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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 29, 2018 (May 29, 2018)

Arbor Realty Trust, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND
(STATE OF INCORPORATION)

001-32136
(COMMISSION
FILE NUMBER)
  20-0057959
(IRS EMPLOYER
ID. NUMBER)

333 Earle Ovington Boulevard, Suite 900
Uniondale, New York

 

11553
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)

(516) 506-4200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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

   


Item 8.01    Other Events.

        On May 15, 2018, Arbor Realty Trust, Inc. (the "Company") completed the issuance and sale of $25.0 million aggregate principle amount of its 5.625% Senior Notes due 2023 (the "Reopened Notes") pursuant to a purchase agreement, by and among the Company, Arbor Realty Limited Partnership and Sandler O'Neill + Partners, L.P., as initial purchaser. The Reopened Notes are a further issuance of, are fully fungible with, and rank equally in right of payment with and form a single series with the $100.0 million principal amount of 5.625% Senior Notes due 2023 initially issued by the Company on March 13, 2018 (the "Initial Notes" and, together with Reopened Notes, the "Original Notes"). Following the offering, the aggregate outstanding principal amount of the Original Notes is $125.0 million.

        The Original Notes were offered and sold in a private offering that was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). In connection with the issuances of the Original Notes, the Company entered into registration rights agreements, pursuant to which the Company, among other things, agreed to use commercially reasonable efforts to file a registration statement with the U.S. Securities and Exchange Commission relating to an offer to exchange (the "Registration Statement") the Original Notes for a like aggregate principal amount of registered notes (the "Exchange Offer").

        In connection with the anticipated filing of Amendment No. 1 to a Registration Statement on Form S-4 relating to the Exchange Offer, the Company is filing this Current Report on Form 8-K to retrospectively reclassify certain previously reported financial information in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, originally filed on February 23, 2018 (the "2017 10-K"), to reflect the impact of Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash, as if it was adopted by the Company as of December 31, 2017. Exhibit 99.1 to this Current Report is incorporated by reference herein and includes updates only to the extent necessary to reflect the retrospective reclassification made to information in the following Items of the 2017 10-K:

        This Current Report on Form 8-K does not reflect events occurring after the Company filed the 2017 10-K and does not update the disclosures therein, other than to illustrate the changes described above.

Item 9.01    Financial Statements and Exhibits.

(d)
Exhibits
Exhibit
Number
  Exhibit
  23.1   Consent of Ernst & Young LLP

 

23.2

 

Consent of Richey, May & Co., LLP

 

99.1

 

Retrospective revisions to the following portions of Arbor Realty Trust, Inc's Annual Report on Form 10-K for the year ended December 31, 2017, as originally filed with the Securities and Exchange Commission on February 23, 2018: Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and Part II, Item 8. Financial Statements and Supplementary Data

 

101.INS

 

XBRL Instance Document

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document


SIGNATURE

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

    ARBOR REALTY TRUST, INC.

 

 

By:

 

/s/ PAUL ELENIO

        Name:   Paul Elenio
        Title:   Chief Financial Officer

Date: May 29, 2018




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SIGNATURE

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Exhibit 23.1


Consent of Independent Registered Public Accounting Firm

        We consent to the incorporation by reference in the following Registration Statements:

of our reports dated February 23, 2018 (except for the effects of the retrospective adoption of the updated accounting standard discussed in Note 2, as to which the date is May 29, 2018), with respect to the consolidated financial statements and schedule of Arbor Realty Trust, Inc. and Subsidiaries, included in this Current Report on Form 8-K.

/s/ Ernst & Young LLP
New York, New York
May 29, 2018




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Consent of Independent Registered Public Accounting Firm

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EXHIBIT 23.2


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the following Registration Statements:

of our report dated February 13, 2017, with respect to the financial statements of Cardinal Financial Company, Limited Partnership, for the year ended December 31, 2016, which is included in this Current Report on Form 8-K.

/s/ Richey, May & Co., LLP
Englewood, Colorado
May 29, 2018




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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Exhibit 99.1

        Note: The information contained in this Item 7 has been updated for the cash flow presentation requirements associated with the adoption of Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"), as if it was adopted by the Company as of December 31, 2017. Within this Item 7, updates have been made to the Liquidity and Capital Resources section as applicable. There have been no other changes made since the filing of the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, originally filed on February 23, 2018 ("2017 10-K.") For significant developments since the filing of the 2017 10-K, refer to other periodic reports filed with the Securities and Exchange Commission ("SEC") through the date of this Current Report on Form 8-K.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should read the following discussion in conjunction with the sections of this report entitled "Forward-Looking Statements," "Risk Factors" and "Selected Financial Data," along with the historical consolidated financial statements including related notes, included in this report.

Overview

        Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity. Through our Agency Business, we originate, sell and service a range of multifamily finance products through GSE, HUD and CMBS programs. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We were previously externally managed and advised by ACM and, on May 31, 2017, we exercised our option to fully internalize our management team and terminate the existing management agreement. See Note 1—Description of Business for details about our business segments and Note 3—Acquisition of Our Former Manager's Agency Platform for details about the Acquisition and termination of the management agreement. We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its REIT-taxable income that is distributed to its stockholders, provided that at least 90% of its REIT-taxable income is distributed and provided that certain other requirements are met.

