10-Q 1 a19-10345_110q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

or

 

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

 

Commission file number: 001-32136

 

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-0057959

(State or other jurisdiction of
incorporation)

 

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

 

 

 

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

 

11553
(Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbols

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

ABR

 

New York Stock Exchange

Preferred Stock, 8.25% Series A Cumulative Redeemable, par value $0.01 per share

 

ABR-PA

 

New York Stock Exchange

Preferred Stock, 7.75% Series B Cumulative Redeemable, par value $0.01 per share

 

ABR-PB

 

New York Stock Exchange

Preferred Stock, 8.50% Series C Cumulative Redeemable, par value $0.01 per share

 

ABR-PC

 

New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 such files).   Yes  x     No  o

 

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

 

 

Large accelerated filer

o

 

Accelerated filer

x

 

 

Non-accelerated filer

o

 

Smaller reporting company

o

 

 

 

 

 

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: 94,341,082 outstanding as of July 26, 2019.

 

 

 


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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 our 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, 2018 (the “2018 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 15, 2019 and in our other reports and filings with the SEC.

 

Although we believe 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.

 

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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)

 

 

 

June 30,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

198,917

 

$

160,063

 

Restricted cash

 

316,455

 

180,606

 

Loans and investments, net

 

3,836,554

 

3,200,145

 

Loans held-for-sale, net

 

601,827

 

481,664

 

Capitalized mortgage servicing rights, net

 

276,648

 

273,770

 

Securities held-to-maturity, net

 

86,017

 

76,363

 

Investments in equity affiliates

 

31,159

 

21,580

 

Real estate owned, net

 

13,382

 

14,446

 

Due from related party

 

16,986

 

1,287

 

Goodwill and other intangible assets

 

113,364

 

116,165

 

Other assets

 

110,421

 

86,086

 

Total assets

 

$

5,601,730

 

$

4,612,175

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

1,621,678

 

$

1,135,627

 

Collateralized loan obligations

 

1,875,444

 

1,593,548

 

Debt fund

 

68,422

 

68,183

 

Senior unsecured notes

 

210,963

 

122,484

 

Convertible senior unsecured notes, net

 

253,729

 

254,768

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

140,587

 

140,259

 

Due to related party

 

7,219

 

 

Due to borrowers

 

92,296

 

78,662

 

Allowance for loss-sharing obligations

 

34,417

 

34,298

 

Other liabilities

 

110,997

 

118,780

 

Total liabilities

 

4,415,752

 

3,546,609

 

 

 

 

 

 

 

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; 20,484,094 and 20,653,584 shares issued and outstanding, respectively; 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

 

89,501

 

89,502

 

Common stock, $0.01 par value: 500,000,000 shares authorized; 94,225,567 and 83,987,707 shares issued and outstanding, respectively

 

942

 

840

 

Additional paid-in capital

 

998,897

 

879,029

 

Accumulated deficit

 

(72,321

)

(74,133

)

Total Arbor Realty Trust, Inc. stockholders’ equity

 

1,017,019

 

895,238

 

Noncontrolling interest

 

168,959

 

170,328

 

Total equity

 

1,185,978

 

1,065,566

 

Total liabilities and equity

 

$

5,601,730

 

$

4,612,175

 

 

Note: Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs, as we are the primary beneficiary of these VIEs. As of June 30, 2019 and December 31, 2018, assets of our consolidated VIEs totaled $2,519,392 and $2,198,096, respectively, and the liabilities of our consolidated VIEs totaled $1,948,555 and $1,665,139, respectively. See Note 15 — Variable Interest Entities for discussion of our VIEs.

