weighted average shares outstanding

 

61,582,796

 

83,918,117

 

51,390,467

 

70,271,796

 

 

 

 

 

 

 

 

 

 

 

Net income per common share (1)

 

$

0.27

 

$

0.26

 

$

0.21

 

$

0.21

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

 

 

Three Months Ended June 30,

 

 

 

2018

 

2017

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders (1)

 

$

17,167

 

$

17,167

 

$

11,929

 

$

11,929

 

Net income attributable to noncontrolling interest (2)

 

 

5,557

 

 

4,494

 

Net income attributable to common stockholders and nocontrolling interest

 

$

17,167

 

$

22,724

 

$

11,929

 

$

16,423

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

65,683,057

 

65,683,057

 

56,652,334

 

56,652,334

 

Dilutive effect of OP Units (2)

 

 

21,230,769

 

 

21,230,769

 

Dilutive effect of restricted stock units (3)

 

 

1,499,921

 

 

1,088,108

 

Dilutive effect of convertible notes (4)

 

 

1,641,423

 

 

93,292

 

Weighted average shares outstanding

 

65,683,057

 

90,055,170

 

56,652,334

 

79,064,503

 

 

 

 

 

 

 

 

 

 

 

Net income per common share (1)

 

$

0.26

 

$

0.25

 

$

0.21

 

$

0.21

 

 

 

Six Months Ended June 30,

 

 

Nine Months Ended September 30, 2017

 

Nine Months Ended September 30, 2016

 

 

2018

 

2017

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders (1)

 

$

43,964,070

 

$

43,964,070

 

$

22,261,516

 

$

22,261,516

 

 

$

43,356

 

$

43,356

 

$

27,543

 

$

27,543

 

Net income attributable to noncontrolling interest (2)

 

 

16,596,415

 

 

 

 

 

14,547

 

 

10,935

 

Net income attributable to common stockholders and nocontrolling interest

 

$

43,964,070

 

$

60,560,485

 

$

22,261,516

 

$

22,261,516

 

 

$

43,356

 

$

57,903

 

$

27,543

 

$

38,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

56,602,504

 

56,602,504

 

51,272,795

 

51,272,795

 

 

63,773,306

 

63,773,306

 

54,071,085

 

54,071,085

 

Dilutive effect of OP Units (2)

 

 

21,230,769

 

 

 

 

 

21,230,769

 

 

21,230,769

 

Dilutive effect of restricted stock units (3)

 

 

1,077,178

 

 

354,755

 

 

 

1,381,310

 

 

1,063,264

 

Dilutive effect of convertible senior unsecurred notes (4)

 

 

32,468

 

 

 

Dilutive effect of convertible notes (4)

 

 

1,035,158

 

 

 

Weighted average shares outstanding

 

56,602,504

 

78,942,919

 

51,272,795

 

51,627,550

 

 

63,773,306

 

87,420,543

 

54,071,085

 

76,365,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share (1)

 

$

0.78

 

$

0.77

 

$

0.43

 

$

0.43

 

 

$

0.68

 

$

0.66

 

$

0.51

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 


(1)         Net of preferred stock dividends.

(2)         We consider OP Units to be common stock equivalents as the holder hasholders have voting rights, the right to distributions and the right to redeem the OP Units for the cash value of a corresponding number of shares of common stock or a corresponding number of shares of common stock, at our election. For the nine months ended September 30, 2016, the OP Units were considered anti-dilutive and excluded from diluted EPS.

(3)         Mr. Kaufman wasis granted restricted stock units in 2017, 2016 and 2015annually, which vest at the end of a four-year performance period based upon our achievement of total stockholder return objectives.

(4)         The convertible senior unsecured notes impact diluted earnings per share if the average price of our common stock exceeds the conversion price, as calculated in accordance with the terms of the indenture.

 

Note 1817 — Income Taxes

 

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

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

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 our TRS Consolidated Group and is 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.

The Tax Reform was signed into law on December 22, 2017. Among numerous provisions included in the new tax law was the reduction of the corporate federal income tax rate from 35% to 21%. Our provision for income taxes in the six months ended June 30, 2018 reflects the newly enacted corporate federal income tax rate of 21%. The final impact of the Tax Reform may differ due to, and among other things, changes in interpretations, assumptions made by us, the issuance of additional guidance and actions we may take as a result of the Tax Reform.

In the three and ninesix months ended SeptemberJune 30, 2018, we recorded a tax provision of $4.5 million and a tax benefit of $4.3 million, respectively. In the three and six months ended June 30, 2017, we recorded a tax provision of $6.7$3.4 million and $16.2$9.5 million, respectively. The provision for income taxes recorded in the three months ended SeptemberJune 30, 2018 consisted of a current tax provision of $4.3 million and a deferred tax provision of $0.2 million. The benefit from income taxes recorded in the six months ended June 30, 2018 consisted of a current tax provision of $8.8 million and a deferred tax benefit of $13.1 million. The deferred tax benefit recorded in the six months ended June 30, 2018 was due primarily to our payoff in January 2018 of the $50.0 million preferred equity interest entered into with ACM to finance a portion of the Acquisition purchase price. See Note 10 — Debt Obligations for details. The provision for income taxes recorded in the three months ended June 30, 2017 consisted of a current tax provision of $7.6$4.3 million partially offset byand a deferred tax benefit of $0.9 million, and themillion. The provision for income taxes recorded in the ninesix months ended SeptemberJune 30, 2017 consisted of a current provision of $16.2 million. In both the three and nine months ended September 30, 2016, we recorded a tax provision of $0.3$8.6 million related to state income tax liability. The significant increase in theand a deferred tax provision in the 2017 periods compared to the same periods in 2016 is due to the utilization of available net operating loss carryforwards during 2016 as well as the growth of our Agency Business during 2017.$0.9 million.

 

Current and deferred taxes are primarily recorded on the portion of earnings (losses) recognized by us with respect to our interest in the TRS’s. 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.

 

Note 1918 — Agreements and Transactions with Related Parties

 

Management Agreement. Prior to May 31, 2017, we ARLP and Arbor Realty SR, Inc. had a management agreement with ACM, pursuant to which ACM provided us with a variety of professional and advisory services vital to our operations, including underwriting, accounting and treasury, compliance, marketing, information technology

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

and human resources. Pursuant to the terms of the management agreement, we reimbursed ACM for its actual costs incurred in connection with managing our business through a base management fee, and, under certain circumstances, an annual incentive fee. In May 2017, we exercised our option to fully internalize our management team and terminateterminated the existing management agreement. See Note 3 — Acquisition of Our Former Manager’s Agency Platform for details.

The following table sets forth ourWe incurred base management fees of $2.7 million and incentive fees incurred prior to$6.7 million in the full internalization of our management teamthree and termination of the existing management agreement:six months ended June 30, 2017, respectively.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Management Fees:

 

2017

 

2016

 

2017

 

2016

 

Base

 

$

 

$

3,325,000

 

$

6,673,260

 

$

8,875,000

 

Incentive

 

 

 

 

 

Total management fee

 

$

 

$

3,325,000

 

$

6,673,260

 

$

8,875,000

 

We have entered into a shared services agreement with our Former ManagerACM where we will provide limited support services to our Former ManagerACM and our Former Manager willthey reimburse us for the costs of performing such services. During the three and ninesix months ended SeptemberJune 30, 2017,2018, we have incurred $0.3 million and $0.4$0.6 million, respectively, and, during both the three and six months ended June 30, 2017, we incurred $0.1 million of costs for services provided to our Former ManagerACM, which are included in due from related party on the consolidated balance sheet.sheets.

 

Other Related Party Transactions. Due from related party was $12.6$10.2 million and $1.5$0.7 million at SeptemberJune 30, 20172018 and December 31, 2016, respectively, and consisted2017, respectively. The increase was primarily ofdue to payoffs to be remitted by our affiliated servicing operations related to real estate transactions.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

Due to related party was $0.3 million at June 30, 2018 and consisted of loan payoffs, holdbacks and escrows held byto be remitted to our affiliated servicing operations related to real estate transactions.

 

Due to related party was $6.0In June 2018, we originated a $21.7 million at December 31, 2016bridge loan on a multifamily property owned in part by a consortium of investors (which includes, among other unaffiliated investors, certain of our officers and consisted primarily of base management fees due to our Former Manager that we remittedchief executive officer) which owns 75% in the following quarter.borrowing entity. The loan has an interest rate of LIBOR plus 4.75%, with a LIBOR floor of 1.25%, and matures in June 2021. Interest income recorded from this loan totaled $0.1 million for both the three and six months ended June 30, 2018.

 

RelatedIn April 2018, we acquired a $9.4 million bridge loan which was originated by ACM. The loan was used to purchase several multifamily properties by a consortium of investors (which includes, among other unaffiliated investors, certain of our officers and our chief executive officer) which owns 75% of the borrowing entity. The loan has an interest rate of LIBOR plus 5.0% with a LIBOR floor of 1.25% and matures in January 2021. Interest income recorded from this loan totaled $0.1 million for both the three and six months ended June 30, 2018.

In January 2018, we paid $50.0 million in full satisfaction of the related party financing was $50.0 million at both September 30, 2017 and December 31, 2016 and represents a preferred equity interest financing agreement we entered into with ACM to finance a portion of the Acquisition purchase price. We incurred interest expense related to this financing of $0.3 million for the six months ended June 30, 2018 and $1.0 million and $2.9 million in the three and nine months ended September 30, 2017, respectively, and $0.8 million during both the three and nine months ended September 30, 2016. See Note 11 — Debt Obligations for details.

In January 2017, we modified a $5.0 million preferred equity investment, increasing our balance to $15.0 million, with a commitment to fund an additional $5.0 million. This investment has a fixed interest rate of 11% and matures in January 2020.  In July 2017, we entered into an agreement with a consortium of investors consisting of certain of our officers, including Mr. Kaufman, which admitted them as a member to fund the remaining $5.0 million preferred equity investment, which is generally subordinate to our investment.  Interest income recorded from our investment totaled $0.2 million and $0.5$1.9 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively.

 

In December 2017, we acquired a $32.8 million bridge loan which was originated by ACM. The loan was used to purchase several multifamily properties by a consortium of investors (which includes, among other unaffiliated investors, certain of our officers and our chief executive officer) which owns 90% of the borrowing entity. The loan has an interest rate of LIBOR plus 5.0%, with a LIBOR floor of 1.13%, and matures in June 2020. Interest income recorded from this loan totaled $0.6 million and $1.1 million for the three and six months ended June 30, 2018.

In the fourth quarter of 2017, we originated two bridge loans totaling $28.0 million on two multifamily properties owned in part by a consortium of investors (which includes, among other unaffiliated investors, certain of our officers and our chief executive officer) which owns 45% in the borrowing entity. The loans have an interest rate of LIBOR plus 5.25% with LIBOR floors ranging from 1.24% to 1.54% and mature in the fourth quarter of 2020. Interest income recorded from these loans totaled $0.5 million and $1.0 million for the three and six months ended June 30, 2018.

In July 2017, we originated a $36.0 million bridge loan on a multifamily property owned in part by a consortium of investors. The consortium of investors (which includes, among other unaffiliated investors, certain of our officers including Mr. Kaufman, who ownand our chief executive officer) owns an interest of approximately 41%95% in the borrowing entity. The loan has an interest rate of one-month LIBOR plus 4.5% with a LIBOR floor of 1% and matures in July 2020. Interest income recorded from this loan totaled $0.4$0.6 million and $1.2 million for both the three and ninesix months ended SeptemberJune 30, 2017.2018.

 

In May 2017, we originated a $46.9 million Fannie Mae loan on a multifamily property owned in part by a consortium of investors including an immediate family member(which includes, among other unaffiliated investors, certain of Mr. Kaufman, whoour officers) which owns ana 21.4% interest of approximately 17.2% in the borrowing entity. We carry a maximum loss-sharing obligation with Fannie Mae on this loan of up to 40%5% of the original UPB.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017 Servicing revenue recorded from this loan was less than $0.1 million for all periods presented.

 

In March 2017, a consortium of investors including Mr. Kaufman(which includes, among other unaffiliated investors, our chief executive officer and our Former Manager,ACM) invested $2.0 million for a 26.1% ownership interest in two portfolios of multifamily properties which has two bridge loans totaling $14.8 million originated by us in November 2016. The outstanding loans have an interest rate of LIBOR plus 5.25% with a LIBOR floor of 0.5% and mature in November 2018. One of the loans was repaid in full in the fourth quarter of 2017 and the remaining loan paid off in June 2018. Interest income recorded from these loans totaled $0.3$0.2 million and $0.8$0.3 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2017, respectively.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

In January 2017, we modified a $5.0 million preferred equity investment, subsequently increasing our balance to $15.0 million, with a commitment to fund an additional $5.0 million. This investment had a fixed interest rate of 11% that was scheduled to mature in January 2020, however, the principal was repaid in full in the fourth quarter of 2017. We also entered into an agreement with a consortium of investors (which includes, among other unaffiliated investors, certain of our officers and our chief executive officer) which admitted them as a member to fund the remaining $5.0 million preferred equity investment, which was generally subordinate to our investment. Interest income recorded from our investment totaled $0.2 million and $0.3 million in the three and six months ended June 30, 2017.

 

In January 2017, Ginkgo Investment Company LLC (“Ginkgo”), of which one of our directors is a 33% managing member, purchased a multifamily apartment complex which assumed an existing $8.3 million Fannie Mae loan that we service. Ginkgo subsequently sold the majority of its interest in this property and owned a 3.6% interest at SeptemberJune 30, 2017.2018. We carry a maximum loss-sharing obligation with Fannie Mae on this loan of up to 20% of the original UPB. Upon the sale, we received a 1% loan assumption fee which was governed by existing loan agreements that were in place when the loan was originated in 2015, prior to such purchase. Servicing revenue recorded from this loan was less than $0.1 million for all periods presented.

 

In September 2016, we originated $48.0 million of bridge loans on six multifamily properties owned in part by a consortium of investors consisting of(which includes, among other unaffiliated investors, certain of our officers including Mr. Kaufman and our Former Manager, who together ownchief executive officer) which owns interests ranging from approximately 7.8%10.5% to 9%12.0% in the borrowing entities. The loans have an interest rate of LIBOR plus 4.5% with a LIBOR floor of 0.25% and mature in September 2019. In addition, in August 2017, a $6.8 million loan on one of the properties paid off in full and in May 2018 three additional loans totaling $23.2 million paid off in full. Interest income recorded from these loans totaled $0.7$0.6 million and $2.1$1.3 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $0.1$0.7 million and $1.3 million for both the three and ninesix months ended SeptemberJune 30, 2016.2017, respectively.

 

In January 2016, we originated a $12.7 million bridge loan and a $5.2 million preferred equity investment on two multifamily properties owned in part by a consortium of investors consisting of(which includes, among other unaffiliated investors, certain of our officers including Mr. Kaufman, who together ownand our chief executive officer) which owns an interest of approximately 50% in the borrowing entity. The loan has an interest rate of one-month LIBOR plus 4.5% with a LIBOR floor of 0.25% and matures in January 2019. The preferred equity investment has a fixed interest rate of 10% and matures ina maturity date extended to November 2017.2018. Interest income recorded from these loans totaled $0.3 million and $0.7 million for both the three and six months ended SeptemberJune 30, 2018, respectively, and $0.3 million and $0.6 million for the three and six months ended June 30, 2017, and 2016 and $0.9 million for both the nine months ended September 30, 2017 and 2016.respectively.

 

In January 2016, we originated a $19.0 million bridge loan on a multifamily property owned in part by a consortium of investors consisting of(which includes, among other unaffiliated investors, certain of our officers including Mr. Kaufman, who together ownand our chief executive officer) which owns an interest of approximately 7.5% in the borrowing entity. The loan hashad an interest rate of one-month LIBOR plus 4.5% with a LIBOR floor of 0.25% and matureswas scheduled to mature in January 2019. In January 2018, this loan paid off in full. Interest income recorded from this loan totaled $0.3 million for the six months ended June 30, 2018 and $0.8$0.3 million and $0.6 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2016, respectively.

