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 March 31, 2018

 

or

 

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

 

Commission file number: 001-32136

 

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-0057959

(State or other jurisdiction of
incorporation)

 

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

 

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

 

11553
(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer

o

Accelerated filer   x

 

Smaller reporting company

o

Non-accelerated filer

o

 (Do not check if a smaller reporting company)

 

Emerging growth company

o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o                               No   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, $0.01 par value per share: 63,062,235 outstanding as of April 27, 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

44

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

55

 

Item 4. Controls and Procedures

55

PART II. OTHER INFORMATION

55

 

Item 1. Legal Proceedings

55

 

Item 1A. Risk Factors

55

 

Item 6. Exhibits

56

Signatures

57

 



Table of Contents

 

Forward-Looking Statements

 

The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in Arbor Realty Trust, Inc.  We urge you to carefully review and consider the various disclosures made by us in this report.

 

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. We use words such as “anticipate,” “expect,” “believe,” “intend,” “should,” “will,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words.  Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results.  Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically; adverse changes in our status with government-sponsored enterprises affecting our ability to originate loans through such programs; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in federal and state laws and regulations, including changes in tax laws; the availability and cost of capital for future investments; and competition. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management’s views as of the date of this report.  The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

 

Additional information regarding these and other risks and uncertainties we face is contained in our annual report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 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)

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

102,548

 

$

104,374

 

Restricted cash

 

131,659

 

139,398

 

Loans and investments, net

 

2,702,097

 

2,579,127

 

Loans held-for-sale, net

 

286,325

 

297,443

 

Capitalized mortgage servicing rights, net

 

255,732

 

252,608

 

Securities held-to-maturity, net

 

36,764

 

27,837

 

Investments in equity affiliates

 

23,625

 

23,653

 

Real estate owned, net

 

16,675

 

16,787

 

Due from related party

 

3,719

 

688

 

Goodwill and other intangible assets

 

120,366

 

121,766

 

Other assets

 

69,258

 

62,264

 

Total assets

 

$

3,748,768

 

$

3,625,945

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Credit facilities and repurchase agreements

 

$

626,063

 

$

528,573

 

Collateralized loan obligations

 

1,419,838

 

1,418,422

 

Debt fund

 

68,176

 

68,084

 

Senior unsecured notes

 

196,090

 

95,280

 

Convertible senior unsecured notes, net

 

232,577

 

231,287

 

Junior subordinated notes to subsidiary trust issuing preferred securities

 

139,760

 

139,590

 

Related party financing

 

 

50,000

 

Due to related party

 

1,558

 

 

Due to borrowers

 

67,858

 

99,829

 

Allowance for loss-sharing obligations

 

31,097

 

30,511

 

Other liabilities

 

77,881

 

99,813

 

Total liabilities

 

2,860,898

 

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; 62,469,535 and 61,723,387 shares issued and outstanding, respectively

 

625

 

617

 

Additional paid-in capital

 

713,001

 

707,450

 

Accumulated deficit

 

(88,528

)

(101,926

)

Accumulated other comprehensive income

 

 

176

 

Total Arbor Realty Trust, Inc. stockholders’ equity

 

714,606

 

695,825

 

Noncontrolling interest

 

173,264

 

168,731

 

Total equity

 

887,870

 

864,556

 

Total liabilities and equity

 

$

3,748,768

 

$

3,625,945

 

 

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 March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Interest income

 

$

51,612

 

$

33,525

 

Interest expense

 

33,387

 

19,437

 

Net interest income

 

18,225

 

14,088

 

Other revenue:

 

 

 

 

 

Gain on sales, including fee-based services, net

 

18,193

 

19,171

 

Mortgage servicing rights

 

19,634

 

20,030

 

Servicing revenue, net

 

9,547

 

4,794

 

Property operating income

 

2,910

 

3,223

 

Other income, net

 

2,878

 

(886

)

Total other revenue

 

53,162

 

46,332

 

Other expenses:

 

 

 

 