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Interest income

 

$

82,171

 

$

59,295

 

$

153,448

 

$

110,908

 

Interest expense

 

48,284

 

37,884

 

90,149

 

71,271

 

Net interest income

 

33,887

 

21,411

 

63,299

 

39,637

 

Other revenue:

 

 

 

 

 

 

 

 

 

Gain on sales, including fee-based services, net

 

14,211

 

15,622

 

30,600

 

33,815

 

Mortgage servicing rights

 

18,709

 

17,936

 

32,941

 

37,571

 

Servicing revenue, net

 

12,612

 

10,871

 

26,164

 

20,418

 

Property operating income

 

3,147

 

2,964

 

5,950

 

5,874

 

Other income, net

 

1,393

 

(470

)

(734

)

2,408

 

Total other revenue

 

50,072

 

46,923

 

94,921

 

100,086

 

Other expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

29,022

 

26,815

 

60,786

 

56,309

 

Selling and administrative

 

10,481

 

8,873

 

20,242

 

17,789

 

Property operating expenses

 

2,691

 

2,856

 

5,086

 

5,652

 

Depreciation and amortization

 

1,909

 

1,845

 

3,821

 

3,691

 

Impairment loss on real estate owned

 

1,000

 

2,000

 

1,000

 

2,000

 

Provision for loss sharing (net of recoveries)

 

368

 

348

 

822

 

821

 

Provision for loan losses (net of recoveries)

 

 

(2,127

)

 

(1,802

)

Total other expenses

 

45,471

 

40,610

 

91,757

 

84,460

 

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

 

38,488

 

27,724

 

66,463

 

55,263

 

Loss on extinguishment of debt

 

 

 

(128

)

 

Income from equity affiliates

 

3,264

 

1,387

 

5,415

 

2,132

 

(Provision for) benefit from income taxes

 

(4,350

)

(4,499

)

(4,341

)

4,285

 

Net income

 

37,402

 

24,612

 

67,409

 

61,680

 

Preferred stock dividends

 

1,888

 

1,888

 

3,777

 

3,777

 

Net income attributable to noncontrolling interest

 

6,598

 

5,557

 

12,066

 

14,547

 

Net income attributable to common stockholders

 

$

28,916

 

$

17,167

 

$

51,566

 

$

43,356

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.32

 

$

0.26

 

$

0.59

 

$

0.68

 

Diluted earnings per common share

 

$

0.31

 

$

0.25

 

$

0.57

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

89,955,923

 

65,683,057

 

87,567,171

 

63,773,306

 

Diluted

 

113,624,384

 

90,055,170

 

110,779,680

 

87,420,543

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.28

 

$

0.25

 

$

0.55

 

$

0.46

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

37,402

 

$

24,612

 

$

67,409

 

$

61,680

 

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

 

 

 

 

(176

)

Comprehensive income

 

37,402

 

24,612

 

67,409

 

61,504

 

Less:

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

6,598

 

5,557

 

12,066

 

14,504

 

Preferred stock dividends

 

1,888

 

1,888

 

3,777

 

3,777

 

Comprehensive income attributable to common stockholders

 

$

28,916

 

$

17,167

 

$

51,566

 

$

43,223

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

($ in thousands, except shares)

 

Three Months Ended June 30, 2019

 

 

 

Preferred
Stock Shares

 

Preferred
Stock Value

 

Common
Stock Shares

 

Common
Stock Par
Value

 

Additional Paid-
in Capital

 

Accumulated
Deficit

 

Total Arbor
Realty Trust,
Inc.
Stockholders’
Equity

 

Noncontrolling
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — March 31, 2019

 

24,199,044

 

$

89,501

 

85,955,995

 

$

860

 

$

893,471

 

$

(74,589

)

$

909,243

 

$

168,140

 

$

1,077,383

 

Issuance of common stock

 

 

 

 

 

9,200,000

 

91

 

115,494

 

 

 

115,585

 

 

 

115,585

 

Repurchase of common stock

 

 

 

 

 

(920,000

)

(9

)

(11,565

)

 

 

(11,574

)

 

 

(11,574

)

Extinguishment of convertible senior unsecured notes

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

 

 

(6

)

Stock-based compensation

 

 

 

 

 

7,692

 

 

1,503

 

 

 

1,503

 

 

 

1,503

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(18,120

)

 

 

 

 

 

 

 

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(26,645

)

(26,645

)

 

 

(26,645

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,888

)

(1,888

)

 

 

(1,888

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(3

)

(3

)

 

 

(3

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,736

)

(5,736

)

Redemption of operating partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

(43

)

Net income

 

 

 