 

In 2015, we originated a $7.1 million bridge loan on a multifamily property owned in part by a consortium of investors consisting of(which includes, among other unaffiliated investors, certain of our officers including Mr. Kaufman, who together ownand our chief executive officer) which owns an interest of approximately 7.5% in the borrowing entity. In August 2017, this loan paid off in full. The loan had an interest rate of LIBOR plus 4.5%, with a LIBOR floor of 0.25%. Interest income recorded from this loan totaled $0.1 million and $0.2 million for both the three and six months ended SeptemberJune 30, 2017, and 2016 and $0.3 million for both the nine months ended September 30, 2017 and 2016.respectively.

 

In 2015, we originated two bridge loans totaling $16.7 million secured by multifamily properties acquired by a third party investor. The properties had beenwere owned and were sold in part by a consortium of investors consisting of (which includes, among other unaffiliated investors, certain of our officers, including Mr. Kaufman,our chief executive officer and certain other related parties and certain unaffiliated persons.parties). The loans have an interest rate of LIBOR plus 5% with a LIBOR floor of 0.25% and were extended as of right to October 2018. Interest income recorded from these loans totaled $0.3 million and $0.7 million for both the three and six months ended SeptemberJune 30, 2018, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2017, and 2016 and $0.8 million for both the nine months ended Septemberrespectively.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2017 and 2016.2018

 

In 2015, we originated a $3.0 million mezzanine loan on a multifamily property that has a $47.0 million first mortgage initially originated by our Former Manager.ACM. The loan bearsbore interest at a fixed rate of 12.5% and matureswas scheduled to mature in April 2025. In January 2018, this loan paid off in full. Interest income recorded from this loan totaled $0.1 million for both the threesix months ended SeptemberJune 30, 20172018 and 2016 and $0.3 million for both the nine months ended September 30, 2017 and 2016.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

In 2015, we originated a $6.3 million bridge loan on a multifamily property owned by a consortium of investors consisting of certain of our officers, including Mr. Kaufman and our Former Manager, who together own an interest of approximately 90% in the borrowing entity.  The loan had an interest rate of LIBOR plus 4.5% with a LIBOR floor of 0.25% and was to mature in April 2018.  The loan was repaid in full in the fourth quarter of 2016. Interest income recorded from this loan totaled $0.1 million and $0.2 million for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

In 2015, we modified an $18.0 million preferred equity investment, increasing our balance to $23.0 million with a fixed interest rate of 10% and a maturity date in February 2018.  To accomplish the modification, we formed a joint venture with a consortium of investors consisting of certain of our officers, including Mr. Kaufman, and other related parties, to invest an additional $2.0 million preferred equity investment that is generally subordinate to ours.  During the second quarter of 2016, the preferred equity investment was repaid in full and we received proceeds of $1.0 million, which was allocated to the consortium of investors.  Interest income recorded from this investment totaled $1.0 million for the nine months ended September 30, 2016.

 

In 2015, we invested $9.6 million for 50% of our Former Manager’sACM’s indirect interest in a joint venture with a third party that was formed to invest in a residential mortgage banking business. As a result of this transaction, we had an initial indirect interest of 22.5% in this entity. Since the initial investment, we invested an additional $16.1 million through this joint venture in non-qualified residential mortgages purchased from the mortgage banking business’s origination platform (which $0.6 million was funded in the nine months ended September 30, 2017) and we received cash distributions totaling $14.0$16.6 million (that were classified as returns of capital) as a result of the joint venture selling most of its mortgage assets (which $0.9$0.4 million was received in the ninesix months ended SeptemberJune 30, 2017)2018). We recorded a lossincome from these investments of $1.2$0.7 million and $1.8$0.8 million duringin the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and incomea loss of $4.2$0.7 million and $8.9$0.6 million duringin the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. In connection with a litigation settlement related to this investment, we provided a guaranty of up to 50% of any amounts payable in connection with the settlement. ACM has also provided us with a guaranty to pay up to 50% of any amounts we may pay under this guaranty. As of June 30, 2018, our maximum exposure under this guaranty totals $2.7 million. We have not accrued this amount as we do not believe that we will be required to make any nonrefundable payments under this guaranty. See Note 8—Investments in Equity Affiliates for details.

 

In 2014, we invested $0.1 million for a 5% interest in a joint venture that owns two multifamily properties. The joint venture is comprised of a consortium of investors consisting of(which includes, among other unaffiliated investors, certain of our officers, including Mr. Kaufman,our chief executive officer and certain other related parties, who together ownparties) which owns an interest of 95%. In 2014, we originated twoWe had a $1.7 million bridge loans totaling $5.0 millionloan to the joint venture with an interest rate of 5.5% over one-month LIBOR and a maturity date extended as of right to September 2016. During the third quarter of 2016, one of the loansLIBOR. The loan was repaid in full and we received proceedsin the fourth quarter of $3.3 million, which was allocated to the consortium of investors. The remaining loan was extended to December 2017. Interest income recorded from these loansthis loan was less than $0.1 million and $0.1 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively.

 

In 2014, we originated a $30.4 million bridge loan for an office property owned in part by a consortium of investors including Mr. Kaufman(which includes, among other unaffiliated investors, our chief executive officer and his affiliates, who together ownaffiliates) which owns an interest of approximately 24% in the borrowing entity. The loan matured in August 2017 and was refinanced with a $43.2 million bridge loan that has an interest rate of 4% over one-month LIBOR with a LIBOR floor of 1.23% and an August 2020 maturity date. We also originated a $4.6 million mezzanine loan in January 2016 to this entity that had a fixed interest rate of 12% and paid off, which was repaid in full at maturity in August 2017. In the fourth quarter of 2017, the consortium of investors sold their ownership interest in the borrowing entity. Interest income recorded from these loans totaled $0.8 million and $2.4$1.6 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, and $0.9 million and $2.6 million for the three and nine months ended September 30, 2016, respectively.

 

In 2014, our Former ManagerACM purchased a property subject to two loans originated by us, a first mortgage of $14.6 million and a second mortgage of $5.1 million, both with maturity dates of April 2016 and an interest rate of 4.8% over LIBOR. In the first quarter of 2016, the $5.1 million second mortgage was repaid in full by our Former Manager and the $14.6 million first mortgage was extended to March 2018.April 2018 and paid off at maturity. Interest income recorded from these loans totaled $0.2less than $0.1 million and $0.7$0.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $0.2 million and $0.7$0.4 million for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

 

In 2011, we restructured a preferred equity investment on the Lexford Portfolio (“Lexford”), which is a portfolio of multifamily assets. In connection with this restructuring, we,We, along with an executive officer of ours and a consortium of independent outside investors, made an additional preferred and direct equity investment. Both of our

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO consolidated FINANCIAL statements (Unaudited)

September 30, 2017

preferredhold equity investments and our direct equity investment were repaid in full ina portfolio of multifamily properties referred to as the third quarter of 2015. As a result of the direct equity investment, we received distributions totaling $0.7 million and $2.0 million during the three and nine months ended September 30, 2017, respectively, and $0.7 million and $2.1 million during the three and nine months ended September 30, 2016, respectively,Lexford Portfolio (“Lexford”), which were recorded as income from equity affiliates. In addition, under the terms of the restructuring, Lexford’s first mortgage lender required a change of property manager for the underlying assets.  The new management company is managed by an entity owned primarily by a consortium of affiliated investors, including Mr. Kaufmanour chief executive officer and an executive officer of ours, and has aours. Based on the terms of the management contract, with the new entity for 7.5 years andmanagement company is entitled to 4.75% of gross revenues of the underlying properties, along with the potential to share in the proceeds of a sale or refinancingrestructuring of the debt. In June 2018, the owners of Lexford restructured part of its debt shouldand we originated twelve bridge loans totaling $280.5 million, which were used to repay in full certain existing mortgage debt and to

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2018

renovate 72 multifamily properties included in the management company remain engagedportfolio. The loans which we originated in June 2018 have interest rates of 400 basis points over LIBOR and mature in June 2021 (with 2 one-year extension options). Interest income recorded from these loans totaled $1.1 million in June 2018. Further, as part of this June 2018 restructuring, $50.0 million in unsecured financing was provided by an unsecured lender to certain parent entities of the newproperty owners. ACM owns slightly less than half of the unsecured lender entity atand, therefore, provided slightly less than half of the time of such capital event.  We have providedunsecured lender financing. In addition, in connection with our equity investment, we received distributions totaling $0.6 million during both the three months ended June 30, 2018 and 2017 and $1.2 million and $1.3 million during the six months ended June 30, 2018 and 2017, respectively, which were recorded as income from equity affiliates. Separate from loans which we originated in June 2018, we provide limited (“bad boy”) guarantees for certain other debt controlled by Lexford. The bad boy guarantees may become a liability for us upon standard “bad” acts such as fraud or a material misrepresentation by Lexford or us. At SeptemberJune 30, 2017,2018, this debt had an aggregate outstanding balance of $845.8$309.1 million and is scheduled to mature between 20172019 and 2025.

 

Several of our executives, including our chief financial officer, general counsel and Mr. Kaufman, our chairman, chief executive officer and president, hold similar positions for our Former Manager. Mr. KaufmanACM. Our chief executive officer and his affiliated entities (“the Kaufman Entities”) together beneficially own approximately 70%75% of the outstanding membership interests of our Former ManagerACM and certain of our employees and directors also hold an ownership interest in our Former Manager.ACM. Furthermore, one of our directors serves as the trustee and co-trustee of onetwo of the Kaufman Entities that holds a majority of the outstandinghold membership interests in our Former Manager and co-trustee of another Kaufman Entity that owns an equity interest in our Former Manager. Our Former Manager holds 5,349,053 shares of our common stock, and uponACM. Upon the closing of the Acquisition in July 2016, waswe issued 21,230,769 OP Units, each paired with one share of our Special Voting Preferred Shares,Shares. In December 2017, ACM distributed 5,780,348 OP Units to its members, which in total,includes the Kaufman Entities and certain of our officers and employees. At June 30, 2018, ACM holds 5,349,053 shares of our common stock and 15,450,421 OP Units, which represents approximately 32%23.2% of the voting power of our outstanding stock. Our Board of Directors approved a resolution under our charter allowing Mr. Kaufmanour chief executive officer and ACM, (which our Former Manager, (which Mr. Kaufmanchief executive officer has a controlling equity interest in), to own more than the 5% ownership interest limit of our common stock as stated in our amended charter.

 

Note 2019 — Segment Information

As a result of the Acquisition, we evaluate our results from operations from two business segments — our Structured Business and our Agency Business.  See Note 1 — Description of Business for a description of each segment.

 

The summarized statements of income and balance sheet data, as well as certain other data, by segment are included in the following tables.tables ($ in thousands). Specifically identifiable costs are recorded directly to each business segment. For items not specifically identifiable, costs have been allocated between the business segments using the most meaningful allocation methodologies, which was predominately direct labor costs (i.e., time spent working on each business segment). Such costs include, but are not limited to, compensation and employee related costs, selling and administrative expenses, management fees (through May 31, 2017 — effective date of the full internalization of our management team and termination of the existing management agreement with our Former Manager)ACM) and stock-based compensation.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

The Agency Business information for the three and nine months ended September 30, 2016 in the following tables includes only the operating results of the Acquisition from July 14, 2016 (Acquisition closing date) to September 30, 2016.

 

Three Months Ended September 30, 2017

 

 

Three Months Ended June 30, 2018

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

37,258,633

 

$

4,880,943

 

$

 

$

42,139,576

 

 

$

54,177

 

$

5,118

 

$

 

$

59,295

 

Interest expense

 

19,912,991

 

2,974,603

 

961,823

 

23,849,417

 

 

34,612

 

3,272

 

 

37,884

 

Net interest income

 

17,345,642

 

1,906,340

 

(961,823

)

18,290,159

 

 

19,565

 

1,846

 

 

21,411

 

Other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

 

17,126,106

 

 

17,126,106

 

 

 

15,622

 

 

15,622

 

Mortgage servicing rights

 

 

18,897,239

 

 

18,897,239

 

 

 

17,936

 

 

17,936

 

Servicing revenue

 

 

20,231,489

 

 

20,231,489

 

 

 

22,808

 

 

22,808

 

Amortization of MSRs

 

 

(11,711,378

)

 

(11,711,378

)

 

 

(11,937

)

 

(11,937

)

Property operating income

 

2,668,055

 

 

 

2,668,055

 

 

2,964

 

 

 

2,964

 

Other income, net

 

540,241

 

237,415

 

 

777,656

 

 

117

 

(587

)

 

(470

)

Total other revenue

 

3,208,296

 

44,780,871

 

 

47,989,167

 

 

3,081

 

43,842

 

 

46,923

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

5,670,249

 

19,524,184

 

 

25,194,433

 

 

6,749

 

20,066

 

 

26,815

 

Selling and administrative

 

3,014,038

 

4,592,898

 

 

7,606,936

 

 

3,497

 

5,376

 

 

8,873

 

Property operating expenses

 

2,582,745

 

 

 

2,582,745

 

 

2,856

 

 

 

2,856

 

Depreciation and amortization

 

428,562

 

1,400,454

 

 

1,829,016

 

 

444

 

1,401

 

 

1,845

 

Impairment loss on real estate owned

 

2,000

 

 

 

2,000

 

Provision for loss sharing (net of recoveries)

 

 

(2,617,064

)

 

(2,617,064

)

 

 

348

 

 

348

 

Provision for loan losses (net of recoveries)

 

2,000,000

 

 

 

2,000,000

 

 

(2,127

)

 

 

(2,127

)

Total other expenses

 

13,695,594

 

22,900,472

 

 

36,596,066

 

 

13,419

 

27,191

 

 

40,610

 

Income before income from equity affiliates and provision for income taxes

 

6,858,344

 

23,786,739

 

(961,823

)

29,683,260

 

Income before income from equity affiliates and income taxes

 

9,227

 

18,497

 

 

27,724

 

Income from equity affiliates

 

995,312

 

 

 

995,312

 

 

1,387

 

 

 

1,387

 

Provision for income taxes

 

 

(6,708,000

)

 

(6,708,000

)

Benefit from (provision for) income taxes

 

500

 

(4,999

)

 

(4,499

)

Net income

 

7,853,656

 

17,078,739

 

(961,823

)

23,970,572

 

 

11,114

 

13,498

 

 

24,612

 

Preferred stock dividends

 

1,888,430

 

 

 

1,888,430

 

 

1,888

 

 

 

1,888

 

Net income attributable to noncontrolling interest

 

 

 

5,661,184

 

5,661,184

 

 

 

 

5,557

 

5,557

 

Net income attributable to common stockholders

 

$

5,965,226

 

$

17,078,739

 

$

(6,623,007

)

$

16,420,958

 

 

$

9,226

 

$

13,498

 

$

(5,557

)

$

17,167

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

 

Three Months Ended September 30, 2016

 

 

Three Months Ended June 30, 2017

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

26,893,151

 

$

2,743,076

 

$

 

$

29,636,227

 

 

$

29,917

 

$

4,551

 

$

 

$

34,468

 

Interest expense

 

14,455,058

 

1,680,561

 

830,609

 

16,966,228

 

 

16,712

 

2,737

 

962

 

20,411

 

Net interest income

 

12,438,093

 

1,062,515

 

(830,609

)

12,669,999

 

 

13,205

 

1,814

 

(962

)

14,057

 

Other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

 

9,693,822

 

 

9,693,822

 

 

 

18,830

 

 

18,830

 

Mortgage servicing rights

 

 

15,968,067

 

 

15,968,067

 

 

 

17,254

 

 

17,254

 

Servicing revenue

 

 

13,472,408

 

 

13,472,408

 

 

 

18,437

 

 

18,437

 

Amortization of MSRs

 

 

(7,586,524

)

 

(7,586,524

)

 

 

(11,828

)

 

(11,828

)

Property operating income

 

2,960,940

 

 

 

2,960,940

 

 

2,863

 

 

 

2,863

 

Other income, net

 