        Our operating performance is primarily driven by the following factors:

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

        Fees and other revenue recognized from originating, selling and servicing mortgage loans through the GSE and HUD programs.    Revenue recognized from the origination and sale of mortgage loans consists of gains on sale of loans (net of any direct loan origination costs incurred), commitment fees, broker fees, loan assumption fees and loan origination fees. These gains and fees are collectively referred to as gain on sales, including fee-based services, net. We record income from MSRs at the time of commitment to the borrower, which represents the fair value of the expected net future cash flows associated with the rights to service mortgage loans that we originate, with the recognition of a corresponding asset upon sale. We also record servicing revenue which consists of fees received for

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servicing mortgage loans, net of amortization on the MSR assets recorded. These origination, selling and servicing fees and other revenue began in the third quarter of 2016 as a result of the Acquisition and are included in our Agency Business results. Although we have long-established relationships with the GSE and HUD agencies, our operating performance would be negatively impacted if our business relationships with these agencies deteriorate.

        Income earned from our structured transactions.    Our structured transactions are primarily comprised of investments in equity affiliates, which represent unconsolidated joint venture investments formed to acquire, develop and/or sell real estate-related assets. If interest rates continue to rise, it is likely that income from these investments will continue to be significantly impacted. In addition, we periodically receive distributions from our equity investments. It is difficult to forecast the timing of such payments, which can be substantial in any given quarter. We account for structured transactions within our Structured Business.

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

Significant Developments During 2017

        Internalization of Management Team.    We exercised our option to fully internalize our management team and terminate the existing management agreement with ACM for $25.0 million. See Note 3—Acquisition of Our Former Manager's Agency Platform for details.

Capital Markets Activity.

Financing Activity.

2


        Dividend.    We raised our quarterly common dividend to $0.21 per share in the first quarter of 2018, a 24% increase over the quarterly common dividend paid in the prior year comparable quarter of $0.17 per share.

Agency Business Activity.

Structured Business Activity.

Current Market Conditions, Risks and Recent Trends

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

        We rely on the capital markets to generate capital for financing the growth of our business. While we have been successful in generating capital through the debt and equity markets throughout 2017, there can be no assurance that we will continue to have access to such markets. If we were to experience a prolonged downturn in the stock or credit markets, it could cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly.

        The Federal Reserve increased its targeted Federal Rate three times in 2017 for an aggregate increase of 75 basis points. To date, we have not been significantly impacted by these increases and do not anticipate a significant decline in origination volume or profitability as interest rates remain at historically low levels. We expect the current interest rate environment to continue for the near term as the Federal Reserve has stated that it will take a measured and conservative approach to future interest rate decisions.

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

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        We are a national originator with Fannie Mae and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency ("FHFA") released the GSE 2018 Scorecard ("2018 Scorecard,") which established Fannie Mae's and Freddie Mac's loan origination caps at $35.0 billion ("2018 Caps") each for the multifamily finance market, a $1.5 billion decrease from the 2017 loan origination caps. Affordable housing loans, loans to small multifamily properties, and manufactured housing rental community loans continue to be excluded from the 2018 Caps. In addition, the definition of the affordable loan exclusions has added an extremely-high cost market category, continues to encompass affordable housing in high- and very-high cost markets and allows for an exclusion from the 2018 Caps for the pro-rata portion of any loan on a multifamily property that includes affordable units. The 2018 Scorecard continues to provide FHFA the flexibility to review the estimated size of the multifamily loan origination market quarterly and proactively adjust the 2018 Caps accordingly. The 2018 Scorecard also continues to provide exclusions for loans to properties in underserved markets and for loans to finance certain energy or water efficiency improvements, however, to qualify for this exclusion, the projected annual energy or water savings must be at least 25%. Our originations with the GSEs are highly profitable executions as they provide significant gains from the sale of our loans, non-cash gains related to MSRs and servicing revenues, therefore, a decline in our GSE originations would negatively impact our financial results. We are unsure whether the FHFA will impose stricter limitations on GSE multifamily production volume in the future.

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

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

Changes in Financial Condition

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

        Cash and cash equivalents decreased $34.3 million, primarily due to an increase in restricted cash from proceeds available to fund additional loans in CLO IX which closed in late December 2017, the payment of distributions to our stockholders, funding of structured loans and investments growth (net

4


of new debt financings) and the payment made to fully internalize our management team and terminate the existing management agreement with our Former Manager, partially offset by cash from operations of the business and proceeds from the public offering of our common stock.

        Restricted cash increased $110.1 million, primarily due to proceeds available in CLO IX for the purpose of funding additional loans subsequent to the closing date in late December 2017. Restricted cash is kept on deposit with the trustees for our CLOs and primarily represents proceeds available for redeployment into new assets or disbursement to bondholders primarily from loan payoffs and paydowns, as well as unfunded loan commitments and interest payments received from loans. Restricted cash for the Agency Business represents cash collateral for possible losses resulting from loans originated under the Fannie Mae DUS program in accordance with the terms of the loss-sharing agreements.