 

 

 

 

 

 

 

 

30,804

 

30,804

 

6,598

 

37,402

 

Balance — June 30, 2019

 

24,199,044

 

$

89,501

 

94,225,567

 

$

942

 

$

998,897

 

$

(72,321

)

$

1,017,019

 

$

168,959

 

$

1,185,978

 

 

Six Months Ended June 30, 2019

 

Balance — December 31, 2018

 

24,365,084

 

$

89,502

 

83,987,707

 

$

840

 

$

879,029

 

$

(74,133

)

$

895,238

 

$

170,328

 

$

1,065,566

 

Issuance of common stock

 

 

 

 

 

9,200,000

 

91

 

115,494

 

 

 

115,585

 

 

 

115,585

 

Repurchase of common stock

 

 

 

 

 

(920,000

)

(9

)

(11,565

)

 

 

(11,574

)

 

 

(11,574

)

Issuance of common stock upon vesting of restricted stock units

 

 

 

 

 

203,492

 

2

 

(2,904

)

 

 

(2,902

)

 

 

(2,902

)

Net settlement on vesting of restricted stock

 

 

 

 

 

(45,953

)

 

(585

)

 

 

(585

)

 

 

(585

)

Issuance of common stock from convertible debt

 

 

 

 

 

210,466

 

2

 

2,505

 

 

 

2,507

 

 

 

2,507

 

Extinguishment of convertible senior unsecured notes

 

 

 

 

 

 

 

 

 

(1,337

)

 

 

(1,337

)

 

 

(1,337

)

Stock-based compensation

 

 

 

 

 

447,866

 

4

 

5,254

 

 

 

5,258

 

 

 

5,258

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(18,120

)

 

 

 

 

 

 

 

 

Issuance of common stock from special dividend

 

 

 

 

 

901,432

 

9

 

10,070

 

 

 

10,079

 

 

 

10,079

 

Issuance of operating partnership units and special voting preferred stock from special dividend

 

221,666

 

2

 

 

 

 

 

 

 

 

 

2

 

2,476

 

2,478

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(49,746

)

(49,746

)

 

 

(49,746

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(3,777

)

(3,777

)

 

 

(3,777

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(8

)

(8

)

 

 

(8

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,302

)

(11,302

)

Redemption of operating partnership units

 

(387,706

)

(3

)

258,677

 

3

 

2,936

 

 

 

2,936

 

(4,609

)

(1,673

)

Net income

 

 

 

 

 

 

 

 

 

 

 

55,343

 

55,343

 

12,066

 

67,409

 

Balance — June 30, 2019

 

24,199,044

 

$

89,501

 

94,225,567

 

$

942

 

$

998,897

 

$

(72,321

)

$

1,017,019

 

$

168,959

 

$

1,185,978

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Continued)

($ in thousands, except shares)

 

Three 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 — March 31, 2018

 

24,942,269

 

$

89,508

 

62,469,535

 

$

625

 

$

713,001

 

$

(88,528

)

$

 

$

714,606

 

$

173,264

 

$

887,870

 

Issuance of common stock, net

 

 

 

 

 

6,092,700

 

61

 

52,832

 

 

 

 

 

52,893

 

 

 

52,893

 

Stock-based compensation

 

 

 

 

 

8,382

 

 

 

1,100

 

 

 

 

 

1,100

 

 

 

1,100

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(15,765

)

 

 

(15,765

)

 

 

(15,765

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,888

)

 

 

(1,888

)

 

 

(1,888

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

 

 

(3

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,307

)

(5,307

)

Net income

 

 

 

 

 

 

 

 

 

 

 

19,056

 

 

 

19,056

 

5,556

 

24,612

 

Balance — June 30, 2018

 

24,942,269

 

$

89,508

 

68,570,617

 

$

686

 

$

766,933

 

$

(87,128

)

$

 

$

769,999

 

$

173,513

 

$

943,512

 

 

Six Months Ended June 30, 2018

 

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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

67,409

 

$

61,680

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,821

 

3,691

 

Stock-based compensation

 

5,258

 

3,645

 

Amortization and accretion of interest and fees, net

 