 

Employee compensation and benefits

 

29,494

 

19,841

 

Selling and administrative

 

8,915

 

7,695

 

Property operating expenses

 

2,796

 

2,638

 

Depreciation and amortization

 

1,846

 

1,897

 

Impairment loss on real estate owned

 

 

1,200

 

Provision for loss sharing (net of recoveries)

 

473

 

1,679

 

Provision for loan losses (net of recoveries)

 

325

 

(696

)

Management fee - related party

 

 

4,000

 

Total other expenses

 

43,849

 

38,254

 

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

 

27,538

 

22,166

 

Gain on extinguishment of debt

 

 

7,116

 

Income from equity affiliates

 

746

 

763

 

Benefit from (provision for) income taxes

 

8,784

 

(6,101

)

Net income

 

37,068

 

23,944

 

Preferred stock dividends

 

1,888

 

1,888

 

Net income attributable to noncontrolling interest

 

8,991

 

6,442

 

Net income attributable to common stockholders

 

$

26,189

 

$

15,614

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.42

 

$

0.30

 

Diluted earnings per common share

 

$

0.42

 

$

0.30

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

61,842,336

 

51,461,156

 

Diluted

 

84,699,735

 

73,730,068

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.21

 

$

0.17

 

 

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 March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net income

 

$

37,068

 

$

23,944

 

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

 

 

29

 

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

 

36,892

 

24,211

 

Less:

 

 

 

 

 

Comprehensive income attributable to noncontrolling interest

 

8,947

 

6,520

 

Preferred stock dividends

 

1,888

 

1,888

 

Comprehensive income attributable to common stockholders

 

$

26,057

 

$

15,803

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

($ in thousands, except shares)

 

Three Months Ended March 31, 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

 

 

 

 

 

360,000

 

4

 

3,010

 

 

 

 

 

3,014

 

 

 

3,014

 

Stock-based compensation

 

 

 

 

 

387,648

 

4

 

2,541

 

 

 

 

 

2,545

 

 

 

2,545

 

Forfeiture of unvested restricted stock

 

 

 

 

 

(1,500

)

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock

 

 

 

 

 

 

 

 

 

 

 

(12,962

)

 

 

(12,962

)

 

 

(12,962

)

Distributions - preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,888

)

 

 

(1,888

)

 

 

(1,888

)

Distributions - preferred stock of private REIT

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

 

 

(5

)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,458

)

(4,458

)

Net income

 

 

 

 

 

 

 

 

 

 

 

28,077

 

 

 

28,077

 

8,991

 

37,068

 

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

 

 

 

 

 

 

 

 

 

 

 

176

 

(176

)

 

 

 

 

Balance — March 31, 2018

 

24,942,269

 

$

89,508

 

62,469,535

 

$

625

 

$

713,001

 

$

(88,528

)

$

 

$

714,606

 

$

173,264

 

$

887,870

 

 

See Notes to Consolidated Financial Statements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

37,068

 

$

23,944

 

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

 

 

 

 

 

Depreciation and amortization

 

1,846

 

1,897

 

Stock-based compensation

 

2,545

 

2,305

 

Amortization and accretion of interest and fees, net

 

3,945

 

742

 

Amortization of capitalized mortgage servicing rights

 

11,865

 

11,888

 

Originations of loans held-for-sale

 

(1,035,737

)

(1,267,713

)

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

 

1,046,204

 

1,364,850

 

Mortgage servicing rights

 

(19,634

)

(20,030

)

Write-off of capitalized mortgage servicing rights from payoffs

 

4,811

 

3,393

 

Impairment loss on real estate owned

 

 

1,200

 

Provision for loan losses (net of recoveries)

 

325

 

(696

)

Provision for loss sharing (net of recoveries)

 

473

 

1,679

 

Net charge-offs for loss sharing obligations

 

113

 

(1,867

)

Gain on extinguishment of debt

 

 

(7,116

)

Deferred tax (benefit) provision

 