111,036

 

248,510

 

 

359,546

 

 

731

 

(1,552

)

 

(821

)

Total other revenue

 

3,071,976

 

31,796,283

 

 

34,868,259

 

 

3,594

 

41,141

 

 

44,735

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

3,460,745

 

10,755,934

 

 

14,216,679

 

 

4,067

 

17,758

 

 

21,825

 

Selling and administrative

 

2,182,406

 

3,720,625

 

 

5,903,031

 

 

2,898

 

4,937

 

 

7,835

 

Acquisition costs

 

 

 

6,406,258

 

6,406,258

 

Property operating expenses

 

2,819,004

 

 

 

2,819,004

 

 

2,622

 

 

 

2,622

 

Depreciation and amortization

 

641,721

 

1,167,044

 

 

1,808,765

 

 

415

 

1,401

 

 

1,816

 

Provision for loss sharing

 

 

1,316,862

 

 

1,316,862

 

Impairment loss on real estate owned

 

1,500

 

 

 

 

1,500

 

Provision for loss sharing (net of recoveries)

 

 

532

 

 

532

 

Provision for loan losses (net of recoveries)

 

(54,000

)

 

 

(54,000

)

 

(1,760

)

 

 

(1,760

)

Management fee - related party

 

1,712,307

 

1,612,693

 

 

3,325,000

 

 

1,284

 

1,389

 

 

2,673

 

Total other expenses

 

10,762,183

 

18,573,158

 

6,406,258

 

35,741,599

 

 

11,026

 

26,017

 

 

37,043

 

Income before income from equity affiliates and provision for income taxes

 

4,747,886

 

14,285,640

 

(7,236,867

)

11,796,659

 

Income from equity affiliates

 

4,929,375

 

 

 

4,929,375

 

Income before loss from equity affiliates and income taxes

 

5,773

 

16,938

 

(962

)

21,749

 

Loss from equity affiliates

 

(3

)

 

 

(3

)

Provision for income taxes

 

 

(300,000

)

 

(300,000

)

 

 

(3,435

)

 

(3,435

)

Net income

 

9,677,261

 

13,985,640

 

(7,236,867

)

16,426,034

 

 

5,770

 

13,503

 

(962

)

18,311

 

Preferred stock dividends

 

1,888,430

 

 

 

1,888,430

 

 

1,888

 

 

 

1,888

 

Net income attributable to noncontrolling interest

 

 

 

3,649,432

 

3,649,432

 

 

 

 

4,494

 

4,494

 

Net income attributable to common stockholders

 

$

7,788,831

 

$

13,985,640

 

$

(10,886,299

)

$

10,888,172

 

 

$

3,882

 

$

13,503

 

$

(5,456

)

$

11,929

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

 

Nine Months Ended September 30, 2017

 

 

Six Months Ended June 30, 2018

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

95,684,909

 

$

14,447,957

 

$

 

$

110,132,866

 

 

$

101,413

 

$

9,495

 

$

 

$

110,908

 

Interest expense

 

51,866,274

 

8,945,898

 

2,885,469

 

63,697,641

 

 

64,817

 

6,125

 

329

 

71,271

 

Net interest income

 

43,818,635

 

5,502,059

 

(2,885,469

)

46,435,225

 

 

36,596

 

3,370

 

(329

)

39,637

 

Other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

 

55,127,004

 

 

55,127,004

 

 

 

33,815

 

 

33,815

 

Mortgage servicing rights

 

 

56,181,638

 

 

56,181,638

 

 

 

37,571

 

 

37,571

 

Servicing revenue

 

 

55,350,118

 

 

55,350,118

 

 

 

44,220

 

 

44,220

 

Amortization of MSRs

 

 

(35,427,217

)

 

(35,427,217

)

 

 

(23,802

)

 

(23,802

)

Property operating income

 

8,754,518

 

 

 

8,754,518

 

 

5,874

 

 

 

5,874

 

Other income, net

 

1,381,847

 

(2,311,740

)

 

(929,893

)

 

351

 

2,057

 

 

2,408

 

Total other revenue

 

10,136,365

 

128,919,803

 

 

139,056,168

 

 

6,225

 

93,861

 

 

100,086

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

13,569,621

 

53,290,960

 

 

66,860,581

 

 

14,336

 

41,973

 

 

56,309

 

Selling and administrative

 

8,993,239

 

14,142,511

 

 

23,135,750

 

 

7,034

 

10,755

 

 

17,789

 

Property operating expenses

 

7,842,571

 

 

 

7,842,571

 

 

5,652

 

 

 

5,652

 

Depreciation and amortization

 

1,340,629

 

4,201,362

 

 

5,541,991

 

 

890

 

2,801

 

 

3,691

 

Impairment loss on real estate owned

 

2,700,000

 

 

 

2,700,000

 

Impairment loss on real estae owned

 

2,000

 

 

 

2,000

 

Provision for loss sharing (net of recoveries)

 

 

(405,494

)

 

(405,494

)

 

 

821

 

 

821

 

Provision for loan losses (net of recoveries)

 

(455,653

)

 

 

(455,653

)

 

(1,802

)

 

 

(1,802

)

Management fee - related party

 

3,258,772

 

3,414,488

 

 

6,673,260

 

Total other expenses

 

37,249,179

 

74,643,827

 

 

111,893,006

 

 

28,110

 

56,350

 

 

84,460

 

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

 

16,705,821

 

59,778,035

 

(2,885,469

)

73,598,387

 

Gain on extinguishment of debt

 

7,116,243

 

 

 

7,116,243

 

Income before income from equity affiliates and income taxes

 

14,711

 

40,881

 

(329

)

55,263

 

Income from equity affiliates

 

1,755,145

 

 

 

1,755,145

 

 

2,132

 

 

 

2,132

 

Provision for income taxes

 

 

(16,244,000

)

 

(16,244,000

)

Benefit from income taxes

 

500

 

3,785

 

 

4,285

 

Net income

 

25,577,209

 

43,534,035

 

(2,885,469

)

66,225,775

 

 

17,343

 

44,666

 

(329

)

61,680

 

Preferred stock dividends

 

5,665,290

 

 

 

5,665,290

 

 

3,777

 

 

 

3,777

 

Net income attributable to noncontrolling interest

 

 

 

16,596,415

 

16,596,415

 

 

 

 

14,547

 

14,547

 

Net income attributable to common stockholders

 

$

19,911,919

 

$

43,534,035

 

$

(19,481,884

)

$

43,964,070

 

 

$

13,566

 

$

44,666

 

$

(14,876

)

$

43,356

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

 

Nine Months Ended September 30, 2016

 

 

Six Months Ended June 30, 2017

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

Structured
Business

 

Agency
Business

 

Other /
Eliminations (1)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

80,681,114

 

$

2,743,076

 

$

 

$

83,424,190

 

 

$

58,426

 

$

9,567

 

$

 

$

67,993

 

Other interest income, net

 

2,539,274

 

 

 

2,539,274

 

Interest expense

 

40,447,159

 

1,680,561

 

830,609

 

42,958,329

 

 

31,953

 

5,971

 

1,924

 

39,848

 

Net interest income

 

42,773,229

 

1,062,515

 

(830,609

)

43,005,135

 

 

26,473

 

3,596

 

(1,924

)

28,145

 

Other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

 

9,693,822

 

 

9,693,822

 

 

 

38,001

 

 

38,001

 

Mortgage servicing rights

 

 

15,968,067

 

 

15,968,067

 

 

 

37,284

 

 

37,284

 

Servicing revenue

 

 

13,472,408

 

 

13,472,408

 

 

 

35,119

 

 

35,119

 

Amortization of MSRs

 

 

(7,586,524

)

 

(7,586,524

)

 

 

(23,716

)

 

(23,716

)

Property operating income

 

12,719,027

 

 

 

12,719,027

 

 

6,086

 

 

 

6,086

 

Other income, net

 

415,467

 

248,510

 

 

663,977

 

 

842

 

(2,549

)

 

(1,707

)

Total other revenue

 

13,134,494

 

31,796,283

 

 

44,930,777

 

 

6,928

 

84,139

 

 

91,067

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

12,100,499

 

10,755,934

 

 

22,856,433

 

 

7,899

 

33,767

 

 

41,666

 

Selling and administrative

 

6,557,219

 

3,720,625

 

 

10,277,844

 

 

5,979

 

9,550

 

 

15,529

 

Acquisition costs

 

 

 

10,261,902

 

10,261,902

 

Property operating expenses

 

10,991,823

 

 

 

10,991,823

 

 

5,260

 

 

 

5,260

 

Depreciation and amortization

 

1,962,366

 

1,167,044

 

 

3,129,410

 

 

912

 

2,801

 

 

3,713

 

Impairment loss on real estate owned

 

11,200,000

 

 

 

11,200,000

 

 

2,700

 

 

 

2,700

 

Provision for loss sharing

 

 

1,316,862

 

 

1,316,862

 

Provision for loss sharing (net of recoveries)

 

 

2,212

 

 

2,212

 

Provision for loan losses (net of recoveries)

 

(24,995

)

 

 

(24,995

)

 

(2,456

)

 

 

(2,456

)

Management fee - related party

 

7,262,307

 

1,612,693

 

 

8,875,000

 

 

3,259

 

3,414

 

 

6,673

 

Total other expenses

 

50,049,219

 

18,573,158

 

10,261,902

 

78,884,279

 

 

23,553

 

51,744

 

 

75,297

 

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

 

5,858,504

 

14,285,640

 

(11,092,511

)

9,051,633

 

Gain on sale of real estate

 

11,630,687

 

 

 

11,630,687

 

Income before gain on extinguishment of debt, income from equity affiliates and income taxes

 

9,848

 

35,991

 

(1,924

)

43,915

 

Gain on extinguishment of debt

 

7,116

 

 

 

7,116

 

Income from equity affiliates

 

11,193,918

 

 

 

11,193,918

 

 

760

 

 

 

760

 

Provision for income taxes

 

 

(300,000

)

 

(300,000

)

 

 

(9,536

)

 

(9,536

)

Net income

 

28,683,109

 

13,985,640

 

(11,092,511

)

31,576,238

 

 

17,724

 

26,455

 

(1,924

)

42,255

 

Preferred stock dividends

 

5,665,290

 

 

 

5,665,290

 

 

3,777

 

 

 

3,777

 

Net income attributable to noncontrolling interest

 

 

 

3,649,432

 

3,649,432

 

 

 

 

10,935

 

10,935

 

Net income attributable to common stockholders

 

$

23,017,819

 

$

13,985,640

 

$

(14,741,943

)

$

22,261,516

 

 

$

13,947

 

$

26,455

 

$

(12,859

)

$

27,543

 

 


(1) Includes certain corporate expenses not allocated to the two reportable segments, such as financing costs associated with the Acquisition, as well as income allocated to the noncontrolling interest holder.holders.

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

 

September 30, 2017

 

 

June 30, 2018

 

 

Structured Business

 

Agency Business

 

Other / Eliminations

 

Consolidated

 

 

Structured Business

 

Agency Business

 

Other / Eliminations

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,874,347

 

$

55,877,050

 

$

 

$

84,751,397

 

 

$

78,997

 

$

27,971

 

$

 

$

106,968

 

Restricted cash

 

137,126,053

 

12,336

 

 

137,138,389

 

 

172,954

 

732

 

 

173,686

 

Loans and investments, net

 

1,997,555,985

 

 

 

1,997,555,985

 

 

3,064,798

 

 

 

3,064,798

 

Loans held-for-sale, net

 

 

333,267,976

 

 

333,267,976

 

 

 

311,487

 

 

311,487

 

Capitalized mortgage servicing rights, net

 

 

247,875,659

 

 

247,875,659

 

 

 

257,021

 

 

257,021

 

Securities held to maturity

 

 

18,851,089

 

 

18,851,089

 

 

 

50,342

 

 

50,342

 

Investments in equity affiliates

 

31,330,740

 

 

 

31,330,740

 

 

24,144

 

 

 

24,144

 

Goodwill and other intangible assets

 

12,500,000

 

110,666,816

 

 

123,166,816

 

 

12,500

 

106,465

 

 

118,965

 

Other assets

 

71,864,641

 

12,375,170

 

 

84,239,811

 

 

79,751

 

17,158

 

 

96,909

 

Total assets

 

$

2,279,251,766

 

$

778,926,096

 

$

 

$

3,058,177,862

 

 

$

3,433,144

 

$

771,176

 

$

 

$

4,204,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt obligations

 

$

1,630,457,754

 

$

327,987,187

 

$

50,000,000

 

$

2,008,444,941

 

 

$

2,759,445

 

$

307,656

 

$

 

$

3,067,101

 

Allowance for loss-sharing obligations

 

 

30,158,464

 

 

30,158,464

 

 

 

31,402

 

 

31,402

 

Other liabilities

 

122,924,302

 

49,852,331

 

1,054,615

 

173,831,248

 

 

135,944

 

26,361

 

 

162,305

 

Total liabilities

 

$

1,753,382,056

 

$

407,997,982

 

$

51,054,615

 

$

2,212,434,653

 

 

$

2,895,389

 

$

365,419

 

$

 

$

3,260,808

 

 

 

December 31, 2016

 

 

December 31, 2017

 

 

Structured Business

 

Agency Business

 

Other / Eliminations

 

Consolidated

 

 

Structured Business

 

Agency Business

 

Other / Eliminations

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,156,034

 

$

35,489,396

 

$

 

$

138,645,430

 

 

$

37,056

 

$

67,318

 

$

 

$

104,374

 

Restricted cash

 

16,230,051

 

13,084,878

 

 

29,314,929

 

 

139,398

 

 

 

139,398

 

Loans and investments, net

 

1,695,732,351

 

 

 

1,695,732,351

 

 

2,579,127

 

 

 

2,579,127

 

Loans held-for-sale, net

 

 

673,367,304

 

 

673,367,304

 

 

 

297,443

 

 

297,443

 

Capitalized mortgage servicing rights, net

 

 

227,742,986

 

 

227,742,986

 

 

 

252,608

 

 

252,608

 

Securities held-to-maturity, net

 

 

27,837

 

 

27,837

 

Investments in equity affiliates

 

33,948,853

 

 

 

33,948,853

 

 

23,653

 

 

 

23,653

 

Goodwill and other intangible assets

 

 

97,489,884

 

 

97,489,884

 

 

12,500

 

109,266

 

 

121,766

 

Other assets

 

63,350,947

 

11,193,562

 

 

74,544,509

 

 

66,227

 

13,512

 

 

79,739

 

Total assets

 

$

1,912,418,236

 

$

1,058,368,010

 

$

 

$

2,970,786,246

 

 

$

2,857,961

 

$

767,984

 

$

 

$

3,625,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt obligations

 

$

1,307,973,936

 

$

660,144,122

 

$

50,000,000

 

$

2,018,118,058

 

 

$

2,189,700

 

$

291,536

 

$

50,000

 

$

2,531,236

 

Allowance for loss-sharing obligations

 

 

32,407,554

 

 

32,407,554

 

 

 

30,511

 

 

30,511

 

Other liabilities

 

133,788,359

 

38,216,483

 

1,217,864

 

173,222,706

 

 

155,814

 

42,819

 

1,009

 

199,642

 

Total liabilities

 

$

1,441,762,295

 

$

730,768,159

 

$

51,217,864

 

$

2,223,748,318

 

 

$

2,345,514

 

$

364,866

 

$

51,009

 

$

2,761,389

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Origination Data:

 

 

 

 

 

 

 

 

 

Structured Business

 

 

 

 

 

 

 

 

 

New loan originations

 

$

473,171,000

 

$

266,599,500

 

$

1,057,003,885

 

$

654,967,500

 

Loan payoffs / paydowns

 

270,010,000

 

118,346,618

 

723,976,741

 

418,433,132

 

 

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

Origination Volumes by Investor:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

650,373,500

 

$

668,644,832

 

$

2,216,819,525

 

$

668,644,832

 

Freddie Mac

 

328,075,000

 

157,145,000

 

880,597,200

 

157,145,000

 

FHA

 

18,273,300

 

24,629,823

 

189,086,997

 

24,629,823

 

CMBS/Conduit

 

 

 

21,370,000

 

 

Total

 

$

996,721,800

 

$

850,419,655

 

$

3,307,873,722

 

$

850,419,655

 

Total loan commitment volume

 

$

928,180,800

 

$

714,820,818

 

$

3,181,367,322

 

$

714,820,818

 

 

 

 

 

 

 

 

 

 

 

Loan Sales Data:

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

665,959,500

 

$

430,371,100

 

$

2,569,821,000

 

$

430,371,100

 

Freddie Mac

 

342,629,800

 

104,448,000

 

862,376,636

 

104,448,000

 

FHA

 

43,484,109

 

17,015,115

 

167,708,801

 

17,015,115

 

CMBS/Conduit

 

 

 

21,370,000

 

 

Total

 

$

1,052,073,409

 

$

551,834,215

*

$

3,621,276,437

 

$

551,834,215

*

Sales margin (fee-based services as a % of loan sales)

 

1.63

%

1.76

%

1.52

%

1.76

%

MSR rate (MSR income as a % of loan commitments)

 

2.04

%

2.23

%

1.77

%

2.23

%


* Loan sales were $970.0 million for the three and nine months ended September 30, 2016, including loans that were acquired as part of the Acquisition.