2,092

 

7,658

 

Amortization of capitalized mortgage servicing rights

 

24,606

 

23,802

 

Originations of loans held-for-sale

 

(1,971,876

)

(2,080,393

)

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

 

1,847,488

 

2,064,486

 

Payoffs and paydowns of loans held-for-sale

 

66

 

22

 

Mortgage servicing rights

 

(32,941

)

(37,571

)

Write-off of capitalized mortgage servicing rights from payoffs

 

9,048

 

10,078

 

Impairment loss on real estate owned

 

1,000

 

2,000

 

Provision for loss sharing (net of recoveries)

 

822

 

821

 

(Charge-offs) recoveries for loss-sharing obligations, net

 

(703

)

70

 

Provision for loan losses (net of recoveries)

 

 

(1,802

)

Deferred tax benefit

 

(3,250

)

(13,135

)

Income from equity affiliates

 

(5,415

)

(2,132

)

Loss on extinguishment of debt

 

128

 

 

Changes in operating assets and liabilities

 

(25,251

)

(24,307

)

Net cash (used in) provided by operating activities

 

(77,698

)

18,613

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded and originated, net

 

(1,398,834

)

(875,212

)

Payoffs and paydowns of loans and investments

 

796,652

 

429,133

 

Deferred fees

 

11,505

 

6,309

 

Investments in real estate, net

 

(287

)

(220

)

Contributions to equity affiliates

 

(6,105

)

(2,460

)

Distributions from equity affiliates

 

 

2,807

 

Purchase of securities held-to-maturity, net

 

(10,000

)

(21,637

)

Payoffs and paydowns of securities held-to-maturity

 

2,679

 

519

 

Proceeds from insurance settlements, net

 

 

1,294

 

Due to borrowers and reserves

 

(24,052

)

(58,585

)

Net cash used in investing activities

 

(628,442

)

(518,052

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from repurchase agreements and credit facilities

 

4,126,430

 

3,971,279

 

Payoffs and paydowns of repurchase agreements and credit facilities

 

(3,640,107

)

(3,588,443

)

Payoffs and paydowns of collateralized loan obligations

 

(250,250

)

(267,750

)

Settlements of convertible senior unsecured notes

 

(3,037

)

 

Payoffs of senior unsecured notes

 

 

(97,860

)

Payoff of related party financing

 

 

(50,000

)

Proceeds from issuance of collateralized loan obligations

 

533,000

 

441,000

 

Proceeds from issuance of senior unsecured notes

 

90,000

 

125,000

 

Redemption of operating partnership units

 

(1,673

)

 

Payments of withholding taxes on net settlement of vested stock

 

(3,487

)

 

Proceeds from issuance of common stock

 

115,736

 

55,907

 

Distribution for the repurchase of common stock

 

(11,574

)

 

Distributions paid on common stock

 

(49,746

)

(28,727

)

Distributions paid on noncontrolling interest

 

(11,302

)

(9,765

)

Distributions paid on preferred stock

 

(3,777

)

(3,777

)

Distributions paid on preferred stock of private REIT

 

(8

)

(7

)

Payment of deferred financing costs

 

(9,362

)

(10,536

)

Net cash provided by financing activities

 

880,843

 

536,321

 

Net increase in cash, cash equivalents and restricted cash

 

174,703

 

36,882

 

Cash, cash equivalents and restricted cash at beginning of period

 

340,669

 

243,772

 

Cash, cash equivalents and restricted cash at end of period

 

$

515,372

 

$

280,654

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

160,063

 

$

104,374

 

Restricted cash at beginning of period

 

180,606

 

139,398

 

Cash, cash equivalents and restricted cash at beginning of period

 

$

340,669

 

$

243,772

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

198,917

 

$

106,968

 

Restricted cash at end of period

 

316,455

 

173,686

 

Cash, cash equivalents and restricted cash at end of period

 

$

515,372

 

$

280,654

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

85,776

 

$

58,675

 

Cash used to pay taxes

 

13,186

 

10,698

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Special dividend - common stock issued

 

10,079

 

 

Special dividend - special voting preferred stock and operating partnership units issued