        Our Structured loan and investment portfolio balance was $2.66 billion and $1.80 billion at December 31, 2017 and 2016, respectively. This increase was primarily due to loan originations exceeding payoffs and other reductions by $918.9 million. See below for details.

        Our portfolio had a weighted average current interest pay rate of 6.28% and 5.71% at December 31, 2017 and 2016, respectively. Including certain fees earned and costs associated with the Structured portfolio, the weighted average current interest rate was 6.99% and 6.39% at December 31, 2017 and 2016, respectively. Advances on our financing facilities totaled $2.24 billion and $1.35 billion at December 31, 2017 and 2016, respectively, with a weighted average funding cost of 4.12% and 3.91%, respectively, which excludes financing costs. Including the financing costs, the weighted average funding rate was 4.83% and 4.45% at December 31, 2017 and 2016, respectively. Activity from our Structured Business portfolio was comprised of the following ($ in thousands):

 
  Year Ended December 31,  
 
  2017   2016  

Loans originated

  $ 1,842,974   $ 847,683  

Number of loans

    93     70  

Weighted average interest rate

    7.04 %   6.74 %

Loans paid-off / paid-down

 
$

924,120
 
$

553,409
 

Number of loans

    64     54  

Weighted average interest rate

    7.10 %   6.97 %

Loans extended

 
$

426,183
 
$

569,134
 

Number of loans

    48     51  

        Our loans held-for-sale from the Agency Business decreased $375.9 million, primarily related to loan sales exceeding loan originations by $352.5 million during 2017 as noted in the following table (in thousands). These loans are generally sold within 60 days from the loan origination date.

 
  Loan
Originations
  Loan Sales  

Fannie Mae

  $ 2,929,481   $ 3,223,953  

Freddie Mac

    1,322,498     1,399,029  

FHA

    189,087     170,554  

CMBS/Conduit

    21,370     21,370  

Total

  $ 4,462,436   $ 4,814,906  

        Our capitalized mortgage servicing rights increased $24.9 million at December 31, 2017, primarily due to MSRs recorded on new loan originations, partially offset by amortization and write-offs. Our capitalized mortgage servicing rights represent the estimated value of our rights to service mortgage

5


loans for others. At December 31, 2017, the weighted average estimated life remaining of our MSRs was 7.2 years.

        Securities held-to-maturity totaling $27.8 million represents the retained portions of the bottom tranche bonds, or "B Piece" of Freddie Mac SBL program securitizations. See Note 8—Securities Held-to-Maturity for details.

        Goodwill and other intangible assets increased $24.3 million, primarily due to $25.0 million of goodwill recorded in connection with the internalization of our management team and termination of our existing management agreement with our Former Manager. See Note 3—Acquisition of Our Former Manager's Agency Platform for details.

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

        Credit facilities and repurchase agreements decreased $378.1 million, primarily due to a $368.6 million decrease in financings on our loans held-for-sale, as a result of loan sales exceeding loan originations during 2017.

        Collateralized loan obligations increased $690.0 million due to the issuances of three new CLOs, where we issued a total of $918.3 million of notes to third party investors, partially offset by the unwind of a CLO totaling $219.0 million.

        We formed a Debt Fund where we issued an aggregate of $70.0 million of floating rate notes to third party investors. See Note 12—Debt Obligations for details.

        Convertible senior unsecured notes increased $150.6 million, primarily due to the issuance of $143.8 million of 5.375% convertible senior unsecured notes and an additional $13.8 million of the 6.50% convertible senior unsecured notes. See Note 12—Debt Obligations for details.

        Junior subordinated notes decreased $18.3 million, primarily due to the repurchase of certain of our junior subordinated notes with a carrying value of $19.8 million. We recorded a gain of $7.1 million upon extinguishment of this debt in the first quarter of 2017.

Equity

        In May 2017, we completed a public offering where we sold 9,500,000 shares of our common stock for $8.05 per share, and received net proceeds of $76.2 million. We used $25.0 million of the proceeds to exercise our option to fully internalize our management team and terminate the existing management agreement with our Former Manager. The remaining amount was used to make investments and for general corporate purposes. We currently have $179.8 million available under our $500.0 million shelf registration statement.

6


Distributions

        The following table presents dividends declared (on a per share basis) for 2017:

Common Stock   Preferred Stock  
 
   
   
  Dividend(1)  
Declaration Date   Dividend   Declaration Date   Series A   Series B   Series C  
November 1, 2017   $ 0.19   November 1, 2017   $ 0.515625   $ 0.484375   $ 0.53125  
August 2, 2017   $ 0.18   August 2, 2017   $ 0.515625   $ 0.484375   $ 0.53125  
May 3, 2017   $ 0.18   May 3, 2017   $ 0.515625   $ 0.484375   $ 0.53125  
March 1, 2017   $ 0.17   February 3, 2017   $ 0.515625   $ 0.484375   $ 0.53125  

(1)
The dividend declared on November 1, 2017 was for September 1, 2017 through November 30, 2017. The dividend declared on August 2, 2017 was for June 1, 2017 through August 31, 2017. The dividend declared on May 3, 2017 was for March 1, 2017 through May 31, 2017. The dividend declared on February 3, 2017 was for December 1, 2016 through February 28, 2017.