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Origination Data:

 

 

 

 

 

 

 

 

 

Structured Business

 

 

 

 

 

 

 

 

 

New loan originations

 

$

606,855

 

$

437,915

 

$

921,070

 

$

583,933

 

Loan payoffs / paydowns

 

238,026

 

263,558

 

428,641

 

453,967

 

 

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

Origination Volumes by Investor:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

606,287

 

$

669,897

 

$

1,269,208

 

$

1,566,446

 

Freddie Mac

 

434,789

 

317,490

 

742,940

 

552,522

 

FHA

 

 

32,878

 

60,738

 

170,814

 

CMBS/Conduit

 

 

 

16,233

 

21,370

 

Total

 

$

1,041,076

 

$

1,020,265

 

$

2,089,119

 

$

2,311,152

 

Total loan commitment volume

 

$

1,079,478

 

$

1,101,243

 

$

2,123,193

 

$

2,253,187

 

 

 

 

 

 

 

 

 

 

 

Loan Sales Data:

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

579,851

 

$

830,515

 

$

1,308,246

 

$

1,903,861

 

Freddie Mac

 

409,612

 

309,508

 

688,128

 

519,747

 

FHA

 

28,820

 

64,330

 

68,113

 

124,225

 

CMBS/Conduit

 

 

 

16,233

 

21,370

 

Total

 

$

1,018,283

 

$

1,204,353

 

$

2,080,720

 

$

2,569,203

 

Sales margin (fee-based services as a % of loan sales)

 

1.53

%

1.56

%

1.63

%

1.48

%

MSR rate (MSR income as a % of loan commitments)

 

1.66

%

1.57

%

1.77

%

1.65

%

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SeptemberJune 30, 20172018

 

 

September 30, 2017

 

 

June 30, 2018

 

Key Servicing Metrics for Agency Business:

 

UPB of Servicing 
Portfolio

 

Wtd. Avg. Servicing 
Fee Rate 
(basis points)

 

Wtd. Avg. Life of 
Servicing Portfolio 
(in years)

 

 

UPB of Servicing
Portfolio

 

Wtd. Avg. Servicing
Fee Rate
(basis points)

 

Wtd. Avg. Life of
Servicing Portfolio
(in years)

 

Fannie Mae

 

$

12,331,135,405

 

53.7

 

7.2

 

 

$

12,794,277

 

53.0

 

7.3

 

Freddie Mac

 

2,732,536,579

 

28.6

 

10.9

 

 

3,730,980

 

30.8

 

11.0

 

FHA

 

537,553,532

 

16.5

 

20.0

 

 

585,017

 

15.9

 

20.1

 

Total

 

$

15,601,225,516

 

48.0

 

8.3

 

 

$

17,110,274

 

46.9

 

8.6

 

 

 

December 31, 2016

 

 

December 31, 2017

 

Fannie Mae

 

$

11,181,152,400

 

53.4

 

6.6

 

 

$

12,502,699

 

53.6

 

6.9

 

Freddie Mac

 

1,953,244,541

 

22.3

 

10.5

 

 

3,166,134

 

29.5

 

10.5

 

FHA

 

420,688,577

 

14.4

 

19.2

 

 

537,482

 

16.5

 

19.6

 

Total

 

$

13,555,085,518

 

47.8

 

7.6

 

 

$

16,206,315

 

47.7

 

8.1

 

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

 

You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes and the section entitled “Forward-Looking Statements” included herein.

 

Overview

 

Through our 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 Business, we originate, sell and service a range of multifamily finance products through GSE, HUD and 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. W

Through May 2017, we were previously externally managed and advised by ACM and, onACM. Effective May 31, 2017, we exercised our option to fully internalize our management team and terminateterminated the existing management agreement. See Note 1 — Description of Business for details aboutagreement with ACM and fully internalized our business segments and Note 3 — Acquisition of Our Former Manager’s Agency Platform for details about the Acquisition and termination of the management agreement. team.

We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its REIT—taxable income that is distributed to its stockholders, provided that at least 90% of its REIT—taxable income is distributed and provided that certain other requirements are met.

 

Our operating performance is primarily driven by the following factors:

 

Net interest income earned on our investments. Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield on our assets increases or the cost or borrowings decreases, this will have a positive impact on earnings. However, if the yield earned on our assets decreases, or the cost of borrowings increases, this will have a negative impact on earnings. Net interest income is also directly impacted by the size and performance of our asset portfolio. We recognize the bulk of our net interest income from our Structured Business. Additionally, we recognize net interest income from loans originated through our Agency Business, which are generally sold within 60 days of origination.

 

Fees and other revenuerevenues recognized from originating, selling and servicing mortgage loans through the GSE and HUD programs. Revenue recognized from the origination and sale of mortgage loans consists of gains on sale of loans (net of any direct loan origination costs incurred), commitment fees, broker fees, loan assumption fees and loan origination fees. These gains and fees are collectively referred to as gain on sales, including fee-based services, net. We record income from MSRs at the time of commitment to the borrower, which represents the fair value of the expected net future cash flows associated with the rights to service mortgage loans that we originate, with the recognition of a corresponding asset upon sale. We also record servicing revenue which consists of fees received for servicing mortgage loans and earnings on escrows, net of amortization on the MSR assets recorded.  These origination,originations, selling and servicing fees and other revenue began in the third quarter of 2016 as a result of the Acquisition andrevenues are included in our Agency Business results. Although we have long-established relationships with the GSE and HUD agencies, our operating performance would be negatively impacted if our business relationships with these agencies deteriorate.

 

Income earned from our structured transactions. Our structured transactions are primarily comprised of investments in equity affiliates, which represent unconsolidated joint venture investments formed to acquire, develop and/or sell real estate-related assets. IncomeOperating results from theseour unconsolidated equity investments principally an equity investment in a residential mortgage banking business, had comprised a significant portion of our operating results during 2016. If interest rates continuecan be difficult to rise, it is likely that income from this investment will continue to bepredict and can vary significantly impacted.period-to-period. In addition, we periodically receive distributions from our equity investments. It is difficult to forecast the timing of such payments, which can be substantial in any given quarter. We account for structured transactions within our Structured Business.

 

Credit quality of our loans and investments, including our servicing portfolio. Effective portfolio management is essential to maximize the performance and value of our loan, and investment and servicing portfolios.  Maintaining the credit quality of the loans in our portfolios is of critical importance.  Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.

Significant Developments During the ThirdSecond Quarter of 20172018

Capital Markets Activity.

·                  In May 2018, we completed a public offering and sold 5,500,000 shares of our common stock for $8.72 per share, receiving net proceeds of $47.8 million; and

·                  In May 2018, we issued an additional $25.0 million of our 5.625% Notes and received net proceeds of $24.4 million.

 

Financing Activity.

 

·                  In August 2017,June 2018, we closed our eighthtenth collateralized securitization vehicle (“CLO VIII”)(CLO X) totaling $365.0$560.0 million of real estate related assets and cash, of which $282.9$441.0 million of investment grade notes were issued to third party investors and $29.2$53.2 million of below investment-grade notes and a $52.9$65.8 million equity interest in the portfolio were retained by us. The notes have an initial weighted average interest rate of 1.31% over LIBOR, 68 basis points lower than our last CLO, which closed in April 2017;us; and

·                  In September 2017,June 2018, we completed the unwindingunwind of CLO IV,V, redeeming $219.0$267.8 million of outstanding notes which were repaid primarily from refinancing of the remaining assets within our existing financing facilities and other CLOs,(including CLO X), as well as with cash held by CLO IV,V, and expensed $1.1$1.3 million of deferred financing fees into interest expense.

Dividend.  We raised our quarterly dividend to $0.19 per share in the fourth quarter of 2017, which represents a 19% increase in our dividend from a year ago and a 6% increase from last quarter.

 

Agency Business Activity.

 

·                  Loan originations and sales totaled $996.7 million$1.04 billion and $1.05$1.02 billion, respectively; and

·                  Our fee-based servicing portfolio grew 3.9%3% to $15.60$17.11 billion from $15.02$16.69 billion at June 30, 2017 and 15.1% from $13.56 billion at DecemberMarch 31, 2016; and

·                   We entered into a new one-year $100.0 million repurchase agreement that bears interest at a rate of 135 basis points over LIBOR and replaced our existing $30.0 million letter of credit facility with a new three-year $50.0 million letter of credit facility that bears interest at a fixed rate of 2.875%.2018.

 

Structured Business Activity.

 

·                  LoanOur Structured loan and investment portfolio grew 13% this quarter to $3.13 billion on loan originations totaled $473.2totaling $606.9 million, with a weighted average interest rate of 7.43%;partially offset by loan runoff totaling $238.0 million; and

·                  Loan payoffs were $270.0We recorded an impairment loss of $2.0 million withon an office building we own (see Note 9 — Real Estate Owned for details) and recorded a weighted average interest ratenet loan loss recovery of 7.50%$2.1 million, primarily related to the settlement of a non-performing preferred equity investment (see Note 3 — Loans and Investments for details).

Subsequent Events.

·                  In July 2018, we completed the issuance and sale of $245.0 million of our 5.25% Convertible Notes through two private placements. We received proceeds totaling $237.2 million, net of the underwriter’s discount and fees from these offerings. We used the net proceeds to exchange $99.8 million of our 6.50% Convertible Notes and $127.6 million of our 5.375% Convertible Notes for a combination of $219.8 million in cash (which includes accrued interest) and 6.8 million shares of our common stock to settle such exchanges (see Note 10 — Debt Obligations for details); and

·                  Through our equity investments,In July 2018, we recorded income of $1.5received approximately $11 million from the redemption of an equity participation interest we held and $0.7 million from a cash distribution from another of our equity investments. This income was partially offset by the recognitionsettlement of a $1.2 million loss fromlitigation related to a prior investment, which will be reflected in our investmentconsolidated financial statements in a residential mortgage banking business.the third quarter of 2018.

 

Current Market Conditions, Risks and Recent Trends

 

Our ability to execute our business strategy, particularly the growth of our Structured Business portfolio of loans and investments, is dependent on many factors, including our ability to access capital and financing on favorable terms.  The past economic downturn had a significant negative impact on both us and our borrowers and limited our ability for growth.  If similar economic conditions recur in the future, it may limit our options for raising capital and obtaining financing on favorable terms and may also adversely impact the creditworthiness of our borrowers which could result in their inability to repay their loans.

 

We rely on the capital markets to generate capital for financing the growth of our business. While we have been successful in generating capital through the debt and equity markets over the past several quarters, there can be no assurance that we will continue to have access to the equity and debtsuch markets.  If we were to experience a prolonged downturn in the stock or credit markets, it could cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly.

The Federal Reserve has increased its targeted Federal Rate twice so far in75 basis points during 2017 for a total increase ofand by another 50 basis points. The Trump administration continues to focus on several issues that could impact interest rates andpoints during the U.S. economy, including tax reform and deregulation. While there is uncertainty regarding the specifics and timingfirst six months of any policy changes, any such actions could impact our business.2018.  To date, we have not been significantly impacted by these increases and do not anticipate a significant decline in origination volume or profitability as interest rates

remain at historically low levels. We expectHowever, we cannot be certain that such a trend will continue as the current interest rate environment to continue for the near term asnumber, timing, and magnitude of additional increases by the Federal Reserve, has statedcombined with other macroeconomic factors, may have a different effect on the commercial real estate market.

The Trump administration continues to focus on several issues that it will takecould impact interest rates and the U.S. economy, including the recently enacted Tax Reform. As a measuredresult of the Tax Reform, we expect to realize a benefit from the reduction of the corporate federal income tax rate from 35% to 21%, as our Agency Business operates in a TRS. While there is uncertainty regarding the specifics and conservative approach totiming of any future interest rate decisions.policy changes, any such actions could impact our business.

 

We are a national originator with Fannie Mae and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency (“FHFA”) released the GSE 20172018 Scorecard (“20172018 Scorecard,”) which established Fannie Mae’s and Freddie Mac’s loan origination caps at $36.5$35.00 billion (“20172018 Caps”) each for the multifamily finance market, no changea $1.50 billion decrease from the 20162017 loan origination caps. Affordable housing loans, loans to small multifamily properties, and manufactured housing rental community loans continue to be excluded from the 20172018 Caps. Additionally,In addition, the definition of the affordable loan exclusionexclusions has added an extremely-high cost market category, continues to encompass affordable housing in high- and very-high cost markets and allows for an exclusion from the 20172018 Caps for the pro-rata portion of any loan on a multifamily property that includes affordable units. The 20172018 Scorecard providescontinues to provide FHFA the flexibility to review the estimated size of the multifamily loan origination market quarterly and proactively adjust the 20172018 Caps upward should the market be larger than expected.accordingly. The 20172018 Scorecard also providescontinues to provide exclusions for loans to properties in underserved markets.markets and for loans to finance certain energy or water efficiency improvements, however, to qualify for this exclusion, the projected annual energy or water savings must be at least 25%. Our originations with the GSEs are highly profitable executions as they provide significant gains from the sale of our loans, non-cash gains related to MSRs and servicing revenues, therefore, a decline in our GSE originations would negatively impact our financial results. We do not knoware unsure whether the FHFA will impose stricter limitations on GSE multifamily production volume in the future.

 

The commercial real estate markets continue to improve, but uncertainty remains as a result of global market instability, the current political climate and other matters and their potential impact on the U.S. economy and commercial real estate markets.  In addition, the growth in multifamily rental rates seen over the past few years are showing signs of stabilizing. If real estate values decline and/or rent growth subsides, it may limit our new mortgage loan originations since borrowers often use increases in the value of, and revenues produced from, their existing properties to support the purchase or investment in additional properties.  Declining real estate values may also significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan.  Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans as well as our ability to originate, sell and securitize loans, which would significantly impact our results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

 

The economic environment over the past few years has seen continued improvement in commercial real estate values, which has generally increased payoffs and reduced the credit exposure in our loan and investment portfolio.  We have made, and continue to make, modifications and extensions to loans when it is economically feasible to do so.  In some cases, a modification is a more viable alternative to foreclosure proceedings when a borrower cannot comply with loan terms.  In doing so, lower borrower interest rates, combined with non-performing loans, would lower our net interest margins when comparing interest income to our costs of financing.  However, since 2013, the levels of modifications and delinquencies have generally declined as property values increasehave increased and borrowers’ access to financing has improved.  If the markets were to deteriorate and the U.S. experienced a prolonged economic downturn, we believe there could be additional loan modifications and delinquencies, which may result in reduced net interest margins and additional losses throughout our sector.