 

2,478

 

 

Issuance of common stock from convertible debt

 

2,507

 

 

Settlements of convertible senior unsecured notes

 

(1,337

)

 

Fair value of conversion feature of convertible senior unsecured notes

 

1,175

 

 

Distributions accrued on 8.25% Series A preferred stock

 

267

 

267

 

Distributions accrued on 7.75% Series B preferred stock

 

203

 

203

 

Distributions accrued on 8.50% Series C preferred stock

 

159

 

159

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (“we,” “us,” or “our”) is a Maryland corporation formed in 2003. We operate through two business segments: our Structured Loan Origination and Investment Business (“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 Business, we originate, sell and service a range of multifamily finance products through the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the government-sponsored enterprises, or the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Authority (“FHA”) and the U.S. Department of Housing and Urban Development (together with Ginnie Mae and FHA, “HUD”) and 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.

 

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 17 — Income Taxes for details.

 

Note 2 — Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

Our 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.  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 2018 Annual Report.

 

Principles of Consolidation

 

These consolidated financial statements include our financial statements and the financial statements of our wholly owned subsidiaries, partnerships and other joint ventures in which we own a controlling interest, including variable interest entities (“VIEs”) of which we are the primary beneficiary.  Entities in which we have a significant influence are accounted for under the equity method. See Note 15 — Variable Interest Entities for information about our VIEs. All significant intercompany transactions and balances have been 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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

Significant Accounting Policies

 

See Item 8 — Financial Statements and Supplementary Data in our 2018 Annual Report for a description of our significant accounting policies. Upon the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) in the first quarter of 2019, we adopted the following significant accounting policy:

 

Leases. We determine if an arrangement is a lease at inception. Our right to use an underlying asset for the lease term is recorded as operating lease right-of-use (“ROU”) assets and our obligation to make lease payments arising from the lease are recorded as lease liabilities. The operating lease ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate; therefore, we use our incremental borrowing rate in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. At the adoption date, we made an accounting policy election to exclude leases with an initial term of twelve months or less.

 

Recently Adopted Accounting Pronouncements

 

Description

 

Adoption Date

 

Effect on Financial Statements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to record most leases on their balance sheet through operating and finance lease liabilities and corresponding ROU assets, as well as adding additional footnote disclosures of key information about those arrangements. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides transition relief on comparative period reporting through a cumulative-effect adjustment at the beginning of the period of adoption (“Effective Date Method”).

 

First quarter of 2019

 

We adopted this guidance using the optional Effective Date Method and elected the group of optional practical expedients, therefore, comparative reporting periods have not been adjusted and are reported under the previous accounting guidance. Upon adoption, we recorded an operating lease ROU asset and corresponding lease liability of $20.1 million, which are included as other assets and other liabilities in our consolidated balance sheets. In addition, we added the required footnote disclosures in Note 14 - Commitments and Contingencies.

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

 

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. This ASU better aligns risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Among other amendments, the update allows entities to designate the variability in cash flows attributable to changes in a contractually specified component stated in the contract as the hedged risk in a cash flow hedge of a forecasted purchase or sale of a nonfinancial asset.

 

First quarter of 2019

 

The adoption of this guidance did not have a material impact on our consolidated financial statements. We will apply this guidance to any future hedging activities.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

Recently Issued Accounting Pronouncements

 

Description

 

Effective Date

 

Effect on Financial Statements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will be required to use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses.

 

First quarter of 2020 with early adoption permitted beginning in the first quarter of 2019

 

We continue to evaluate the impact the adoption of this guidance will have on our consolidated financial statements and disclosures. As part of our evaluation process, we have established a task force that includes individuals from various functional areas to implement this new accounting standard. The standard applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This currently includes our Structured Business loan and investment portfolio, held-to-maturity debt securities and loss-sharing obligations related to the Fannie Mae DUS program. Our preliminary evaluation indicates this standard is expected to impact our consolidated financial statements, in particular the level of credit losses.