        Common Stock—On February 21, 2018, the Board of Directors declared a cash dividend of $0.21 per share of common stock. The dividend is payable on March 21, 2018 to common stockholders of record as of the close of business on March 8, 2018.

        Preferred Stock—On February 2, 2018, the Board of Directors declared a cash dividend of $0.515625 per share of 8.25% Series A preferred stock; a cash dividend of $0.484375 per share of 7.75% Series B preferred stock; and a cash dividend of $0.53125 per share of 8.50% Series C preferred stock. These amounts reflect dividends from December 1, 2017 through February 28, 2018 and are payable on February 28, 2018 to preferred stockholders of record on February 15, 2018.

Deferred Compensation

        In 2017, we issued 395,339 shares of restricted stock to employees of ours and our Former Manager, including our chief executive officer, 74,375 shares to the independent members of the Board of Directors and up to 448,980 performance-based restricted common stock units to our chief executive officer. We also granted our chief executive officer 357,569 shares of performance-based restricted stock as a result of meeting the goals related to the integration of the Acquisition. See Note 18—Equity for details.

7


Comparison of Results of Operations for Years Ended 2017 and 2016

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

 
  Year Ended December 31,   Increase / (Decrease)  
 
  2017   2016   Amount   Percent  

Interest income

  $ 156,177   $ 116,173   $ 40,004     34 %

Other interest income, net

        2,539     (2,539 )   (100 )%

Interest expense

    90,072     63,623     26,449     42 %

Net interest income

    66,105     55,089     11,016     20 %

Other revenue:

                         

Gain on sales, including fee-based services, net

    72,799     24,594     48,205     196 %

Mortgage servicing rights

    76,820     44,941     31,879     71 %

Servicing revenue, net

    29,210     9,054     20,156     nm  

Property operating income

    10,973     14,881     (3,908 )   (26 )%

Other income, net

    685     1,041     (356 )   (34 )%

Total other revenue

    190,487     94,511     95,976     102 %

Other expenses:

                         

Employee compensation and benefits

    92,126     38,647     53,479     138 %

Selling and administrative

    30,738     17,587     13,151     75 %

Acquisition costs

        10,262     (10,262 )   (100 )%

Property operating expenses

    10,482     13,501     (3,019 )   (22 )%

Depreciation and amortization

    7,385     5,022     2,363     47 %

Impairment loss on real estate owned

    3,200     11,200     (8,000 )   (71 )%

Provision for loss sharing (net of recoveries)

    (259 )   2,235     (2,494 )   nm  

Provision for loan losses (net of recoveries)

    (456 )   (134 )   (322 )   nm  

Management fee—related party

    6,673     12,600     (5,927 )   (47 )%

Total other expenses

    149,889     110,920     38,969     35 %

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

    106,703     38,680     68,023     176 %

Gain on extinguishment of debt

    7,116         7,116     100 %

Gain on sale of real estate

        11,631     (11,631 )   (100 )%

(Loss) income from equity affiliates

    (2,951 )   12,995     (15,946 )   nm  

Provision for income taxes

    (13,359 )   (825 )   (12,534 )   nm  

Net income

    97,509     62,481     35,028     56 %

Preferred stock dividends

    7,554     7,554          

Net income attributable to noncontrolling interest

    24,120     12,131     11,989     99 %

Net income attributable to common stockholders

  $ 65,835   $ 42,796   $ 23,039     54 %

    nm—not meaningful

8


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

 
  Year Ended December 31,  
 
  2017   2016  
 
  Average
Carrying
Value(1)
  Interest
Income /
Expense
  W/A Yield /
Financing
Cost(2)
  Average
Carrying
Value(1)
  Interest
Income /
Expense
  W/A Yield /
Financing
Cost(2)
 

Structured Business interest-earning assets:

                                     

Bridge loans

  $ 1,775,793   $ 118,396     6.67 % $ 1,510,811   $ 95,211     6.28 %

Preferred equity investments

    105,947     9,335     8.81 %   78,620     5,809     7.37 %

Mezzanine / junior participation loans

    96,329     7,616     7.91 %   111,018     7,762     6.97 %

Core interest-earning assets

    1,978,069     135,347     6.84 %   1,700,449     108,782     6.38 %

Cash equivalents

    198,860     1,179     0.59 %   206,971     840     0.41 %

Total interest-earning assets

  $ 2,176,929     136,526     6.27 % $ 1,907,420     109,622     5.73 %

Structured Business interest-bearing liabilities:

                                     

CLO

  $ 983,807     39,442     4.01 % $ 846,324     30,239     3.56 %

Warehouse lines

    223,856     9,531     4.26 %   181,169     6,427     3.54 %

Unsecured debt

    214,634     18,018     8.39 %   117,983     9,718     8.21 %

Trust preferred

    155,692     6,420     4.12 %   175,858     6,358     3.61 %

Debt Fund

    8,978     530     5.90 %            

Interest rate swaps

        195             5,201      

Total interest-bearing liabilities

  $ 1,586,967     74,136     4.67 % $ 1,321,334     57,943     4.37 %

Net interest income

        $ 62,390               $ 51,679        

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

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

Net Interest Income

        The increase in interest income is comprised of $26.9 million from our Structured Business and $13.1 million from our Agency Business. The $26.9 million, or 25%, increase from our Structured Business was primarily due to a 16% increase in our average core interest-earning assets, as a result of loan originations exceeding loan payoffs, and a 7% increase in the average yield on core interest-earning assets, largely due to increases in the average LIBOR rate and acceleration fees from early runoff. The increase in our Agency Business is due to the full period impact in 2017 of the Acquisition completed in the third quarter of 2016.