Changes in Financial Condition

 

Assets — Comparison of balances at SeptemberJune 30, 20172018 to December 31, 2016:2017:

Cash and cash equivalents decreased $53.9 million, primarily due to funding new loan originations and investments, distributions from unwinding CLO IV, the payment made to fully internalize our management team and terminate the existing management agreement with our Former Manager and the payment of distributions to our stockholders, partially offset by proceeds received from loan sales and payoffs, proceeds from the public offering of our common stock and issuance of convertible notes, transferring loans into our CLO vehicles and interest and fees from our investments.

Restricted cash increased $107.8 million, primarily due to payoffs on our CLO loans in excess of loans transferred into our CLO vehicles. Restricted cash is kept on deposit with the trustees for our CLOs and primarily represents proceeds received from loan payoffs and paydowns that have not yet been disbursed to bondholders or redeployed

into new assets, as well as unfunded loan commitments and interest payments received from loans. Restricted cash for the Agency Business represents cash collateral for possible losses resulting from loans originated under the Fannie Mae DUS program in accordance with the terms of the loss-sharing agreements.

 

Our Structured loan and investment portfolio balance was $2.10$3.13 billion and $1.80$2.65 billion at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.  This increase was primarily due to loan originations exceeding payoffs and other reductions by $333.0$492.4 million. See below for details.

 

Our portfolio had a weighted average current interest pay rate of 6.04%6.76% and 5.71%6.28% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.  Including certain fees earned and costs associated with the Structuredstructured portfolio, the weighted average current interest rate was 6.84%7.40% and 6.39%6.99% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.  Advances on our financing facilities totaled $1.67$2.81 billion and $1.35$2.24 billion at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, with a weighted average funding cost of 3.87%4.34% and 3.91%4.12%, respectively, which excludes changes in the market value of certain interest rate swaps and financing costs.  Including the financing costs, the weighted average funding rate was 4.48%4.93% and 4.45%4.83% at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

Activity from our Structured Business portfolio was comprised of the following:following ($ in thousands):

 

 

Three Months Ended 
September 30, 2017

 

Nine Months Ended 
September 30, 2017

 

 

Three Months Ended
June 30, 2018

 

Six Months Ended
June 30, 2018

 

Loans originated

 

$

473,171,000

 

$

1,057,003,885

 

 

$

606,855

 

$

921,070

 

Number of loans

 

23

 

59

 

 

32

 

51

 

Weighted average interest rate

 

7.43

%

7.47

%

 

6.95

%

7.16

%

 

 

 

 

 

 

 

 

 

 

Loans paid-off

 

$

270,010,000

 

$

723,976,741

 

Loan payoffs / paydowns

 

$

238,026

 

$

428,641

 

Number of loans

 

22

 

52

 

 

22

 

42

 

Weighted average interest rate

 

7.50

%

6.92

%

 

6.70

%

6.89

%

 

 

 

 

 

 

 

 

 

 

Loans extended

 

$

156,156,830

 

$

311,356,206

 

 

$

130,978

 

$

189,378

 

Number of loans

 

12

 

32

 

 

9

 

13

 

 

Our loansLoans held-for-sale net from the Agency Business was $333.3increased $14.0 million, and $673.4 million at Septemberprimarily related to loan originations exceeding loan sales during the six months ended June 30, 2017 and December 31, 2016, respectively.2018 as noted in the following table (in thousands). These loans are generally sold within 60 days from the loan origination date. The decrease was primarily related to loan sales exceeding loan originations by $313.4 million during the nine months ended September 30, 2017, as noted in the following table.

 

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

 

Loan Originations

 

Loan Sales

 

Loan Originations

 

Loan Sales

 

Fannie Mae

 

$

650,373,500

 

$

665,959,500

 

$

2,216,819,525

 

$

2,569,821,000

 

Freddie Mac

 

328,075,000

 

342,629,800

 

880,597,200

 

862,376,636

 

FHA

 

18,273,300

 

43,484,109

 

189,086,997

 

167,708,801

 

CMBS/Conduit

 

 

 

21,370,000

 

21,370,000

 

Total

 

$

996,721,800

 

$

1,052,073,409

 

$

3,307,873,722

 

$

3,621,276,437

 

Our capitalized mortgage servicing rights, net increased $20.1 million at September 30, 2017, primarily due to MSRs recorded on new loan originations. Our capitalized mortgage servicing rights represent the estimated value of our rights to service mortgage loans for others. At September 30, 2017, the weighted average estimated life remaining of our MSRs was 7.1 years.

 

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

 

 

Loan Originations

 

Loan Sales

 

Loan Originations

 

Loan Sales

 

Fannie Mae

 

$

606,287

 

$

579,851

 

$

1,269,208

 

$

1,308,246

 

Freddie Mac

 

434,789

 

409,612

 

742,940

 

688,128

 

FHA

 

 

28,820

 

60,738

 

68,113

 

CMBS/Conduit

 

 

 

16,233

 

16,233

 

Total

 

$

1,041,076

 

$

1,018,283

 

$

2,089,119

 

$

2,080,720

 

 

Securities held-to-maturity net totaling $18.9increased $22.5 million represents the retained portionsas a result of the bottom tranchetwo additional purchases of B Piece bonds or “B Piece” offrom Freddie Mac SBL Programprogram securitizations. See Note 8 — 7—Securities Held-to-Maturity for details.

Goodwill and other intangible assets

Due from related party increased $25.7$9.5 million, primarily due to $25.0 million of goodwill recorded in connection with the internalization ofpayoffs to be remitted by our management team and termination of our existing management agreement with our Former Manager and a $4.9 million adjustment madeaffiliated servicing operations related to the Acquisition purchase price allocation, which was offset by the amortization of intangible assets. See Note 2 — Basis of Presentation and Significant Accounting Policies and Note 3 — Acquisition of Our Former Manager’s Agency Platform for details.real estate transactions.

 

Other assets increased $9.8 million, primarily due to an increase in interest and other receivables from new loan originations, as well as an increase in deferred tax assets.

Liabilities — Comparison of balances at SeptemberJune 30, 20172018 to December 31, 2016:2017:

 

Credit facilities and repurchase agreements decreased $344.3increased $381.9 million, primarily due to a $332.2 million decrease in financings on our loans held-for-sale, as a resultfunding of new structured loan sales exceeding loan originations during the nine months ended September 30, 2017.activity.

 

Collateralized loan obligations increased $337.8$172.2 million primarily, due to the issuancesissuance of a new CLO, VII and CLO VIII, where we issued a total of $561.9$441.0 million of CLO notes to third party investors, partially offset by the unwind of a CLO IV totaling $219.0$267.8 million.

 

Convertible seniorSenior unsecured notes net increased $14.7$27.1 million, due to the issuance of $125.0 million aggregate principal amount of our 5.625% Notes, partially offset by the full redemption of our 7.375% Notes totaling $97.9 million.

In January 2018, we paid $50.0 million in full satisfaction of the related party financing entered into with ACM to finance a portion of the aggregate purchase price of the Acquisition.

Due to borrowers decreased $21.7 million, primarily due to a decrease in funds held on loan originations.

Other liabilities decreased $16.0 million, primarily due to the issuancepayment of an additional $13.8 million of the 6.50% convertible senior unsecured notes. See Note 11 — Debt Obligations for details.

Junior subordinated notes decreased $18.4 million, primarily due to the repurchase of certain of our junior subordinated notes with a carrying value of $19.8 million. We recorded a gain of $7.1 million upon extinguishment of this debt inincentive compensation during the first quarter of 2017.2018, related to 2017 performance, and a decrease in current and deferred tax liabilities.

 

Equity

 

In May 2017, we completed a public offering where we sold 9,500,000 shares of our common stock for $8.05 per share, and received net proceeds of $76.2 million. We used $25.0 million of the proceeds to exercise our option to fully internalize our management team and terminate the existing management agreement with our Former Manager. The remaining amount was used to make investments and for general corporate purposes. We currently have $323.5 million available under our $500.0 million shelf registration statement.

Distributions

The following table presents dividendsDividends declared (on a per share basis) for the ninesix months ended SeptemberJune 30, 2017:2018 were as follows:

 

Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

Dividend (1)

 

Declaration Date

 

Dividend

 

Declaration Date

 

Series A

 

Series B

 

Series C

 

August 2, 2017

 

$

0.18

 

August 2, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

May 3, 2017

 

$

0.18

 

May 3, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

March 1, 2017

 

$

0.17

 

February 3, 2017

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

Dividend (1)

 

Declaration Date

 

Dividend

 

Declaration Date

 

Series A

 

Series B

 

Series C

 

February 21, 2018

 

$

0.21

 

February 2, 2018

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

May 2, 2018

 

$

0.25

 

May 2, 2018

 

$

0.515625

 

$

0.484375

 

$

0.53125

 

 


(1)         The dividend declared on AugustMay 2, 2017 was for June 1, 2017 through August 31, 2017, the dividend declared on May 3, 20172018 was for March 1, 20172018 through May 31, 20172018 and the dividend declared on February 3, 20172, 2018 was for December 1, 20162017 through February 28, 2017.2018.

 

Common Stock — On NovemberAugust 1, 2017,2018, the Board of Directors declared a cash dividend of $0.19$0.25 per share of common stock.  The dividend is payable on November 30, 2017August 31, 2018 to common stockholders of record as of the close of business on NovemberAugust 15, 2017.2018.

 

Preferred Stock — On NovemberAugust 1, 2017,2018, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock; a cash dividend of $0.484375 per share of 7.75% Series B preferred stock; and a cash dividend of $0.53125 per share of 8.50% Series C preferred stock.  These amounts reflect dividends from SeptemberJune 1, 20172018 through November 30, 2017August 31, 2018 and are payable on November 30, 2017August 31, 2018 to preferred stockholders of record on NovemberAugust 15, 2017.2018.

Deferred Compensation

 

We issued 374,580329,028 shares of restricted stock to employees of ours, and our Former Manager, including our chief executive officer, 74,37558,620 shares to the independent members of the Board of Directors and up to 448,980381,503 performance-based restricted common stock units to our chief executive officer in the first quarter of 2017.  In August 2017, we also granted our chief executive officer 357,569 shares of performance-based restricted stock as a result of the Company meeting the goals related to the integration of the Acquisition.2018.  See Note 1716 — Equity for details.

Comparison of Results of Operations for the Three Months Ended SeptemberJune 30, 20172018 and 20162017

 

The following table provides our consolidated operating results:results ($ in thousands):

 

 

Three Months Ended September 30,

 

Increase / (Decrease)

 

 

Three Months Ended June 30,

 

Increase / (Decrease)

 

 

2017

 

2016

 

Amount

 

Percent

 

 

2018

 

2017

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

42,139,576

 

$

29,636,227

 

$

12,503,349

 

42

%

 

$

59,295

 

34,468

 

$

24,827

 

72

%

Interest expense

 

23,849,417

 

16,966,228

 

6,883,189

 

41

%

 

37,884

 

20,411

 

17,473

 

86

%

Net interest income

 

18,290,159

 

12,669,999

 

5,620,160

 

44

%

 

21,411

 

14,057

 

7,354

 

52

%

Other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

17,126,106

 

9,693,822

 

7,432,284

 

77

%

 

15,622

 

18,830

 

(3,208

)

(17

)%

Mortgage servicing rights

 

18,897,239

 

15,968,067

 

2,929,172

 

18

%

 

17,936

 

17,254

 

682

 

4

%

Servicing revenue, net

 

8,520,111

 

5,885,884

 

2,634,227

 

45

%

 

10,871

 

6,609

 

4,262

 

64

%

Property operating income

 

2,668,055

 

2,960,940

 

(292,885

)

(10

)%

 

2,964

 

2,863

 

101

 

4

%

Other income, net

 

777,656

 

359,546

 

418,110

 

116

%

 

(470

)

(821

)

351

 

(43

)%

Total other revenue

 

47,989,167

 

34,868,259

 

13,120,908

 

38

%

 

46,923

 

44,735

 

2,188

 

5

%

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

25,194,433

 

14,216,679

 

10,977,754

 

77

%

 

26,815

 

21,825

 

4,990

 

23

%

Selling and administrative

 

7,606,936

 

5,903,031

 

1,703,905

 

29

%

 

8,873

 

7,835

 

1,038

 

13

%

Acquisition costs

 

 

6,406,258

 

(6,406,258

)

nm

 

Property operating expenses

 

2,582,745

 

2,819,004

 

(236,259

)

(8

)%

 

2,856

 

2,622

 

234

 

9

%

Depreciation and amortization

 

1,829,016

 

1,808,765

 

20,251

 

1

%

 

1,845

 

1,816

 

29

 

2

%

Impairment loss on real estate owned

 

2,000

 

1,500

 

500

 

33

%

Provision for loss sharing (net of recoveries)

 

(2,617,064

)

1,316,862

 

(3,933,926

)

nm

 

 

348

 

532

 

(184

)

(35

)%

Provision for loan losses (net of recoveries)

 

2,000,000

 

(54,000

)

2,054,000

 

nm

 

 

(2,127

)

(1,760

)

(367

)

21

%

Management fee - related party

 

 

3,325,000

 

(3,325,000

)

nm

 

 

 

2,673

 

(2,673

)

nm

 

Total other expenses

 

36,596,066

 

35,741,599

 

854,467

 

 

 

 

40,610

 

37,043

 

3,567

 

10

%

Income before income from equity affiliates and provision for income taxes

 

29,683,260

 

11,796,659

 

17,886,601

 

152

%

Income from equity affiliates

 

995,312

 

4,929,375

 

(3,934,063

)

(80

)%

Income before income (loss) from equity affiliates and income taxes

 

27,724

 

21,749

 

5,975

 

27

%

Income (loss) from equity affiliates

 

1,387

 

(3

)

1,390

 

nm

 

Provision for income taxes

 

(6,708,000

)

(300,000

)

(6,408,000

)

nm

 

 

(4,499

)

(3,435

)

(1,064

)

nm

 

Net income

 

23,970,572

 

16,426,034

 

7,544,538

 

46

%

 

24,612

 

18,311

 

6,301

 

34

%

Preferred stock dividends

 

1,888,430

 

1,888,430

 

 

 

 

1,888

 

1,888

 

 

 

Net income attributable to noncontrolling interest

 

5,661,184

 

3,649,432

 

2,011,752

 

55

%

 

5,557

 

4,494

 

1,063

 

24

%

Net income attributable to common stockholders

 

$

16,420,958

 

$

10,888,172

 

$

5,532,786

 

51

%

 

$

17,167

 

$

11,929

 

$

5,238

 

44

%

 

nm — not meaningful

The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and the corresponding weighted average yields (dollars($ in thousands):

 

 

Three Months Ended September 30,

 

 

Three Months Ended June 30,

 

 

2017

 

2016

 

 

2018

 

2017

 

 

Average 
Carrying 
Value (1)

 

Interest 
Income / 
Expense

 

W/A Yield / 
Financing 
Cost (2)

 

Average 
Carrying 
Value (1)

 

Interest 
Income / 
Expense

 

W/A Yield / 
Financing 
Cost (2)

 

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield /
Financing
Cost (2)

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield / 
Financing
Cost (2)

 

Structured Business interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,769,722

 

$

31,232

 

7.00

%

$

1,540,872

 

$

23,597

 

6.08

%

 

$

2,641,796

 

$

46,754

 

7.10

%

$

1,648,821

 

$

27,414

 

6.67

%

Preferred equity investments

 

190,228

 

2,592

 

9.12

%

71,759

 

1,051

 

5.88

%

Mezzanine / junior participation loans

 

96,471

 

2,232

 

9.18

%

114,318

 

2,041

 

7.08

%

 

79,093

 

4,326

 

13.15

%

80,717

 

1,161

 

5.77

%

Preferred equity investments

 

130,409

 

3,489

 

10.62

%

71,616

 

1,113

 

6.17

%

Core interest-earning assets

 

1,996,602

 

36,953

 

7.34

%

1,726,806

 

26,751

 

6.15

%

 

2,911,117

 

53,672

 

7.40

%

1,801,297

 

29,626

 

6.60

%

Cash equivalents

 

235,669

 

306

 

0.51

%

204,441

 

142

 

0.28

%

 

220,153

 

505

 

0.92

%

223,053

 

291

 

0.53

%

Total interest-earning assets

 

$

2,232,271

 

$

37,259

 

6.62

%

$

1,931,247

 

$

26,893

 

5.52

%

 

$

3,131,270

 

$

54,177

 

6.94

%

$

2,024,350

 

$

29,917

 

5.93

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structured Business interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO

 

$

1,458,875

 

$

17,307

 

4.76

%

$

982,499

 

$

9,517

 

3.89

%

Warehouse lines

 

$

173,285

 

$

1,975

 

4.52

%

$

209,098

 

$

1,787

 

3.39

%

 

481,010

 

5,485

 

4.57

%

123,215

 

1,446

 

4.71

%

CLO

 

1,090,568

 

12,104

 

4.40

%

885,914

 

7,746

 

3.47

%

Unsecured debt

 

378,950

 

8,637

 

9.14

%

198,050

 

4,179

 

8.46

%

Trust preferred

 

154,336

 

1,636

 

4.21

%

175,858

 

1,612

 

3.64

%

 

154,379

 

1,978

 

5.14

%

154,336

 

1,570

 

4.08

%

Unsecured debt

 

198,462

 

4,198

 

8.39

%

97,860

 

1,995

 

8.09

%

Interest rate swaps

 

 

 

 

 

1,315

 

 

Debt fund

 

68,208

 

1,205

 

7.09

%

 

 

 

Total interest-bearing liabilities

 

$

1,616,651

 

19,913

 

4.89

%

$

1,368,730

 

14,455

 

4.19

%

 

$

2,541,422

 

34,612

 

5.46

%

$

1,458,100

 

16,712

 

4.60

%

Net interest income

 

 

 

$

17,346

 

 

 

 

 

$

12,438

 

 

 

 

 

 

$

19,565

 

 

 

 

 

$

13,205

 

 

 


(1)         Based on UPB for loans, amortized cost for securities and principal amount of debt.