(13,320

)

1,827

 

Income from equity affiliates

 

(746

)

(763

)

Changes in operating assets and liabilities

 

(18,961

)

(42,967

)

Net cash provided by operating activities

 

20,797

 

72,573

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Loans and investments funded and originated, net

 

(283,937

)

(138,952

)

Payoffs and paydowns of loans and investments

 

192,023

 

191,752

 

Deferred fees

 

2,827

 

227

 

Investments in real estate, net

 

(66

)

(119

)

Contributions to equity affiliates

 

(2,460

)

(348

)

Distributions from equity affiliates

 

2,608

 

385

 

Purchase of securities held-to-maturity, net

 

(8,445

)

(7,838

)

Payoffs and paydowns of securities held-to-maturity

 

139

 

2

 

Proceeds from insurance settlements

 

2,278

 

647

 

Due to borrowers and reserves

 

(63,941

)

(753

)

Net cash (used in) provided by investing activities

 

(158,974

)

45,003

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

1,870,249

 

2,439,585

 

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

 

(1,771,463

)

(2,491,430

)

Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities

 

 

(12,691

)

Payoff of related party financing

 

(50,000

)

 

Proceeds from convertible senior unsecured notes

 

 

13,750

 

Proceeds from senior unsecured notes

 

100,000

 

 

Receipts on swaps and returns of margin calls from counterparties

 

 

430

 

Distributions paid on common stock

 

(12,962

)

(8,738

)

Distributions paid on noncontrolling interest

 

(4,458

)

(3,609

)

Distributions paid on preferred stock

 

(1,888

)

(1,888

)

Distributions paid on preferred stock of private REIT

 

(5

)

(5

)

Payment of deferred financing costs

 

(3,875

)

(834

)

Proceeds from issuance of common stock, net

 

3,014

 

 

Net cash provided by (used in) financing activities

 

128,612

 

(65,430

)

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(9,565

)

52,146

 

Cash, cash equivalents and restricted cash at beginning of period

 

243,772

 

167,960

 

Cash, cash equivalents and restricted cash at end of period

 

$

234,207

 

$

220,106

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash used to pay interest

 

$

27,507

 

$

15,014

 

Cash used to pay taxes

 

$

3,718

 

$

750

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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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Table of Contents

 

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

Note 1 — Description of Business

 

Arbor Realty Trust, Inc. (the “Company,” “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.

 

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 and, effective May 31, 2017, terminated the existing management agreement with ACM to fully internalize our management team. Please refer to our 2017 Annual Report for details of our acquisition of the Agency Business (the “Acquisition”) and termination of the management agreement.

 

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 2017 Annual Report.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation. See the following “Recently Adopted Accounting Pronouncements” section for the cash flows impact of the retrospective adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash and ASU 2016-15, Statement of Cash Flows.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

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.

 

Significant Accounting Policies

 

We describe our significant accounting policies in our 2017 Annual Report. There have been no significant changes in our significant accounting policies since December 31, 2017.

 

Recently Adopted Accounting Pronouncements

 

Description

 

Adoption Date

 

Effect on Financial Statements

Since 2014, the Financial Accounting Standards Board (“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.

 

The adoption of this guidance did not have a material impact on our consolidated financial statements. This standard may impact the timing of gains on certain future sales of real estate.

 

 

 

 

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Many entities today apply the modification accounting guidance when any of the terms or conditions of an award are changed, even if the changes are not substantive. Under the new guidance, modification accounting will not apply to a share-based payment award if all of the following are the same immediately before and after the change; (1) the award’s fair value; (2) the award’s vesting conditions; and (3) the award’s classification as an equity or liability instrument.

 

First quarter of 2018.

 

This ASU required prospective adoption, therefore, any future award changes will be evaluated under the amended guidance.

 

 

 

 

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. This ASU changes the definition of a business to assist with evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs.

 

First quarter of 2018.