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

9


        The increase in interest expense is comprised of $16.2 million from our Structured Business, $8.2 million from our Agency Business and $2.1 million from the seller financing entered into in connection with the Acquisition. The $16.2 million, or 28%, increase from our Structured Business was primarily due to a 20% increase in the average balance of our interest-bearing liabilities and a 7% increase in the average cost of our interest-bearing liabilities. The increase in the average debt balance was due to growth in our loan portfolio, resulting in the issuance of our convertible senior unsecured notes, CLOs and a Debt Fund. The increase in the average cost of our interest-bearing liabilities was primarily due to an increase in the average LIBOR rate, partially offset by the runoff of swaps in the first quarter of 2017. The increases from our Agency Business and seller financing are due to the full period impact in 2017 of the Acquisition.

Agency Business Revenue

        The increase in gain on sales, including fee-based services was primarily due to a $3.32 billion increase in loan sales, as a result of the full period impact in 2017 of the Acquisition, as well as loans originated late in 2016 that sold in 2017, partially offset by a 14 basis point decrease in the sales margin (gain on sales, including fee-based services, net as a percentage of loan sales volume) from 1.65% to 1.51% in 2017, primarily due to an increase in larger Fannie Mae loans originated in 2017 which generally yield a lower sales margin.

        The increase in income from MSRs was primarily due to a $2.21 billion increase in loan commitment volume, primarily a result of the full period impact in 2017 of the Acquisition. This increase was partially offset by a 34 basis point decrease in the MSR rate (income from MSRs as a percentage of loan commitment volume) from 2.11% to 1.77% in 2017, primarily due to an increase in the percentage of Freddie Mac SBL loans commitment volume in 2017, which carry lower servicing fees.

        The increase in servicing revenue was primarily due to an increase in our servicing portfolio and the full period impact in 2017 of the Acquisition. Our servicing portfolio increased 20% from $13.56 billion at December 31, 2016 to $16.21 billion at December 31, 2017. Our servicing revenue, net in 2017 and 2016 includes $47.2 million and $21.7 million of amortization expense, respectively.

Other Expenses

        The increase in employee compensation and benefits expense is comprised of $48.8 million from our Agency Business and $4.7 million from our Structured Business. The increase in our Agency Business was primarily due to the full period impact in 2017 of the Acquisition, an increase in commissions and headcount as a result of portfolio growth and compensation expense recorded directly by the Agency Business, which was previously charged through the management fee prior to the internalization of our management team and termination of our existing management agreement with our Former Manager effective May 31, 2017. The $4.7 million, or 31%, increase from our Structured Business was primarily associated with the employees that transferred to us as a result of the internalization of our management team and termination of the existing management agreement.

        The increase in selling and administrative expenses is comprised of $11.1 million from our Agency Business and $2.1 million from our Structured Business. The increase in our Agency Business is primarily due to the full period impact in 2017 of the Acquisition. The $2.1 million, or 21%, increase from our Structured Business was primarily due to an increase in professional fees, as well as rent expense that was recorded directly by the Structured Business, which was previously charged through the management fee prior to the Acquisition, as the lease contracts were assumed in connection with the Acquisition.

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

10


        The increase in depreciation and amortization is comprised of $3.0 million from our Agency Business partially offset by a $0.7 million decrease from our Structured Business. The increase in our Agency Business is due to the full period impact in 2017 of the amortization of intangibles related to the Acquisition.

        Impairment loss on real estate owned was $3.2 million and $11.2 million in 2017 and 2016, respectively. During 2016, we determined that our hotel property exhibited indicators of impairment and, as a result, we recorded an impairment loss. The impairment loss in 2017 primarily relates to a further impairment of $2.7 million on this property resulting from additional market analyses received.

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

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

Gain on Extinguishment of Debt

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

Gain on Sale of Real Estate

        During 2016, we sold three multifamily properties and a hotel property for $50.7 million and recognized a gain of $11.6 million.

(Loss) Income from Equity Affiliates

        Loss from equity affiliates was $3.0 million in 2017 comprised primarily of a $5.5 million charge for our proportionate share of a litigation settlement and a $1.7 million loss incurred from our investment in a residential mortgage banking business, partially offset by distributions from other equity investments totaling $4.0 million. We recognized income from equity affiliates of $13.0 million in 2016 comprised primarily of $10.0 million of income from our investment in a residential mortgage banking business and a $2.8 million distribution from one of our investments. See Note 9—Investments in Equity Affiliates for details.