 

Note 3 — Loans and Investments

 

Our Structured Business loan and investment portfolio consists of ($ in thousands):

 

 

 

June 30, 2019

 

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

 

$

3,488,103

 

89

%

183

 

6.39

%

17.7

 

0

%

75

%

Mezzanine loans

 

216,304

 

6

%

23

 

10.28

%

29.1

 

23

%

77

%

Preferred equity investments

 

185,255

 

5

%

11

 

8.05

%

72.3

 

68

%

90

%

Other

 

33,547

 

<1

%

9

 

2.05

%

70.6

 

0

%

71

%

 

 

3,923,209

 

100

%

226

 

6.64

%

21.4

 

4

%

75

%

Allowance for loan losses

 

(71,069

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(15,586

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

3,836,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

2,992,814

 

91

%

167

 

6.84

%

18.5

 

0

%

74

%

Mezzanine loans

 

108,867

 

3

%

13

 

10.57

%

22.1

 

28

%

72

%

Preferred equity investments

 

181,661

 

6

%

10

 

7.97

%

78.0

 

66

%

89

%

 

 

3,283,342

 

100

%

190

 

7.02

%

22.0

 

5

%

75

%

Allowance for loan losses

 

(71,069

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(12,128

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

3,200,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

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

 

Concentration of Credit Risk

 

We are subject to concentration risk in that, at June 30, 2019, the UPB related to 34 loans with five different borrowers represented 19% of total assets.  At December 31, 2018, the UPB related to 45 loans with five different borrowers represented 22% of total assets. During both the six months ended June 30, 2019 and the year ended December 31, 2018, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue. For details on our concentration of related party loans and investments, see Note 18 — Agreements and Transactions with Related Parties.

 

We assign a credit risk rating of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, with a pass rating being the lowest risk and a doubtful rating being the 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.  All portfolio assets are subject to, at a minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are 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 June 30, 2019 and December 31, 2018, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $128.2 million and $128.7 million, respectively, and a weighted average last dollar LTV ratio of 99% for both periods.

 

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

 

 

 

June 30, 2019

 

Asset Class

 

UPB

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal Risk
Rating

 

Wtd. Avg.
First Dollar
LTV Ratio

 

Wtd. Avg.
Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

3,010,082

 

77

%

pass/watch

 

5

%

76

%

Self Storage

 

246,209

 

6

%

special mention

 

3

%

72

%

Land

 

232,228

 

6

%

special mention

 

0

%

86

%

Healthcare

 

146,025

 

4

%

pass/watch

 

0

%

79

%

Office

 

132,032

 

3

%

special mention

 

3

%

71

%

Hotel

 

92,300

 

2

%

pass/watch

 

0

%

61

%

Retail

 

49,308

 

1

%

pass/watch

 

6

%

62

%

Other

 

15,025

 

<1

%

pass/watch

 

7

%

72

%

Total

 

$

3,923,209

 

100

%

pass/watch

 

4

%

75

%

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

 

 

December 31, 2018

 

Asset Class

 

UPB

 

Percentage
of Portfolio

 

Wtd. Avg.
Internal Risk
Rating

 

Wtd. Avg.
First Dollar
LTV Ratio

 

Wtd. Avg.
Last Dollar
LTV Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

2,427,920

 

74

%

pass/watch

 

5

%

75

%

Self Storage

 

301,830

 

9

%

pass/watch

 

0

%

72

%

Land

 

151,628

 

5

%

substandard

 

0

%

90

%

Healthcare

 

122,775

 

4

%

pass/watch

 

0

%

77

%

Office

 

132,047

 

4

%

special mention

 

3

%

68

%

Hotel

 

100,075

 

3

%

pass/watch

 

13

%

66

%

Retail

 

45,367

 

1

%

pass/watch

 

6

%

65

%

Other

 

1,700

 

<1

%

doubtful

 

63

%

63

%

Total

 

$

3,283,342

 

100

%

pass/watch

 

5

%

75

%

 

Geographic Concentration Risk

 

As of June 30, 2019, 22% and 14% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. As of December 31, 2018, 23% and 18% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. No other states represented 10% or more of the total loan and investment portfolio.