 

This ASU required prospective adoption, therefore, any future acquisitions will be evaluated under the amended guidance.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

Description

 

Adoption Date

 

Effect on Financial Statements

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. This ASU requires changes in the total 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.

 

This guidance required retrospective adoption, therefore, we adjusted the cash flow statement for the comparable prior period. The following table shows the impact of the adoption of this gyuidance, as well as the adoption of ASU 2016-15 described below.

 

 

 

 

 

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 $0.6 million of proceeds from insurance settlements from net cash provided by operating activities to net cash (used in) provided by investing activities for the three months ended March 31, 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)

 

Three Months Ended
March 31, 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

 

(33,802

)

Cash and cash equivalents at end of period

 

104,843

 

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

 

(42,461

)

Net cash (used in) provided by investing activities

 

44,356

 

Net cash provided by (used in) financing activities

 

(151,398

)

 

 

 

 

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

 

52,146

 

Cash, cash equivalents and restricted cash at end of period

 

220,106

 

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

 

(42,967

)

Net cash (used in) provided by investing activities

 

45,003

 

Net cash provided by (used in) financing activities

 

(65,430

)

 

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.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 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 March 2018, the FASB issued ASU 2018-05, Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to complexities involved in accounting for the enacted Tax Cuts and Jobs Act (“Tax Reform”).

 

N/A

 

We recognized the estimated impact of the Tax Reform in our consolidated financial statements for the year ended December 31, 2017.

 

 

Note 3 — Loans and Investments

 

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

 

 

 

March 31, 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

 

$

2,502,574

 

90

%

153

 

6.41

%

19.6

 

0

%

72

%

Preferred equity investments

 

188,872

 

7

%

13

 

6.77

%

63.5

 

58

%

88

%

Mezzanine loans

 

84,976

 

3

%

7

 

10.81

%

19.9

 

20

%

66

%

 

 

2,776,422

 

100

%

173

 

6.57

%

22.6

 

5

%

73

%

Allowance for loan losses

 

(63,108

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(11,217

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

2,702,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge loans

 

$

2,422,105

 

91

%

150

 

6.10

%

20.9

 

0

%

72

%

Preferred equity investments

 

142,892

 

6

%

12

 

6.47

%

68.7

 

64

%

90

%

Mezzanine loans

 

87,541

 

3

%

8

 

10.78

%

24.8

 

20

%

63

%

 

 

2,652,538

 

100

%

170

 

6.28

%

23.6

 

4

%

73

%

Allowance for loan losses

 

(62,783

)

 

 

 

 

 

 

 

 

 

 

 

 

Unearned revenue

 

(10,628

)

 

 

 

 

 

 

 

 

 

 

 

 

Loans and investments, net

 

$

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.

 

Concentration of Credit Risk

 

We are subject to concentration risk in that, at March 31, 2018, the UPB related to 41 loans with five different borrowers represented 23% of total assets.  At December 31, 2017, the UPB related to 42 loans with five different borrowers represented 24% of total assets. During both the three months ended March 31, 2018 and the year ended December 31, 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.

 

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

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 March 31, 2018 and December 31, 2017, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $126.9 million and $126.5 million, respectively, and a weighted average last dollar LTV ratio of 93% 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):

 

 

 

March 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

 

$

2,049,398

 

74

%

pass/watch

 

4

%

72

%

Self Storage

 

301,830

 

11

%

pass/watch

 

0

%

71

%

Land

 

132,903

 

5

%

substandard

 

0

%

91

%

Office

 

107,818

 

4

%

special mention

 

1

%

65

%

Hotel

 

90,725

 

3

%

pass/watch

 

35

%

79

%

Healthcare

 

55,615

 

2

%

pass/watch

 

0

%

77

%

Retail

 

36,433

 

1

%

pass/watch

 

8

%

66

%

Commercial

 

1,700

 

<1

%

doubtful

 

63

%

63

%

Total

 

$

2,776,422

 

100

%

pass/watch

 

5

%

73

%

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

$

1,925,529

 

73

%

pass/watch

 