Provision for Income Taxes

        Our 2017 results of operations included the impact of the enactment of the Tax Reform, which was signed into law on December 22, 2017. Among numerous provisions included in the new tax law was the reduction of the corporate federal income tax rate from 35% to 21%. The provision for income taxes for 2017 includes the newly enacted corporate federal income tax rate of 21% resulting in approximately a $5.3 million deferred income tax benefit, which is reflected in the consolidated statements of income. The deferred income tax benefit was primarily the result of applying the new lower income tax rates to our net long-term deferred tax assets and liabilities recorded on our consolidated balance sheets. The final impact of Tax Reform may differ due to, among other things, changes in interpretations, assumptions made by us, the issuance of additional guidance and actions we may take as a result of the Tax Reform.

        The provision for income taxes was $13.4 million for 2017, which consisted of a current provision of $20.8 million and a deferred benefit of $7.4 million. The deferred tax benefit includes the effect of the reduction in the newly enacted corporate federal income tax rate on our Agency Buisiness. The

11


provision for income taxes primarily represents federal and state taxes related to the Agency Business, which was acquired by the TRS Consolidated Group in July 2016.

Net Income Attributable to Noncontrolling Interest

        The noncontrolling interest relates to the 21,230,769 OP Units issued to satisfy a portion of the aggregate purchase price of the Acquisition, which represents approximately 25.6% of our outstanding stock at December 31, 2017. The OP Units are redeemable for cash, or at our option, for shares of our common stock on a one-for-one basis.

12


Comparison of Results of Operations for Years Ended 2016 and 2015

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

 
  Year Ended December 31,   Increase / (Decrease)  
 
  2016   2015   Amount   Percent  

Interest income

  $ 116,173   $ 106,769   $ 9,404     9 %

Other interest income, net

    2,539     7,884     (5,345 )   (68 )%

Interest expense

    63,623     49,720     13,903     28 %

Net interest income

    55,089     64,933     (9,844 )   (15 )%

Other revenue:

                         

Gain on sales, including fee-based services, net

    24,594         24,594     nm  

Mortgage servicing rights

    44,941         44,941     nm  

Servicing revenue, net

    9,054         9,054     nm  

Property operating income

    14,881     27,666     (12,785 )   (46 )%

Other income, net

    1,041     270     771     nm  

Total other revenue

    94,511     27,936     66,575     nm  

Other expenses:

                         

Employee compensation and benefits

    38,647     17,500     21,147     121 %

Selling and administrative

    17,587     9,392     8,195     87 %

Acquisition costs

    10,262     3,134     7,128     nm  

Property operating expenses

    13,501     23,238     (9,737 )   (42 )%

Depreciation and amortization

    5,022     5,436     (414 )   (8 )%

Impairment loss on real estate owned

    11,200         11,200     nm  

Provision for loss sharing

    2,235         2,235     nm  

Provision for loan losses (net of recoveries)

    (134 )   4,467     (4,601 )   nm  

Management fee—related party

    12,600     10,900     1,700     16 %

Total other expenses

    110,920     74,067     36,853     50 %

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

    38,680     18,802     19,878     106 %

Gain on acceleration of deferred income

        19,172     (19,172 )   nm  

Loss on termination of swaps

        (4,630 )   4,630     nm  

Gain on sale of real estate

    11,631     7,784     3,847     49 %

Income from equity affiliates

    12,995     12,301     694     6 %

Provision for income taxes

    (825 )       (825 )   nm  

Net income

    62,481     53,429     9,052     17 %

Preferred stock dividends

    7,554     7,554          

Net income attributable to noncontrolling interest

    12,131         12,131     nm  

Net income attributable to common stockholders

  $ 42,796   $ 45,875   $ (3,079 )   (7 )%

nm—not meaningful

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

 
  Year Ended December 31,  
 
  2016   2015  
 
  Average
Carrying
Value(1)
  Interest
Income /
Expense
  W/A Yield /
Financing
Cost(2)
  Average
Carrying
Value(1)
  Interest
Income /
Expense
  W/A Yield /
Financing
Cost(2)
 

Structured Business interest-earning assets:

                                     

Bridge loans

  $ 1,510,811   $ 95,211     6.28 % $ 1,348,245   $ 88,816     6.59 %

Mezzanine / junior participation loans

    111,018     7,762     6.97 %   138,328     10,175     7.36 %

Preferred equity investments

    78,620     5,809     7.37 %   104,064     7,103     6.83 %

Securities

                770     8     1.04 %

Core interest-earning assets

    1,700,449     108,782     6.38 %   1,591,407     106,102     6.67 %

Cash equivalents

    206,971     840     0.41 %   190,044     667     0.35 %

Total interest-earning assets

  $ 1,907,420     109,622     5.73 % $ 1,781,451     106,769     5.99 %

Structured Business interest-bearing liabilities:

                                     