(2)         Weighted average yield calculated based on annualized interest income or expense divided by average carrying value.

Net Interest Income

The increase in interest income is primarily due to an increase of $24.3 million, or 81%, from our Structured Business, which was primarily the result of a 62% increase in our average core interest-earning assets, due to loan originations exceeding loan runoff, and a 12% increase in the average yield on core interest-earning assets, largely due to increases in the average LIBOR rate.

The increase in interest expense is primarily due to an increase of $17.9 million, or 107%, from our Structured Business, partially offset by a decrease of $1.0 million from the pay off in January 2018 of the seller financing entered into in connection with the Acquisition. The increase from our Structured Business was primarily due to a 74% increase in the average balance of our interest-bearing liabilities and a 19% increase in the average cost of our interest-bearing liabilities. The increase in the average debt balance was due to growth in our loan portfolio and the issuance of additional unsecured debt. The increase in the average cost of our interest-bearing liabilities was primarily due to $2.9 million of accelerated deferred financing costs recorded in the second quarter of 2018 related to the unwind of a CLO in June and the redemption of unsecured debt, along with an increase in the average LIBOR rate.

Agency Business Revenue

The decrease in gain on sales, including fee-based services, net was primarily due to a $186.1 million decrease in loan sales. Sales margin (gain on sales, including fee-based services, net as a percentage of loan sales volume) was flat at 1.53% this quarter compared to 1.56% in the second quarter of 2017.

The increase in servicing revenue, net was primarily due to an increase in our servicing portfolio and an increase in earnings on escrows. Our servicing portfolio increased 14% from $15.02 billion at June 30, 2017 to $17.11 billion at June 30, 2018.  Our servicing revenue, net in the second quarter of 2018 and 2017 included $11.9 million and $11.8 million, respectively, of amortization expense.

Other Expenses

The increase in employee compensation and benefits expense is comprised of $2.7 million from our Structured Business and $2.3 million from our Agency Business. The increase in both businesses is primarily due to compensation expense recorded directly by each business associated with the employees that transferred to us as a result of the internalization of our management team in 2017. Such costs were previously charged through the management fee prior to the termination of our management agreement with ACM in May 2017. In addition, increases in headcount associated with each business’s portfolio growth also contributed to the increase.

The increase in selling and administrative expenses is comprised of $0.6 million from our Structured Business and $0.4 million from our Agency Business. The increase from our Structured Business was primarily due to an increase in professional fees. The increase in our Agency Business was primarily due to increases in professional fees and rent expense.

Impairment losses on real estate owned were $2.0 million and $1.5 million for the three months ended June 30, 2018 and 2017, respectively. During these periods, we received market analysis which resulted in impairment losses on our real estate properties owned. See Note 9 — Real Estate Owned for details.

The recovery for loan losses in the second quarter of 2018 was due to a $31.6 million settlement of a preferred equity investment with a carrying value of $29.1 million resulting in a $2.5 million recovery and a $0.9 million payment received on a written-off junior participation interest in an office building. These recoveries were partially offset by a $1.3 million provision recorded on a bridge loan. The recovery of loan losses for the three months ended June 30, 2017 was the result of a $1.8 million pay-off of a fully reserved mezzanine loan.

The decrease in management fee — related party was due to the internalization of our management team and termination of the existing management agreement with ACM effective May 31, 2017.

Income (Loss) from Equity Investments

The increase in income (loss) from equity affiliates was primarily due to an increase in income from our investment in a residential mortgage banking business. In the three months ended June 30, 2018 we recorded income of $0.7 million from this investment, compared to a $0.7 million loss in the 2017 comparable period.

Provision for Income Taxes

In the three months ended June 30, 2018 and 2017, we recorded a tax provision of $4.5 million and $3.4 million, respectively. The provision for income taxes in the three months ended June 30, 2018 consisted of a current tax provision of $4.3 million and a deferred tax provision of $0.2 million and the provision for income taxes in the three months ended June 30, 2017 consisted of a current tax provision of $4.3 million and a deferred tax benefit of $0.9 million, respectively.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the 21,230,769 OP Units issued as part of the Acquisition, which represented 23.6% and 25.7% of our outstanding stock at June 30, 2018 and 2017, respectively.

Comparison of Results of Operations for the Six Months Ended June 30, 2018 and 2017

The following table provides our consolidated operating results ($ in thousands):

 

 

Six Months Ended June 30,

 

Increase / (Decrease)

 

 

 

2018

 

2017

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

110,908

 

67,993

 

$

42,915

 

63

%

Interest expense

 

71,271

 

39,848

 

31,423

 

79

%

Net interest income

 

39,637

 

28,145

 

11,492

 

41

%

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

33,815

 

38,001

 

(4,186

)

(11

)%

Mortgage servicing rights

 

37,571

 

37,284

 

287

 

1

%

Servicing revenue, net

 

20,418

 

11,403

 

9,015

 

79

%

Property operating income

 

5,874

 

6,086

 

(212

)

(3

)%

Other income, net

 

2,408

 

(1,707

)

4,115

 

nm

 

Total other revenue

 

100,086

 

91,067

 

9,019

 

10

%

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

56,309

 

41,666

 

14,643

 

35

%

Selling and administrative

 

17,789

 

15,529

 

2,260

 

15

%

Property operating expenses

 

5,652

 

5,260

 

392

 

7

%

Depreciation and amortization

 

3,691

 

3,713

 

(22

)

(1

)%

Impairment loss on real estate owned

 

2,000

 

2,700

 

(700

)

(26

)%

Provision for loss sharing (net of recoveries)

 

821

 

2,212

 

(1,391

)

(63

)%

Provision for loan losses (net of recoveries)

 

(1,802

)

(2,456

)

654

 

(27

)%

Management fee - related party

 

 

6,673

 

(6,673

)

nm

 

Total other expenses

 

84,460

 

75,297

 

9,163

 

12

%

Income before gain on extinguishment of debt, income from equity affiliates and income taxes

 

55,263

 

43,915

 

11,348

 

26

%

Gain on extinguishment of debt

 

 

7,116

 

(7,116

)

nm

 

Income from equity affiliates

 

2,132

 

760

 

1,372

 

181

%

Benefit from (provision for) income taxes

 

4,285

 

(9,536

)

13,821

 

nm

 

Net income

 

61,680

 

42,255

 

19,425

 

46

%

Preferred stock dividends

 

3,777

 

3,777

 

 

 

Net income attributable to noncontrolling interest

 

14,547

 

10,935

 

3,612

 

33

%

Net income attributable to common stockholders

 

$

43,356

 

$

27,543

 

$

15,813

 

57

%

nm — not meaningful

The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and the corresponding weighted average yields ($ in thousands):

 

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

 

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield /
Financing
Cost (2)

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield /
Financing
Cost (2)

 

Structured Business interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

2,544,754

 

$

87,739

 

6.95

%

$

1,635,394

 

$

52,805

 

6.51

%

Preferred equity investments

 

170,083

 

7,625

 

9.04

%

68,069

 

2,151

 

6.37

%

Mezzanine / junior participation loans

 

82,442

 

5,156

 

12.61

%

96,567

 

3,006

 

6.28

%

Core interest-earning assets

 

2,797,279

 

100,520

 

7.25

%

1,800,030

 

57,962

 

6.49

%

Cash equivalents

 

210,374

 

893

 

0.86

%

179,977

 

464

 

0.52

%

Total interest-earning assets

 

$

3,007,653

 

$

101,413

 

6.80

%

$

1,980,007

 

$

58,426

 

5.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structured Business interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLO

 

$

1,441,318

 

$

31,518

 

4.41

%

$

860,565

 

$

16,385

 

3.84

%

Warehouse lines

 

389,595

 

9,139

 

4.73

%

200,395

 

3,957

 

3.98

%

Unsecured debt

 

367,524

 

18,135

 

9.95

%

195,984

 

8,301

 

8.54

%

Trust preferred

 

154,379

 

3,728

 

4.87

%

157,071

 

3,115

 

4.00

%

Debt fund

 

68,162

 

2,297

 

6.80

%

 

 

 

Interest rate swaps

 

 

 

 

 

195

 

 

Total interest-bearing liabilities

 

$

2,420,978

 

64,817

 

5.40

%

$

1,414,015

 

31,953

 

4.56

%

Net interest income

 

 

 

$

36,596

 

 

 

 

 

$

26,473

 

 

 

 


(1)         Based on UPB for loans, amortized cost for securities and principal amount of debt.

(2)         Weighted average yield calculated based on annualized interest income or expense divided by average carrying value.

 

Net Interest Income

 

The increase in interest income wasis primarily due to a $10.4an increase of $43.0 million, or 39%74%, increase from our Structured Business.  The Structured Business, increasewhich was largely due toprimarily the result of a 16%55% increase in our average core interest-earning assets, as a result ofdue to loan loan originations exceeding loan payoffs,runoff, and a 19%12% increase in the average yield on core interest-earning assets, primarilylargely due to a $2.1 million increase in fee income from accelerated runoff and an increaseincreases in the average LIBOR rate. The increase from our Agency Business of $2.1 million, or 78%, was primarily due to a period-over-period increase in average loans held-for-sale, along with the impact of thirteen additional operating days in the third quarter of 2017 from the Acquisition completed on July 14, 2016.

 

The increase in interest expense is primarily due to an increase of $32.9 million, or 103%, from our Structured Business, partially offset by a decrease of $1.6 million from the pay off in January 2018 of the seller financing entered into in connection with the Acquisition. The increase from our Structured Business was primarily due to a $5.5 million, or 38%, increase from our Structured Business. The Structured Business increase was largely due to an 18% and 17%71% increase in the average debt balance of our interest-bearing liabilities and an 18% increase in the average cost of our interest-bearing liabilities, respectively.liabilities. The increase in the average debt balance was primarily due to the growth in our loan portfolio as well asand the issuance of our convertible senioradditional CLOs, unsecured notes.debt and the Debt Fund. The increase in the average cost of our interest-bearing liabilities was primarily due to $1.1$5.3 million of accelerated feesdeferred financing costs recorded in 2018 related to the redemption of unsecured debt and the unwind of a CLO, IV, a higher rate on the convertible senior unsecured notes, as compared to our overall portfolio, andalong with an increase in the average LIBOR rate, partially offset by a lower rate on CLO VIII, as compared to our overall portfolio, and the runoff of swaps in the first quarter of 2017. The increase from our Agency Business of $1.3 million, of 77%, was primarily due to an increase in our average debt balance, as a result of an increase in the average loans held-for-sale, along with the impact of thirteen additional operating days in the third quarter of 2017 from the Acquisition, partially offset by improved rates in certain credit facilities.rate.

 

Agency Business Revenue

 

The increasedecrease in gain on sales, including fee-based services, net was primarily due to a $500.2$488.5 million or 91%, increasedecrease in loan sales, due in part to thirteen additional operating days in the third quarter of 2017 from the Acquisition, partially offset by a 1315 basis point decreaseincrease in the sales margin (gain on sales, including fee-based services, net as a percentage of loan sales volume) from 1.76%1.48% to 1.63% in the third quarter of 2017. Agency loan sales for this period were $1.05 billion, compared to $551.8 million in the 2016 comparable period.

2018. The increase in income from MSRsthe sales margin was primarily due to a $213.4 million, or 30%, increase in loan commitment volume, as a result of an increase in Freddie Mac SBL originations, and thirteen additional operating days in the third quarter of 2017 from the Acquisition. This increase was partially offset by a 30 basis point decrease in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 2.23% to 2.04% in the third quarter of 2017, which was due to Freddie Mac SBL loans carrying a lower rate than our overall portfolio.Fannie Mae margins.

 

The increase in servicing revenue, net was primarily due to an increase in our servicing portfolio and thirteen additional operating daysan increase in earnings on escrows due to increases in the third quarter of 2017 from the Acquisition.average LIBOR rate. Our servicing portfolio increased 24%14% from $12.60$15.02 billion at SeptemberJune 30, 20162017 to $15.60$17.11 billion at SeptemberJune 30, 2017.2018.  Our servicing revenue, net in the third quarter ofsix months ended June 30, 2018 and 2017 and 2016 includes $11.7included $23.8 million and $7.6$23.7 million, respectively, of amortization respectively.expense.

Other Income, Net

The increase in other income, net was comprised primarily of a $4.6 million increase from our Agency Business, which was due to changes in the fair value of our rate lock commitments. See Note 13 — Fair Value for details.

 

Other Expenses

 

The increase in employee compensation and benefits expense wasis comprised of $8.2 million from our Agency Business and $6.4 million from our Structured Business. The increase in both businesses is primarily due to several factors, includingcompensation expense recorded directly by each business associated with the employees that transferred to us as a result of the internalization of our management team andin 2017. Such costs were previously charged through the management fee prior to the termination of the existingour management agreement with our Former Manager effectiveACM in May 31, 2017, thirteen additional operating days in the third quarter of 2017 from the Acquisition and2017. In addition, increases in commissions and headcount as a result of increases in our both our Structured and Agency portfolios during 2017.associated with each business’s portfolio growth also contributed to the increase.

 

The increase in selling and administrative expenses is comprised of $1.2 million from our Agency Business and $1.1 million from our Structured Business. The increase in our Agency Business was primarily due to increases in professional fees and rent expense. The increase from our Structured Business was primarily due to an increase in legal and consultingprofessional fees, and rent, along with the impact of an additional thirteen days of expensespartially offset by a decrease in the third quarter of 2017 from the Acquisition.stock-based compensation expense.

 

Acquisition costsImpairment losses on real estate owned were $2.0 million and $2.7 million for the threesix months ended SeptemberJune 30, 2016 represent costs incurred related to the Acquisition,2018 and 2017, respectively. During these periods, we received market analysis which was completedresulted in July 2016.impairment losses on our real estate properties owned. See Note 39Acquisition of Our Former Manager’s Agency PlatformReal Estate Owned for details.

 

The decrease in our provision for loss sharing was primarily related to a $3.3 million reversal of a specific reserve related to arunoff and higher Fannie Mae DUS loan that settled with no loss sharesales in our Agency Business.the six months ended June 30, 2017.