4

%

72

%

Self Storage

 

301,830

 

11

%

pass

 

0

%

71

%

Land

 

132,828

 

5

%

substandard

 

0

%

90

%

Office

 

107,853

 

4

%

pass/watch

 

1

%

64

%

Hotel

 

90,725

 

3

%

special mention

 

37

%

81

%

Healthcare

 

55,615

 

2

%

pass/watch

 

0

%

74

%

Retail

 

36,458

 

1

%

pass/watch

 

8

%

66

%

Commercial

 

1,700

 

<1

%

doubtful

 

63

%

63

%

Total

 

$

2,652,538

 

100

%

pass/watch

 

4

%

73

%

 

Geographic Concentration Risk

 

As of March 31, 2018, 21%, 21% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas and California, respectively.  As of December 31, 2017, 23%, 21% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in Texas, New York and California, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

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 March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

62,783

 

$

83,712

 

Provision for loan losses

 

325

 

 

Recoveries of reserves

 

 

(696

)

Allowance at end of period

 

$

63,108

 

$

83,016

 

 

The recoveries of reserves recorded in the first quarter of 2017 related to multifamily loans and the ratio of net recoveries to the average loans and investments outstanding was de minimus.

 

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 March 31, 2018 and 2017.

 

We have six loans with a carrying value totaling $120.4 million at March 31, 2018, which mature in September 2018, that are collateralized by a land development project. The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $111.0 million entitle us to a weighted average accrual rate of interest of 8.80%. 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 March 31, 2018 and December 31, 2017, we had cumulative allowances for loan losses of $49.4 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):

 

 

 

March 31, 2018

 

Three Months Ended March 31, 2018

 

Asset Class

 

UPB

 

Carrying Value (1)

 

Allowance for
Loan Losses

 

Average Recorded
Investment (2)

 

Interest Income
Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,411

 

$

125,174

 

$

54,208

 

$

131,249

 

$

 

Hotel

 

34,750

 

34,750

 

5,700

 

34,750

 

 

Office

 

2,283

 

2,283

 

1,500

 

2,286

 

29

 

Commercial

 

1,700

 

1,700

 

1,700

 

1,700

 

 

Total

 

$

170,144

 

$

163,907

 

$

63,108

 

$

169,985

 

$

29

 

 

 

 

December 31, 2017

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

131,086

 

$

124,812

 

$

53,883

 

$

131,086

 

$

 

Hotel

 

34,750

 

34,750

 

5,700

 

34,750

 

310

 

Office

 

2,288

 

2,288

 

1,500

 

27,560

 

25

 

Commercial

 

1,700

 

1,700

 

1,700

 

1,700

 

 

Multifamily

 

 

 

 

2,151

 

22

 

Total

 

$

169,824

 

$

163,550

 

$

62,783

 

$

197,247

 

$

357

 

 


(1)              Represents the UPB of five impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at both March 31, 2018 and December 31, 2017.

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

At both March 31, 2018 and December 31, 2017, two loans with an aggregate net carrying value of $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 (in thousands):

 

 

 

March 31, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel

 

$

34,750

 

$

 

$

34,750

 

$

34,750

 

$

 

$

34,750

 

Commercial

 

1,700

 

 

1,700

 

1,700

 

 

1,700

 

Total

 

$

36,450

 

$

 

$

36,450

 

$

36,450

 

$

 

$

36,450

 

 

At March 31, 2018 and December 31, 2017, we did not have any loans contractually past due 90 days or more that were still accruing interest.

 

There were no loan modifications, refinancings and/or extensions during the three months ended March 31, 2018 and 2017 that we 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.  As of March 31, 2018, we had total interest reserves of $46.3 million on 84 loans with an aggregate UPB of $1.66 billion. As of December 31, 2017, we had total interest reserves of $52.5 million on 81 loans with an aggregate UPB of $1.57 billion.