CLO

  $ 846,324     30,239     3.56 % $ 600,643     20,619     3.43 %

Warehouse lines

    181,169     6,427     3.54 %   231,339     7,249     3.12 %

Trust preferred

    175,858     6,358     3.61 %   175,858     5,700     3.24 %

Unsecured debt

    117,983     9,718     8.21 %   105,586     8,665     8.21 %

CDO

                55,965     1,104     1.97 %

Other non-recourse

                1,749     128     7.32 %

Interest rate swaps

        5,201             6,255      

Total interest-bearing liabilities

  $ 1,321,334     57,943     4.37 % $ 1,171,140     49,720     4.25 %

Net interest income

        $ 51,679               $ 57,049        

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

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

Net Interest Income

        Interest income increased $2.9 million, or 3%, for 2016 as compared to 2015, excluding $6.6 million of interest income associated with the Agency Business acquired. The impact of our average core interest-earning assets increasing 7% for 2016 was partially offset by a 4% decrease in the average yield on core interest-earning assets. The increase in our core interest-earning assets was primarily due to loan originations exceeding loan payoffs in 2016. The decrease in the average yield on core interest-earning assets was primarily due to $4.3 million in interest income and fee income from accelerated runoff in 2015, partially offset by $2.0 million of yield maintenance received on a loan payoff in the second quarter of 2016 and an increase in the average LIBOR rate.

        Other interest income, net was $2.5 million and $7.9 million for 2016 and 2015, respectively. During 2015, we acquired a $116.0 million defaulted first mortgage note, at par, that paid off. We initially recognized net other interest income of $7.9 million at the time the note paid off during 2015.

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In 2016, additional funds held in escrow from the note payoff were released following an arbitration proceeding and we recognized net other interest income totaling $2.5 million.

        Interest expense increased $8.2 million, or 17%, for 2016 as compared to 2015, excluding $5.7 million of interest expense associated with the Agency Business acquired. The increase was primarily due to a 13% increase in the average balance of our interest-bearing liabilities and a 3% increase in the average cost of our interest-bearing liabilities. The increase in the average debt balance was due to increased leverage on our portfolio, as well as an increase in the average loan balance from portfolio growth and the issuance of $86.3 million in convertible senior unsecured notes in the fourth quarter of 2016. The increase in the average cost of our interest-bearing liabilities was due to a period-over-period increase in the average LIBOR rate and a higher rate on the convertible senior unsecured notes issued as compared to our overall portfolio, partially offset by a $1.1 million decrease in accelerated fees resulting from the unwind of several of our securitization vehicles and the termination of certain swaps in 2015.

Agency Business Revenue

        Gain on sales, including fee-based services was $24.6 million for 2016. The agency loan sales for this period were $1.49 billion and the sales margin was 165 basis points.

        Income from MSRs was $44.9 million for 2016. The loan commitments volume was $2.13 billion and the MSR rate was 211 basis points.

        Servicing revenue was $9.1 million for 2016, which was comprised of servicing revenue of $30.8 million, partially offset by amortization of MSRs of $21.7 million. The Agency Business servicing portfolio was $13.56 billion with a weighted average servicing fee of 48 basis points at December 31, 2016.

Other Revenue

        Property operating results (income less expenses) decreased $3.0 million, or 69%, for 2016 as compared to 2015, primarily due to the sale of several properties during 2015 and 2016, partially offset by the addition of an office building in August 2015.

Other Expenses

        Employee compensation and benefits expense decreased $2.6 million, or 15%, for 2016 as compared to 2015, excluding $23.8 million of employee compensation and benefits expense associated with the Agency Business acquired. The decrease was primarily due to expenses totaling $2.2 million related to both the $116.0 million defaulted first mortgage that was repaid in 2015 and distributions received from one of our equity investments in 2015.

        Selling and administrative expenses remained relatively flat for 2016 as compared to 2015, excluding $7.9 million of selling and administrative expenses associated with the Agency Business acquired.

        Acquisition costs of $10.3 million and $3.1 million for 2016 and 2015, respectively, represent costs incurred related to the Acquisition, which was completed in July 2016. See Note 3—Acquisition of Our Manager's Agency Platform for details.

        Depreciation and amortization decreased $3.0 million, or 55%, for 2016 as compared to 2015, excluding $2.6 million of depreciation and amortization associated with the acquired assets of the Agency Business. The decrease was primarily due to the sale of several real estate owned properties during 2015 and 2016.

15


        Impairment loss on real estate owned was $11.2 million for 2016. During 2016, we determined that our hotel property exhibited indicators of impairment and, as a result, we recorded an impairment loss of $11.2 million.

        The provision for loss sharing for 2016 represents our estimated total loss-sharing obligations needed to satisfy our partial guarantee for the performance of Agency Business loans sold under the Fannie Mae DUS program.

        The decrease in provision for loan losses (net of recoveries) was primarily due to the recognition, in 2015, of a $6.5 million provision for loan losses related to five loans, which was partially offset by net recoveries of previously recorded loan losses of $2.0 million.

        The increase in management fee—related party was primarily due to compensation related costs incurred by employees of our Former Manager in connection with services they performed related to the Agency Business acquired.

Gain on Acceleration of Deferred Income / Loss on Termination of Swaps

        In connection with the unwind of our remaining collateralized debt obligations ("CDOs") in 2015, we recorded a $19.2 million gain that was previously deferred due to the reissuance of CDO bonds in 2010 as a result of a deferral of the gain from the extinguishment of trust preferred debt. See Note 12—Debt Obligations for details about this gain. We also terminated the basis and interest rate swaps associated with these CDOs and recognized a loss of $4.6 million. See Note 14—Derivative Financial Instruments for details about the swap termination.