 

The increase in the provisionrecovery for loan losses for the six months ended June 30, 2018 was due to a $31.6 million settlement of a preferred equity investment with a carrying value of $29.1 million resulting in a $2.5 million recovery and a $0.9 million payment received on a written-off junior participation interest in an additional $2.0office building. These recoveries were partially offset by a $1.7 million provision recorded inon a bridge loan. The recovery of loan losses of $2.5 million for the third quartersix months ended June 30, 2017 was primarily due to the pay-off of 2017 related to a preferred equity investment.fully reserved mezzanine loan with a UPB of $1.8 million.

 

The decrease in management fee — related party was due to the internalization of our management team and termination of the existing management agreement with our Former ManagerACM effective May 31, 2017.

 

Income from Equity Affiliates

The decrease in income from equity affiliates was primarily related to a $1.2 million loss incurred in connection with our investment in a residential mortgage banking business during the third quarter of 2017, as compared to $4.2 million of income in the third quarter of 2016, partially offset by income of $1.5 million in the third quarter of 2017 from the redemption of an equity participation interest we held.

Provision for Income Taxes

The provision for income taxes of $6.7 million for the three months ended September 30, 2017 was related to the income from our Agency Business, which is operated through our TRS Consolidated Group.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the 21,230,769 OP Units issued to our Former Manager to satisfy a portion of the aggregate purchase price of the Acquisition, which represents approximately 25.6% of our outstanding stock at September 30, 2017.

Comparison of Results of Operations for the Nine Months Ended September 30, 2017 and 2016

The following table provides our consolidated operating results:

 

 

2017

 

2016

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

110,132,866

 

$

83,424,190

 

$

26,708,676

 

32

%

Other interest income, net

 

 

2,539,274

 

(2,539,274

)

nm

 

Interest expense

 

63,697,641

 

42,958,329

 

20,739,312

 

48

%

Net interest income

 

46,435,225

 

43,005,135

 

3,430,090

 

8

%

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

55,127,004

 

9,693,822

 

45,433,182

 

nm

 

Mortgage servicing rights

 

56,181,638

 

15,968,067

 

40,213,571

 

nm

 

Servicing revenue, net

 

19,922,901

 

5,885,884

 

14,037,017

 

nm

 

Property operating income

 

8,754,518

 

12,719,027

 

(3,964,509

)

(31

)%

Other income, net

 

(929,893

)

663,977

 

(1,593,870

)

nm

 

Total other revenue

 

139,056,168

 

44,930,777

 

94,125,391

 

nm

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

66,860,581

 

22,856,433

 

44,004,148

 

nm

 

Selling and administrative

 

23,135,750

 

10,277,844

 

12,857,906

 

nm

 

Acquisition costs

 

 

10,261,902

 

(10,261,902

)

nm

 

Property operating expenses

 

7,842,571

 

10,991,823

 

(3,149,252

)

(29

)%

Depreciation and amortization

 

5,541,991

 

3,129,410

 

2,412,581

 

77

%

Impairment loss on real estate owned

 

2,700,000

 

11,200,000

 

(8,500,000

)

(76

)%

Provision for loss sharing (net of recoveries)

 

(405,494

)

1,316,862

 

(1,722,356

)

nm

 

Provision for loan losses (net of recoveries)

 

(455,653

)

(24,995

)

(430,658

)

nm

 

Management fee - related party

 

6,673,260

 

8,875,000

 

(2,201,740

)

(25

)%

Total other expenses

 

111,893,006

 

78,884,279

 

33,008,727

 

42

%

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

 

73,598,387

 

9,051,633

 

64,546,754

 

nm

 

Gain on extinguishment of debt

 

7,116,243

 

 

7,116,243

 

nm

 

Gain on sale of real estate

 

 

11,630,687

 

(11,630,687

)

nm

 

Income from equity affiliates

 

1,755,145

 

11,193,918

 

(9,438,773

)

(84

)%

Provision for income taxes

 

(16,244,000

)

(300,000

)

(15,944,000

)

nm

 

Net income

 

66,225,775

 

31,576,238

 

34,649,537

 

110

%

Preferred stock dividends

 

5,665,290

 

5,665,290

 

 

 

Net income attributable to noncontrolling interest

 

16,596,415

 

3,649,432

 

12,946,983

 

nm

 

Net income attributable to common stockholders

 

$

43,964,070

 

$

22,261,516

 

$

21,702,554

 

97

%

nm — not meaningful

The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and corresponding weighted average yields (dollars in thousands):

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

 

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield /
Financing
Cost (2)

 

Average
Carrying
Value (1)

 

Interest
Income /
Expense

 

W/A Yield /
Financing
Cost (2)

 

Structured Business interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

1,680,662

 

$

84,039

 

6.69

%

$

1,479,995

 

$

70,023

 

6.30

%

Mezzanine / junior participation loans

 

96,534

 

5,238

 

7.25

%

109,750

 

5,690

 

6.91

%

Preferred equity investments

 

89,078

 

5,640

 

8.47

%

81,413

 

4,331

 

7.09

%

Core interest-earning assets

 

1,866,274

 

94,917

 

6.80

%

1,671,158

 

80,044

 

6.38

%

Cash equivalents

 

198,745

 

768

 

0.52

%

208,985

 

637

 

0.41

%

Total interest-earning assets

 

$

2,065,019

 

$

95,685

 

6.20

%

$

1,880,143

 

$

80,681

 

5.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structured Business interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse lines

 

$

191,259

 

$

5,931

 

4.15

%

$

200,006

 

$

5,149

 

3.43

%

CLO

 

938,075

 

28,489

 

4.06

%

807,516

 

20,621

 

3.40

%

Trust preferred

 

156,149

 

4,752

 

4.07

%

175,858

 

4,685

 

3.55

%

Unsecured debt

 

196,819

 

12,499

 

8.49

%

97,860

 

5,985

 

8.15

%

Interest rate swaps

 

 

195

 

 

 

4,007

 

 

Total interest-bearing liabilities

 

$

1,482,302

 

51,866

 

4.68

%

$

1,281,240

 

40,447

 

4.21

%

Net interest income

 

 

 

$

43,819

 

 

 

 

 

$

40,234

 

 

 


(1)         Based on UPB for loans, amortized cost for securities and principal amount of debt.

(2)         Weighted average yield calculated based on annualized interest income or expense divided by average carrying value.

Net Interest Income

The increase in interest income is comprised of $15.0 million from our Structured Business and $11.7 million from our Agency Business. The $15.0 million, or 19%, increase from our Structured Business was primarily due to a 12% increase in our average core interest-earning assets, as a result of loan originations exceeding loan payoffs, and a 7% increase in the average yield on core interest-earning assets, largely due to an increase in the average LIBOR rate and higher rates on originations compared to payoffs. The increase in our Agency Business is due to the full period impact in 2017 of the Acquisition completed in the third quarter of 2016.

Other interest income, net was $2.5 million for the nine months ended September 30, 2016. During 2015, we acquired a $116.0 million defaulted first mortgage at par, which paid off during 2015. In April 2016, additional funds held in escrow from the note payoff were released following an arbitration proceeding and we recognized net other interest income totaling $2.5 million.

The increase in interest expense is comprised of $11.4 million from our Structured Business, $7.3 million from our Agency Business and $2.1 million from the seller financing entered into in connection with the Acquisition. The $11.4 million, or 28%, increase from our Structured Business was primarily due to a 16% increase in the average balance of our interest-bearing liabilities and an 11% increase in the average cost of our interest-bearing liabilities. The increase in the average debt balance was due to an increase in our loan portfolio, as well as from the issuance of our convertible senior unsecured notes and CLOs. The increase in the average cost of our interest-bearing liabilities was due to $1.1 million of accelerated fees related to the unwind of CLO IV, a higher rate on the convertible senior unsecured notes, as compared to our overall portfolio, and an increase in the average LIBOR rate, partially offset by a lower rate on CLO VIII, as compared to our overall portfolio, and the runoff of swaps in the first quarter of 2017.   The increase in our Agency Business is due to the full period impact in 2017 of the Acquisition.

Other Revenue

Within our Agency Business, our primary revenue sources which include gain on sales, including fee-based services, net; mortgage servicing rights; and servicing revenue, net each increased substantially during the nine

months ended September 30, 2017, as compared to the same period in 2016, primarily due to the Acquisition completed in the third quarter of 2016. Our 2017 results reflect the full period impact of the Acquisition, compared to less than three months impact in 2016.

The decrease in property operating results (income less expenses) was primarily due to the sale of several properties during 2016 and the vacancy of our real estate owned office building in April 2017.

The decrease in other income, net was primarily due to a decline in the fair value of our forward sale commitments held by our Agency Business at September 30, 2017.

Other Expenses

The increase in employee compensation and benefits expense is comprised of $42.5 million from our Agency Business and $1.5 million from our Structured Business. The increase in our Agency Business is due to the full period impact in 2017 of the Acquisition. The $1.5 million, or 12%, increase from our Structured Business was primarily associated with the employees that transferred to us as a result of the internalization of our management team and termination of the existing management agreement with our Former Manager effective May 31, 2017.

The increase in selling and administrative expenses is comprised of $10.4 million from our Agency Business and $2.4 million from our Structured Business. The increase in our Agency Business is due to the full period impact in 2017 of the Acquisition. The $2.4 million, or 37%, increase from our Structured Business was primarily due to an increase in professional fees and rent expense that was recorded directly by the Structured Business, which was previously charged through the management fee prior to the Acquisition, as the lease contracts were assumed in connection with the Acquisition.

Acquisition costs for the nine months ended September 30, 2016 represent costs incurred related to the Acquisition, which was completed in July 2016.  See Note 3 — Acquisition of Our Former Manager’s Agency Platform for details.

The increase in depreciation and amortization is comprised of $3.0 million from our Agency Business partially offset by a $0.6 million decrease from our Structured Business. The increase in our Agency Business is due to the full period impact in 2017 of the amortization of intangibles related to the Acquisition. The $0.6 million, or 32%, decrease in our Structured Business was primarily due to the sale of several real estate owned properties during 2016.

Impairment loss on real estate owned was $2.7 million and $11.2 million for the nine months ended September 30, 2017 and 2016, respectively. During the second quarter of 2016, we determined that our hotel property exhibited indicators of impairment and, as a result, we recorded an impairment loss. During the first half of 2017, we received additional market analyses which resulted in a further impairment loss on this property.

The decrease in our provision for loss sharing was primarily related to a $3.3 million reversal of a specific reserve related to a Fannie Mae DUS loan that settled with no loss share in our Agency Business, partially offset by the full period impact in 2017 of reserves related to the Acquisition.

The recovery of loan losses for the nine months ended September 30, 2017 was due to the pay-off of a fully reserved mezzanine loan with a UPB of $1.8 million and a $0.7 million reserve recovery on a multifamily bridge loan, partially offset by a $2.0 million provision on a preferred equity investment.

The decrease in management fee — related party was due to the internalization of our management team and termination of the existing management agreement with our Former Manager effective May 31, 2017.

Gain on Extinguishment of Debt

 

During the ninesix months ended SeptemberJune 30, 2017, we purchased, at a discount, certain$20.9 million of our junior subordinated notes with a carrying value of $19.8 million and recorded a gain on extinguishment of debt of $7.1 million.

Gain on Sale of Real Estate

During the nine months ended September 30, 2016, we sold three multifamily properties and a hotel property for $50.7 million and recognized a gain of $11.6 million.

 

Income from Equity AffiliatesInvestments

 

The decreaseincrease in income from equity affiliates was primarily relateddue to a $1.8 million loss incurredan increase in income from our investment in a residential mortgage banking business duringbusiness. In the ninesix months ended SeptemberJune 30, 2017, as2018 we recorded income of $0.8 million from this investment, compared to $8.9a $0.6 million of incomeloss in the 20162017 comparable period, partially offset by income of $1.5 million in the nine months ended September 31, 2017 from the redemption of an equity participation interest we held.period.

 

Provision forBenefit from (Provision for) Income Taxes

 

In the six months ended June 30, 2018 and 2017, we recorded a tax benefit of $4.3 million and a tax provision of $9.5 million, respectively. The benefit from income taxes in the six months ended June 30, 2018 consisted of a current tax provision of $8.8 million and a deferred tax benefit of $13.1 million, and the provision for income taxes in the six months ended June 30, 2017 consisted of a current tax provision of $8.6 million and a deferred tax provision of $0.9 million, respectively.  The deferred tax benefit recorded in the six months ended June 30, 2018

was due primarily to our payoff in January 2018 of the $50.0 million preferred equity interest entered into with ACM to finance a portion of the Acquisition purchase price.

The provision for income taxes of $16.2 million and $0.3 million forin the ninesix months ended SeptemberJune 30, 20172018 includes the effect of the newly enacted corporate federal income tax rate of 21% on our Agency Business as a result of the Tax Reform. The provision for income taxes primarily represents federal and 2016, respectively, wasstate taxes related to the income from our Agency Business, which is operated through ourwas acquired by the TRS Consolidated Group.Group in July 2016.

 

Net Income Attributable to Noncontrolling Interest

 

The noncontrolling interest relates to the 21,230,769 OP Units issued to our Former Manager to satisfy a portion of the aggregate purchase priceas part of the Acquisition, which represents approximately 25.6%represented 23.6% and 25.7% of our outstanding stock at SeptemberJune 30, 2017.2018 and 2017, respectively.

 

Liquidity and Capital Resources

 

Sources of Liquidity. Liquidity is a measure of our ability to meet our potential cash requirements, including ongoing commitments to repay borrowings, satisfaction of collateral requirements under the Fannie Mae DUS risk-sharing agreement and, as an approved designated seller/servicer of Freddie Mac’s SBL Program,program, operational liquidity requirements of the GSE agencies, fund new loans and investments, fund operating costs and distributions to our stockholders, as well as other general business needs. Our primary sources of funds for liquidity consist of proceeds from equity and debt offerings, debt facilities and cash flows from our operations. We closely monitor our liquidity position and believe our existing sources of funds and access to additional liquidity will be adequate to meet our liquidity needs.

 

While we have been successful in obtaining proceeds from debt and equity offerings, CLOs and certain financing facilities, current conditions in the capital and credit markets have and may continue to make certain forms of financing less attractive and, in certain cases, less available. Therefore we will continue to rely, in part, on cash flows provided by operating and investing activities for working capital.

 

To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT—taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital requirements.

 

Cash Flows. Cash flows provided by operating activities totaled $387.9$18.6 million during the ninesix months ended SeptemberJune 30, 20172018 and consisted primarily of net cash inflows of $333.7 million, as a result of loan sales exceeding loan originations in our Agency Business, and net income, adjusted for noncash items, of $60.5$62.7 million, partially offset by net cash outflows of $15.9 million as a result of loan originations exceeding loan sales in our Agency Business and a period-over-period increases in other assets of $9.8 million and due from related party of $9.5 million. We had net cash inflowsoutflows from loans-held-for-sale during the ninesix months ended SeptemberJune 30, 20172018 due to the timing of agency loan sales, as agency loans are generally sold within 60 days of origination. At September 30, 2017, we had loans held-for-sale, net totaling $333.3 million that are expected to be sold in the fourth quarter of 2017.

 

Cash flows used in investing activities totaled $350.8$518.1 million during the ninesix months ended SeptemberJune 30, 2017.2018.  Loan and investment activity (originations and payoffs/paydowns) comprise the bulk of our investing activities. Loan originations from our Structured Business totaling $1.05 billion,$875.2 million, net of payoffs and paydowns of $758.1

$429.1 million, resulted in net cash outflows of $293.3$446.1 million. Cash used in investing activities also includes a $25.0 million cash payment to fully internalize our management team and terminate the existing management agreement with our Former Manager, $22.6$58.6 million of cash used to fund holdbacks and reserves on our loans and investments and an $18.3$21.6 million in cash paymentpayments to purchase the B Piece of thebonds from SBL Program securitizations.