 

Note 4 — Loans Held-for-Sale, Net

 

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

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Fannie Mae

 

$

178,222

 

$

243,717

 

Freddie Mac

 

77,180

 

47,545

 

FHA

 

26,359

 

987

 

 

 

281,761

 

292,249

 

Fair value of future MSR

 

5,200

 

5,806

 

Unearned discount

 

(636

)

(612

)

Loans held-for-sale, net

 

$

286,325

 

$

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 months ended March 31, 2018 and 2017, we sold $1.06 billion and $1.36 billion, respectively, of loans held-for-sale and recorded gain on sales of $17.4 million and $18.1 million, respectively. At March 31, 2018 and December 31, 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.

 

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 7.2 years at both March 31, 2018 and December 31, 2017.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

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

 

 

 

Three Months Ended March 31, 2018

 

 

 

Acquired

 

Originated

 

Total

 

Balance at beginning of period

 

$

143,270

 

$

109,338

 

$

252,608

 

Additions

 

 

19,800

 

19,800

 

Amortization

 

(7,995

)

(3,870

)

(11,865

)

Write-downs and payoffs

 

(3,341

)

(1,470

)

(4,811

)

Balance at end of period

 

$

131,934

 

$

123,798

 

$

255,732

 

 

 

 

Three Months Ended March 31, 2017

 

Balance at beginning of period

 

$

194,801

 

$

32,942

 

$

227,743

 

Additions

 

 

26,469

 

26,469

 

Amortization

 

(10,462

)

(1,426

)

(11,888

)

Write-downs and payoffs

 

(3,393

)

 

(3,393

)

Balance at end of period

 

$

180,946

 

$

57,985

 

$

238,931

 

 

We collected prepayment fees of $3.7 million and $2.0 million during the three months ended March 31, 2018 and 2017, respectively, which are included as a component of servicing revenue, net on the consolidated statements of income. As of March 31, 2018 and December 31, 2017, we had no valuation allowance recorded on any of our MSRs.

 

The expected amortization of capitalized MSRs recorded as of March 31, 2018 is shown in the table below. Actual amortization may vary from these estimates (in thousands).

 

Year

 

Amortization

 

2018 (nine months ending 12/31/2018)

 

$

35,767

 

2019

 

44,539

 

2020

 

39,231

 

2021

 

31,900

 

2022

 

25,314

 

2023

 

20,802

 

Thereafter

 

58,179

 

Total

 

$

255,732

 

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

Note 6 — Mortgage Servicing

 

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

 

March 31, 2018

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

UPB
Percentage

 

Product

 

UPB

 

Total

 

State

 

of Total

 

Fannie Mae

 

$

12,700,635

 

76

%

Texas

 

22

%

Freddie Mac

 

3,397,535

 

20

%

North Carolina

 

10

%

FHA

 

591,836

 

4

%

California

 

8

%

Total

 

$

16,690,006

 

100

%

New York

 

8

%

 

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

 

Florida

 

6

%

 

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

 

Total

 

100

%

 

December 31, 2017

 

Product Concentrations

 

Geographic Concentrations

 

 

 

 

 

Percent of

 

 

 

UPB
Percentage

 

Product

 

UPB

 

Total

 

State

 

of Total

 

Fannie Mae

 

$

12,502,699

 

77

%

Texas

 

22

%

Freddie Mac

 

3,166,134

 

20

%

North Carolina

 

10

%

FHA

 

537,482

 

3

%

California

 

8

%

Total

 

$

16,206,315

 

100

%

New York

 

8

%

 

 

 

 

 

 

Georgia

 

6

%

 

 

 

 

 

 

Florida

 

6

%

 

 

 

 

 

 

Other (1)

 

40

%

 

 

 

 

 

 

Total

 

100

%

 


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

 

At March 31, 2018 and December 31, 2017, our weighted average servicing fee was 47.5 basis points and 47.7 basis points, respectively. We held cash in escrow for these loans totaling $443.2 million and $477.9 million at March 31, 2018 and December 31, 2017, respectively, which is not reflected in our consolidated balance sheets.  These escrows are maintained in separate accounts at several federally insured depository institutions, which may exceed FDIC insured limits. We earn interest income on these escrow deposits, generally based on a market rate of interest negotiated with the financial institutions that hold the escrow deposits. Interest earned on escrows, net of interest paid to the borrower, was $2.2 million and $0.7 million during the three months ended March 31, 2018 and 2017, respectively, and is a component of servicing revenue, net in the consolidated statements of income.