 

Impaired Loans and Allowance for Loan Losses

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

71,069

 

$

63,108

 

$

71,069

 

$

62,783

 

Provision for loan losses

 

 

1,325

 

 

1,650

 

Charge-offs

 

 

(3,173

)

 

(3,173

)

Recoveries of reserves

 

 

(2,527

)

 

(2,527

)

Allowance at end of period

 

$

71,069

 

$

58,733

 

$

71,069

 

$

58,733

 

 

During the three and six months ended June 30, 2018, we determined that the fair value of the underlying collateral (land development project) securing six loans with a carrying value of $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 reserve recovery of $2.5 million and a charge-off of $3.2 million. In addition, we received a payment and recorded a recovery of $0.9 million related to a written-off junior participation interest in an office building.

 

The ratios of net recoveries to the average loans and investments outstanding were de minimus for the three and six months ended June 30, 2018.

 

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of June 30, 2019 and 2018.

 

We have six loans with a carrying value totaling $120.9 million at June 30, 2019 that are collateralized by a land development project that are scheduled to mature in September 2019. The loans do not carry a current pay rate of interest, however, five of the loans with a carrying value totaling $111.5 million entitle us to a weighted average

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

accrual rate of interest of 9.04%. 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. At both June 30, 2019 and December 31, 2018, we had cumulative allowances for loan losses of $61.4 million related to these loans. The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development’s outputs upon completion of the project, and litigation risk. Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

 

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

 

 

 

June 30, 2019

 

Three Months Ended June 30, 2019

 

Six Months Ended June 30, 2019

 

Asset Class

 

UPB

 

Carrying 
Value (1)

 

Allowance for
Loan Losses

 

Average Recorded 
Investment (2)

 

Interest Income 
Recognized

 

Average Recorded 
Investment (2)

 

Interest Income 
Recognized

 

Land

 

$

134,215

 

$

127,386

 

$

67,869

 

$

134,215

 

$

28

 

$

134,215

 

$

55

 

Office

 

2,251

 

2,251

 

1,500

 

2,255

 

34

 

2,259

 

68

 

Commercial

 

1,700

 

1,700

 

1,700

 

1,700

 

 

1,700

 

 

Total

 

$

138,166

 

$

131,337

 

$

71,069

 

$

138,170

 

$

62

 

$

138,174

 

$

123

 

 

 

 

December 31, 2018

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

Land

 

$

134,215

 

$

127,869

 

$

67,869

 

$

131,985

 

$

 

$

131,823

 

$

 

Hotel

 

 

 

 

17,375

 

 

17,375

 

 

Office

 

2,266

 

2,266

 

1,500

 

2,281

 

31

 

2,284

 

60

 

Commercial

 

1,700

 

1,700

 

1,700

 

1,700

 

 

1,700

 

 

Total

 

$

138,181

 

$

131,835

 

$

71,069

 

$

153,341

 

$

31

 

$

153,182

 

$

60

 

 


(1)  Represents the UPB of five impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at both June 30, 2019 and December 31, 2018.

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

 

At both June 30, 2019 and December 31, 2018, two loans with an aggregate net carrying value of $0.8 million, net of related loan loss reserves of $1.7 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 (in thousands):

 

 

 

June 30, 2019

 

December 31, 2018

 

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

 

Commercial

 

$

1,700

 

$

 

$

1,700

 

$

1,700

 

$

 

$

1,700

 

Office

 

832

 

 

832

 

832

 

 

832

 

Total

 

$

2,532

 

$

 

$

2,532

 

$

2,532

 

$

 

$

2,532

 

 

At both June 30, 2019 and December 31, 2018, there were no loans contractually past due 90 days or more that were still accruing interest.

 

There were no loan modifications, refinancing’s and/or extensions during both the six months ended June 30, 2019 and 2018 that were considered troubled debt restructurings.