 

Cash flows used inprovided by financing activities totaled $91.0$536.3 million during the ninesix months ended SeptemberJune 30, 2017,2018, and consisted primarily of $566.0 million of net proceeds from the issuances of a CLO and additional unsecured notes, net cash outflowsinflows of $344.4$382.8 million from debt facility activities (facility paydowns(funded loan originations were greater than funded loan originations),facility paydowns) and $55.9 million of net proceeds from a public offering of our common stock. These cash inflows were partially offset by outflows of $219.0$267.8 million for the redemption of CLO IV, a $107.8V, $97.9 million increase in restricted cash, primarily fromfor the payoffredemption of loans in our CLO vehicles, $47.86.50% Convertible Notes, $50.0 million in distributionsfor full satisfaction of the seller financing related to the Acquisition of the Agency Business and $42.3 million distributed to our stockholders and OP Unit holder, a $12.7 million partial payoff of our junior subordinated notes and $11.5 million payment for deferred financing costs. These cash outflows were primarily offset by $561.9 million of proceeds from the issuances of CLO VII and VIII, $76.2 million of net proceeds from a public offering of our common stock and $13.8 million of net proceeds from the issuance of convertible senior unsecured notes.holders.

Agency Business Requirements. The Agency Business is subject to supervision by certain regulatory agencies. Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, purchase and loss obligations and compliance with reporting requirements. Our adjusted net worth and operational liquidity exceeded the agencies’ requirements as of SeptemberJune 30, 2017.2018. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $47.0 million and $0.7 million of cash collateral. See Note 1514 — Commitments and Contingencies for details about our performance regarding these requirements.

 

We also enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 1312 — Derivative Financial Instruments and Note 1413 — Fair Value.

 

Debt Instruments. We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments.

investments and substantially all of our loans held-for-sale. The following is a summary of our debt instruments:facilities ($ in thousands):

 

 

September 30, 2017

 

 

June 30, 2018

 

Debt Instruments

 

Commitment

 

Principal Balance
(1)

 

Available

 

Maturity
Dates

 

 

Commitment

 

UPB (1)

 

Available

 

Maturity
Dates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structured Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

537,497,894

 

$

235,954,920

 

$

301,542,974

 

2017 - 2020

 

 

$

947,968

 

$

605,963

 

$

342,005

 

2018 - 2021

 

Collateralized loan obligations (2)

 

1,079,874,000

 

1,079,874,000

 

 

2017 - 2021

 

 

1,609,524

 

1,609,524

 

 

2018 - 2023

 

Debt Fund (2)

 

70,000

 

70,000

 

 

2019 - 2022

 

Senior unsecured notes

 

97,860,025

 

97,860,025

 

 

2021

 

 

125,000

 

125,000

 

 

2023

 

Convertible unsecured senior notes

 

100,000,000

 

100,000,000

 

 

2019

 

 

243,750

 

243,750

 

 

2019 - 2020

 

Junior subordinated notes

 

154,336,000

 

154,336,000

 

 

2034 - 2037

 

 

154,336

 

154,336

 

 

2034 - 2037

 

Structured Business total

 

1,969,567,919

 

1,668,024,945

 

301,542,974

 

 

 

Structured transaction business total

 

3,150,578

 

2,808,573

 

342,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities (3)

 

1,150,000,000

 

328,276,946

 

821,723,054

 

2018

 

 

1,000,000

 

307,811

 

692,189

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Related party financing

 

50,000,000

 

50,000,000

 

 

2021

 

 

 

 

 

 

 

 

 

 

Consolidated total

 

$

3,169,567,919

 

$

2,046,301,891

 

$

1,123,266,028

 

 

 

 

$

4,150,578

 

$

3,116,384

 

$

1,034,194

 

 

 

 


(1)         Principal balance excludesExcludes the impact of deferred financing costs.

(2)         Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of SeptemberJune 30, 2017.

2018.

(3)         The ASAP agreement we have with Fannie Mae has no expiration date.

 

The debt instruments in the table above,facilities, including their restrictive covenants, as well as our $50.0 million letter of credit facility, are described in Note 1110 — Debt Obligations.

Contractual Obligations. Other thanDuring the changes made to our debt obligations described in Note 11 — Debt Obligations, including, but not limited to, entering into and unwinding CLOs and closing new or modifying existing credit facilities, there has been nosix months ended June 30, 2018, the following significant changes were made to our contractual obligations disclosed in our 20162017 Annual Report duringReport:

·                  Closed CLO X issuing $441.0 million of investment grade notes to third party investors;

·                  Unwound CLO V redeeming $267.8 million of outstanding notes;

·                  Subsequently issued $245.0 million of 5.25% Convertible Notes (which were used to repurchase substantially all of our 6.50% Convertible Notes and 5.375% Convertible Notes totaling $227.4 million);

·                  Issued $125.0 million of our 5.625% Notes (which were substantially used to redeem all of our 7.375% Notes totaling $97.9 million);

·                  Repaid the nine months ended September 30, 2017.  Refer$50.0 million related party financing; and

·                  Closed new and modified existing credit facilities.

See Note 10 — Debt Obligations for details and refer to Note 1514 — Commitments and Contingencies for a description of our debt maturities by year and our unfunded commitments as of SeptemberJune 30, 2017.2018.

Off-Balance Sheet Arrangements. At June 30, 2018, we had no off-balance sheet arrangements.

 

Agreements and Transactions with Related Parties. On May 31, 2017, we exercised our option to fully internalize our management team and terminated the existing management agreement with our Former Manager for $25.0 million. See Note 19 —Agreements and Transactions with Related Parties for details of our related party transactions.

Derivative Financial Instruments

 

We enter into derivative financial instruments in the normal course of business through the origination and sale of mortgage loans and the management of potential loss exposure caused by fluctuations of interest rates. See Note 13—12— Derivative Financial Instruments for details about our derivative financial instruments.

 

Critical Accounting Policies

 

Please refer to Note 2 — Basis of Presentation and Significant Accounting Policies of the Notes to Consolidated Financial Statements in our 20162017 Annual Report for a discussion of our critical accounting policies. During the ninesix months ended SeptemberJune 30, 2017,2018, there were no material changes to these policies.

 

Non-GAAP Financial Measures

 

Funds from Operations and Adjusted Funds from OperationsOperations.

We present funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) because we believe they are important supplemental measures of our operating performance in that they are frequently used by analysts, investors and other parties in the evaluation of REITs. The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (loss) attributable to common stockholders (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated real properties, plus impairments of depreciated real properties and real estate related depreciation and amortization, and after adjustments for unconsolidated ventures.

 

We define AFFO as funds from operations adjusted for accounting items such as non-cash stock-based compensation expense, income from MSRs, changes in fair value of certain derivatives that temporarily flow through earnings, amortization and write-offs of MSRs, deferred tax (benefit) provisionbenefit and the amortization of the convertible senior notes conversion option.options. We also add back one-time charges such as acquisition costs and impairment losses on real estate and gains (losses) on sales of real estate. We are generally not in the business of operating real estate property and had obtained real estate by foreclosure or through partial or full settlement of mortgage debt related to our loans to maximize the value of the collateral and minimize our exposure. Therefore, we deem such impairment and gains (losses) on real estate as an extension of the asset management of our loans, thus a recovery of principal or additional loss on our initial investment.

 

FFO and AFFO are not intended to be an indication of our cash flow from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions. Our calculation of FFO and AFFO may be different from the calculations used by other companies and, therefore, comparability may be limited.

FFO and AFFO are as follows:follows ($ in thousands, except share and per share data):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

16,420,958

 

$

10,888,172

 

$

43,964,070

 

$

22,261,516

 

 

$

17,167

 

$

11,929

 

$

43,356

 

$

27,543

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of real estate

 

 

 

 

(11,630,687

)

Net income attributable to noncontrolling interest

 

5,661,184

 

3,649,432

 

16,596,415

 

3,649,432

 

 

5,557

 

4,494

 

14,547

 

10,935

 

Impairment loss on real estate owned

 

 

 

2,700,000

 

11,200,000

 

 

2,000

 

1,500

 

2,000

 

2,700

 

Depreciation - real estate owned

 

172,657

 

443,684

 

591,755

 

1,764,329

 

 

178

 

169

 

356

 

419

 

Depreciation - investments in equity affiliates

 

101,447

 

93,588

 

304,341

 

280,764

 

 

125

 

101

 

250

 

203

 

Funds from operations (1)

 

$

22,356,246

 

$

15,074,876

 

$

64,156,581

 

$

27,525,354

 

 

$

25,027

 

$

18,193

 

$

60,509

 

$

41,800

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from mortgage servicing rights

 

(18,897,239

)

(15,968,067

)

(56,181,638

)

(15,968,067

)

 

(17,936

)

(17,254

)

(37,571

)

(37,284

)

Impairment loss on real estate owned

 

 

 

(2,700,000

)

(11,200,000

)

 

(2,000

)

(1,500

)

(2,000

)

(2,700

)

Deferred tax (benefit) provision

 

(922,000

)

 

15,000

 

 

Deferred tax provision (benefit)

 

185

 

(890

)

(13,135

)

937

 

Amortization and write-offs of MSRs

 

15,927,329

 

7,586,524

 

46,140,491

 

7,586,524

 

 

17,203

 

14,932

 

33,879

 

30,213

 

Depreciation and amortization

 

1,882,543

 

1,365,081

 

5,623,203

 

1,365,081

 

 

2,255

 

1,873

 

4,511

 

3,741

 

Net (gain) loss on changes in fair value of derivatives

 

(237,415

)

(248,510

)

2,311,740

 

(248,510

)

Gain on sale of real estate

 

 

 

 

11,630,687

 

Net loss (gain) on changes in fair value of derivatives

 

587

 

1,552

 

(2,057

)

2,549

 

Stock-based compensation

 

847,128

 

777,080

 

3,833,361

 

2,940,174

 

 

1,100

 

682

 

3,645

 

2,986

 

Acquisition costs

 

 

6,406,258

 

 

10,261,902

 

Adjusted funds from operations (1)

 

$

20,956,592

 

$

14,993,242

 

$

63,198,738

 

$

33,893,145

 

 

$

26,421

 

$

17,588

 

$

47,781

 

$

42,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted FFO per share (1)

 

$

0.27

 

$

0.21

 

$

0.81

 

$

0.48

 

 

$

0.28

 

$

0.23

 

$

0.69

 

$

0.55

 

Diluted AFFO per share (1)

 

$

0.25

 

$

0.21

 

$

0.80

 

$

0.59

 

 

$

0.29

 

$

0.22

 

$

0.55

 

$

0.55

 

Diluted weighted average shares outstanding (1)

 

83,918,117

 

70,271,796

 

78,942,919

 

57,748,830

 

 

90,055,170

 

79,064,503

 

87,420,543

 

76,365,118

 

 


(1)         Amounts are attributable to common stockholders and OP Units holder.holders. The OP Units are redeemable for cash, or at our option for shares of our common stock on a one-for-one basis.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

We disclosed a quantitative and qualitative analysis regarding market risk in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20162017 Annual Report.  That information is supplemented by the information included above in Item 2 of this report. Other than the developments described thereunder, there have been no material changes in our quantitative and qualitative exposure to market risk since December 31, 2016.2017.

 

The following table projects the potential impact on interest income and interest expense for a 12-month period, and the potential change in fair value of our derivative financial instruments as of September 30, 2017, assuming an instantaneous increase or decrease of both 25 and 50 basis points in LIBOR and forward interest rate curves, adjusted for the effects of our interest rate hedging activities.(in thousands).

 

 

Assets (Liabilities)
Subject to Interest
Rate Sensitivity (1)

 

25 Basis
Point
Increase

 

25 Basis Point
Decrease (2)

 

50 Basis
Point
Increase

 

50 Basis Point
Decrease (2)

 

 

Assets (Liabilities)
Subject to Interest
Rate Sensitivity (1)

 

25 Basis
Point
Increase

 

25 Basis Point
Decrease (2)

 

50 Basis
Point
Increase

 

50 Basis Point
Decrease (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans and investments

 

$

2,094,376,123

 

$

4,314,668

 

$

(3,000,994

)

$

8,640,845

 

$

(5,429,989

)

 

$

3,134,879

 

$

6,970

 

$

(6,494

)

$

13,967

 

$

(12,623

)

Interest expense from debt obligations

 

$

(1,718,024,946

)

3,670,418

 

(3,670,418

)

7,340,835

 

(7,340,835

)

 

(2,808,573

)

6,092

 

(6,092

)

12,183

 

(12,183

)

Total net interest income

 

 

 

$

644,250

 

$

669,424

 

$

1,300,010

 

$

1,910,846

 

 

 

 

$

878

 

$

(402

)

$

1,784

 

$

(440

)

 


(1)         Represents the UPB of our loan portfolio and the principal balance of our debt.

(2)         The quoted one-month LIBOR rate was 1.23%2.09% as of SeptemberJune 30, 2017.2018.

 

Our Agency Business originates, sells and services a range of multifamily finance products with Fannie Mae, Freddie Mac and HUD. Our loans held-for-sale to Fannie Mae, Freddie Mac and HUD are not currently exposed to interest rate risk during the loan commitment, closing and delivery process. The sale or placement of each loan to an

investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is generally effectuated within 60 days of closing. The coupon rate for the loan is set after we established the interest rate with the investor.

 

In addition, the fair value of our MSRs is subject to market risk since a significant driver of the fair value of these assets is the discount rates. A 100 basis point increase in the weighted average discount rate would decrease the fair value of our MSRs by approximately $9.3$9.7 million as of SeptemberJune 30, 2017,2018, while a 100 basis point decrease would increase the fair value by approximately $9.9$10.3 million.

Item 4.   Controls and Procedures

 

Management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures at SeptemberJune 30, 2017.2018.  Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2018.

 

There were no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us other than the litigation described in Note 1514 — Commitments and Contingencies.  We have not made a loss accrual for any litigation because we believe that it is not probable that a loss has been incurred and an amount cannot be reasonably estimated.

Item 1A.  Risk Factors

 

There have been no material changes to the risk factors set forth in Item 1A of our 20162017 Annual Report.

Item 6.   Exhibits

 

Exhibit #

 

Description

3.1

 

Articles of Incorporation of Arbor Realty Trust, Inc. *

 

 

 

3.2

 

Amended and Restated Bylaws of Arbor Realty Trust, Inc. **

 

 

 

4.1

Indenture, dated as of March 13, 2018, between Arbor Realty Trust, Inc. and U.S. Bank National Association, as trustee. ***

10.1

 

Indenture, dated August 24, 2017,June 14, 2018, by and between Arbor Realty Commercial Real Estate Notes 2017-FL2,2018-FL1, LTD., Arbor Realty Commercial Real Estate Notes 2017-FL22018-FL1 LLC, Arbor Realty SR, Inc. and U.S. Bank National Association.

 

 

 

10.2

 

Loan Obligation ManagementMortgage Asset Purchase Agreement, dated August 24, 2017,June 14, 2018, by and between Arbor Realty Collateral Management, LLCSR, Inc. and Arbor Realty Commercial Real Estate Notes 2017-FL1,2018-FL1, LTD.

 

 

 

10.3

 

Placement Agreement, dated August 7, 2017,May 23, 2018, by and between Arbor Realty Commercial Real Estate Notes 2017-FL2,2018-FL1, LTD., Arbor Realty Commercial Real Estate Notes 2017-FL22018-FL1 LLC and J.P. Morgan Securities LLC.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14.

 

 

 

32

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit #

Description

101.1

 

Financial statements from the Quarterly Report on Form 10-Q of Arbor Realty Trust, Inc. for the quarter ended SeptemberJune 30, 2017,2018, filed on NovemberAugust 3, 2017,2018, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 


*                           Incorporated by reference to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-110472), as amended, filed November 13, 2003.

 

**                    Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (No. 001-32136) filed August 4, 2017.

***             Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (No. 001-32136) filed March 13, 2018.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ARBOR REALTY TRUST, INC.

 

 

 

 Date: NovemberAugust 3, 20172018

By:

/s/ Ivan Kaufman

 

 

Ivan Kaufman

 

 

Chief Executive Officer

 

 

 

 Date: NovemberAugust 3, 20172018

By:

/s/ Paul Elenio

 

 

Paul Elenio

 

 

Chief Financial Officer

 

6765