 

Note 7 — Securities Held-to-Maturity

 

Freddie Mac may choose to hold, sell or securitize loans we sell to them under the Freddie Mac SBL program. As part of the securitizations under the SBL program, we are required to purchase the bottom tranche bond, generally referred to as the “B Piece,” that represents the bottom 10%, or highest risk, of the securitization.  During the three months ended March 31, 2018, we purchased a B Piece bond with an initial face value of $12.3 million, at a discount, for $8.4 million. As of March 31, 2018, we retained 49%, or $53.3 million initial face value, of four B Piece bonds, at a discount, for $35.6 million and sold the remaining 51% to a third party at par.  These held-to-maturity securities are carried at cost, net of unamortized discounts, and are collateralized by a pool of multifamily

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

mortgage loans, bear interest at an initial weighted average variable rate of 3.64% and have an estimated weighted average maturity of 5.7 years. The weighted average effective interest rate was 11.43% and 12.97% at March 31, 2018 and December 31, 2017, respectively, including the accretion of discount. Approximately $8.0 million is estimated to mature within one year, $25.4 million is estimated to mature after one year through five years, $12.3 million is estimated to mature after five years through ten years and $7.0 million is estimated to mature after ten years.

 

The following is a summary of the held-to-maturity securities we held (in thousands):

 

March 31, 2018

 

 

 

Face Value

 

Carrying Value

 

Unrealized
Gain

 

Estimated Fair
Value

 

B Piece bonds

 

$

52,673

 

$

36,764

 

$

509

 

$

37,273

 

 

December 31, 2017

 

B Piece bonds

 

$

40,566

 

$

27,837

 

$

602

 

$

28,439

 

 

As of March 31, 2018, no impairment was recorded on these held-to-maturity securities. During the three months ended March 31, 2018 and 2017, we recorded interest income of $0.6 million and less than $0.1 million, respectively, related to these investments.

 

Note 8 — 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 (in thousands):

 

 

 

Investments in Equity Affiliates at

 

UPB of Loans to
Equity Affiliates at

 

Equity Affiliates

 

March 31, 2018

 

December 31, 2017

 

March 31, 2018

 

 

 

 

 

 

 

 

 

Arbor Residential Investor LLC

 

$

19,137

 

$

19,193

 

$

 

West Shore Café

 

2,168

 

2,140

 

1,688

 

Lightstone Value Plus REIT L.P.

 

1,895

 

1,895

 

 

JT Prime

 

425

 

425

 

 

East River Portfolio

 

 

 

 

Lexford Portfolio

 

 

 

 

Total

 

$

23,625

 

$

23,653

 

$

1,688

 

 

Arbor Residential Investor LLC (“ARI”).  During both the three months ended March 31, 2018 and 2017, we recorded income of $0.1 million to income from equity affiliates in our consolidated statements of income related to our investment in this residential mortgage banking business. In addition, during the three months ended March 31, 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.

 

During the three months ended March 31, 2018, we received a $0.2 million cash distribution, which was classified as a return of capital, in connection with a joint venture that invests in non-qualified residential mortgages purchased from ARI’s origination platform. During both the three months ended March 31, 2018 and 2017, we recorded income of less than $0.1 million to income from equity affiliates in our consolidated statements of income related to this investment.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

Lexford Portfolio. In the three months ended March 31, 2018 and 2017, we received distributions of $0.6 million and $0.7 million, respectively, from this equity investment which was recognized as income. See Note 18 — Agreements and Transactions with Related Parties for details.