 

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.  At June 30, 2019 and December 31, 2018, we had total interest reserves of $61.4 million and $48.9 million, respectively, on 132 loans and 110 loans, respectively, with an aggregate UPB of $2.49 billion and $2.22 billion, respectively.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

Note 4 — Loans Held-for-Sale, Net

 

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

 

 

 

June 30, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Fannie Mae

 

$

428,648

 

$

358,790

 

Freddie Mac

 

122,013

 

95,004

 

FHA

 

46,625

 

19,170

 

 

 

597,286

 

472,964

 

Fair value of future MSR

 

6,243

 

10,253

 

Unearned discount

 

(1,702

)

(1,553

)

Loans held-for-sale, net

 

$

601,827

 

$

481,664

 

 

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 six months ended June 30, 2019, we sold $923.0 million and $2.02 billion, respectively, of loans held-for-sale and recorded gain on sales of $12.9 million and $28.0 million, respectively. During the three and six months ended June 30, 2018, we sold $1.02 billion and $2.08 billion, respectively, of loans held-for-sale and recorded gain on sales of $14.8 million and $32.2 million, respectively. At June 30, 2019 and December 31, 2018, 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.

 

Note 5 — Capitalized Mortgage Servicing Rights

 

Our capitalized mortgage servicing rights (“MSRs”) reflect commercial real estate MSRs derived from loans sold in our Agency Business. The discount rates used to determine the present value of our MSRs throughout the periods presented for all MSRs were between 8% - 15% (representing a weighted average discount rate of 12%) based on our best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 7.7 years and 7.6 years at June 30, 2019 and December 31, 2018, respectively.

 

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

 

 

 

Three Months Ended June 30, 2019

 

Six Months Ended June 30, 2019

 

 

 

Acquired

 

Originated

 

Total

 

Acquired

 

Originated

 

Total

 

Balance at beginning of period

 

$

88,029

 

$

189,610

 

$

277,639

 

$

97,084

 

$

176,686

 

$

273,770

 

Additions

 

 

15,923

 

15,923

 

 

36,532

 

36,532

 

Amortization

 

(5,546

)

(6,778

)

(12,324

)

(11,461

)

(13,145

)

(24,606

)

Write-downs and payoffs

 

(2,991

)

(1,599

)

(4,590

)

(6,131

)

(2,917

)

(9,048

)

Balance at end of period

 

$

79,492

 

$

197,156

 

$

276,648

 

$

79,492

 

$

197,156

 

$

276,648

 

 

 

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

 

Balance at beginning of period

 

$

131,934

 

$

123,798

 

$

255,732

 

$

143,270

 

$

109,338

 

$

252,608

 

Additions

 

 

18,493

 

18,493

 

 

38,293

 

38,293

 

Amortization

 

(7,517

)

(4,420

)

(11,937

)

(15,512

)

(8,290

)

(23,802

)

Write-downs and payoffs

 

(4,400

)

(867

)

(5,267

)

(7,741

)

(2,337

)

(10,078

)

Balance at end of period

 

$

120,017

 

$

137,004

 

$

257,021

 

$

120,017

 

$

137,004

 

$

257,021

 

 

We collected prepayment fees totaling $3.5 million and $8.5 million during the three and six months ended June 30, 2019, respectively, and $4.9 million and $8.7 million during the three and six months ended June 30, 2018, respectively.  Prepayment fees are included as a component of servicing revenue, net on the consolidated statements of income. As of June 30, 2019 and December 31, 2018, we had no valuation allowance recorded on any of our MSRs.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2019

 

The expected amortization of capitalized MSRs recorded as of June 30, 2019 is as follows (in thousands):

 

Year 

 

Amortization

 

2019 (six months ending 12/31/2019)

 

$

24,388

 

2020

 

45,925

 

2021

 

40,855

 

2022

 

34,531

 

2023

 

29,583

 

2024

 

25,205

 

Thereafter

 

76,161

 

Total

 

$

276,648

 

 

Actual amortization may vary from these estimates.

 

Note 6 — Mortgage Servicing

 

Product and geographic concentrations that impact our servicing revenue are as follows ($ in thousands):

 

June 30, 2019

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

UPB 
Percentage

 

Product

 

UPB

 

Total

 

State

 

of Total

 

Fannie Mae

 

$

14,122,916

 

73

%

Texas

 

20

%

Freddie Mac

 

4,657,097

 

24

%

North Carolina

 

9

%

FHA

 

684,527