 

Note 9 — Real Estate Owned

 

Our real estate assets at both March 31, 2018 and December 31, 2017 were comprised of a hotel property and an office building.

 

Real Estate Owned

 

 

 

March 31, 2018

 

December 31, 2017

 

(in thousands)

 

Hotel
Property

 

Office
Building

 

Total

 

Hotel
Property

 

Office
Building

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

3,294

 

$

4,509

 

$

7,803

 

$

3,294

 

$

4,509

 

$

7,803

 

Building and intangible assets

 

30,765

 

2,010

 

32,775

 

30,699

 

2,010

 

32,709

 

Less: Impairment loss

 

(13,307

)

(500

)

(13,807

)

(13,307

)

(500

)

(13,807

)

Less: Accumulated depreciation and amortization

 

(9,367

)

(729

)

(10,096

)

(9,228

)

(690

)

(9,918

)

Real estate owned, net

 

$

11,385

 

$

5,290

 

$

16,675

 

$

11,458

 

$

5,329

 

$

16,787

 

 

For the three months ended March 31, 2018 and 2017, our hotel property had a weighted average occupancy rate of 58% and 55%, respectively, a weighted average daily rate of $128 and $134, respectively, and weighted average revenue per available room of $75 and $73, respectively.  The operation of a hotel property is seasonal with the majority of revenues earned in the first two quarters of the calendar year.

 

Our office building was fully occupied by a single tenant until April 2017 when the lease expired. The building is currently vacant.

 

Our real estate owned assets had restricted cash balances totaling $0.6 million and $0.7 million at March 31, 2018 and December 31, 2017, respectively, due to escrow requirements.

 

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

 

Note 10 — Debt Obligations

 

Credit Facilities and Repurchase Agreements

 

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

 

 

 

 

 

 

 

 

 

March 31, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$300 million repurchase facility

 

Mar. 2020

 

Mar. 2021

 

L + 1.75%
to 3.50%

 

$

115,226

 

$

163,000

 

3.96

%

$

102,350

 

$

145,850

 

3.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100 million repurchase facility

 

June 2019

 

N/A

 

L + 2.00%

 

37,871

 

50,827

 

3.94

%

2,445

 

6,600

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

Dec. 2018

 

N/A

 

L + 2.00%
to 2.50%

 

13,212

 

18,500

 

4.06

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$75 million credit facility

 

June 2018

 

N/A

 

L + 2.00%

 

9,000

 

16,000

 

3.94

%

8,999

 

16,000

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Feb. 2019

 

N/A

 

L + 2.00%

 

38,027

 

48,800

 

3.94

%

32,538

 

40,700

 

3.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50 million credit facility

 

Sept. 2019

 

Sept. 2021

 

L + 2.50% to 3.25%

 

3,599

 

4,625

 

5.20

%

3,581

 

4,625

 

4.88

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$25.5 million credit facility

 

Oct. 2019

 

N/A

 

L + 2.50%

 

13,940

 

18,753

 

4.44

%

13,920

 

18,753

 

4.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$23.2 million credit facility

 

Feb. 2020

 

Feb. 2021

 

L + 2.30%

 

23,072

 

30,900

 

4.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$20 million credit facility

 

Mar. 2020

 

Mar. 2021

 

L + 2.50%

 

19,884

 

41,650

 

4.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$10 million working capital facility

 

June 2018

 

N/A

 

L + 2.50%

 

 

 

 

10,000

 

 

4.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$7.5 million credit facility

 

Aug. 2018

 

N/A

 

L + 2.75%

 

7,444

 

9,340

 

4.70

%

7,432

 

9,340

 

4.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase facility - securities

 

N/A

 

N/A

 

L + 2.50%
to 3.50%

 

60,390

 

 

4.84

%

53,938

 

 

4.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$3 million master security agreement

 

Oct. 2020

 

N/A

 

2.96% to 3.42%

 

1,670

 

 

3.20

%

1,834

 

 

3.21

%