Gain on Sale of Real Estate

        During 2016, we sold three multifamily properties and a hotel property for $50.7 million and recognized a gain of $11.6 million. During 2015, we sold three hotel properties and a multifamily property for $41.1 million and recognized a gain of $7.8 million.

Income from Equity Affiliates

        In 2016, we recognized income of $9.5 million from our investment in a residential mortgage banking business and $2.8 million from a distribution received from one of our equity investments. In 2015, we recognized income of $6.6 million from our investment in a residential mortgage banking business and received $5.5 million in distributions from one of our equity investments.

Provision for Income Taxes

        The provision for income taxes for 2016 includes a current provision of $2.4 million and a deferred benefit of $1.5 million. The provision is net of net operating losses of $11.4 million and the release of a valuation allowance of $5.4 million at the TRS Consolidated Group. The provision primarily represents federal and state taxes related to the Agency Business which was acquired by the TRS Consolidated Group in July 2016.

Net Income Attributable to Noncontrolling Interest

        The noncontrolling interest relates to the 21,230,769 OP Units issued to our Former Manager to satisfy a portion of the aggregate purchase price of the Acquisition, which represents approximately 29.2% of our outstanding stock at December 31, 2016.

16


Liquidity and Capital Resources

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

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

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

        Cash Flows.    Cash flows provided by operating activities totaled $460.8 million during 2017 and consisted primarily of net cash inflows of $370.0 million, as a result of loan sales exceeding loan originations in our Agency Business, and net income, adjusted for noncash items, of $90.0 million. We had net cash inflows from loans-held-for-sale during 2017 due to the timing of agency loan sales, as agency loans are generally sold within 60 days of origination.

        Cash flows used in investing activities totaled $907.9 million during 2017. Loan and investment activity (originations and payoffs/paydowns) comprise the bulk of our investing activities. Loan originations from our Structured Business totaling $1.87 billion, net of payoffs and paydowns of $959.7 million, resulted in net cash outflows of $907.7 million. Cash used in investing activities also includes a $27.2 million cash payment to purchase the B Piece bonds of the SBL program securitizations and a $25.0 million cash payment to fully internalize our management team and terminate the existing management agreement with our Former Manager. The use of cash mentioned above was partially offset by $38.4 million increase of cash held to fund holdbacks and reserves on our loans and investments as a result of the growth in our loan portfolio.

        Cash flows provided by financing activities totaled $523.0 million during 2017, and consisted primarily of $988.3 million of proceeds from CLOs and Debt Fund issuances, $157.5 million of net proceeds from the issuances of convertible senior unsecured notes and $76.2 million of net proceeds from a public offering of our common stock, partially offset by net cash outflows of $377.7 million from debt facility activities (facility paydowns were greater than funded loan originations), outflows of $219.0 million for the redemption of CLO IV, $65.5 million in distributions to our stockholders and OP Unit holder and a $24.6 million payment for deferred financing costs.

        Agency Business Requirements.    The Agency Business is subject to supervision by certain regulatory agencies. Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, purchase and loss obligations and compliance with reporting requirements. Our adjusted net worth and operational liquidity exceeded the agencies' requirements as of December 31, 2017. Our restricted liquidity and purchase and loss

17


obligations were satisfied with letters of credit totaling $47.0 million. See Note 16—Commitments and Contingencies for additional details about our performance regarding these requirements.

        We also enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 14—Derivative Financial Instruments and Note 15—Fair Value.

        Debt Facilities.    We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments and substantially all of our loans held-for-sale. The following is a summary of our debt facilities (in thousands):

 
  December 31, 2017
Debt Facilities
  Commitment   UPB(1)   Available   Maturity
Dates

Structured Business

                     

Credit facilities and repurchase agreements

  $ 673,745   $ 239,222   $ 434,523   2018 - 2020

Collateralized loan obligations(2)

    1,436,274     1,436,274       2018 - 2022

Debt Fund(2)

    70,000     70,000       2019 - 2021

Senior unsecured notes

    97,860     97,860       2021

Convertible unsecured senior notes

    243,750     243,750       2019 - 2020

Junior subordinated notes

    154,336     154,336       2034 - 2037

Structured transaction business total

    2,675,965     2,241,442     434,523    

Agency Business

   
 
   
 
   
 
 

 

Credit facilities(3)

    1,150,000     291,716     858,284   2018

Other

   
 
   
 
   
 
 

 

Related party financing(4)

    50,000     50,000       2021

Consolidated total

  $ 3,875,965   $ 2,583,158   $ 1,292,807    

(1)
Excludes the impact of deferred financing costs.

(2)
Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of December 31, 2017.

(3)
The As Soon as Pooled ® Plus agreement we have with Fannie Mae has no expiration date.

(4)
In January 2018, we paid $50.0 million in full satisfaction of this debt.

        These debt facilities, including their restrictive covenants, are described in detail in Note 12—Debt Obligations.

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        Contractual Obligations.    As of December 31, 2017, we had the following material contractual obligations (in thousands):

 
  Payments Due by Period(1)  
 
  Year Ending December 31,    
   
 
Contractual Obligations
  2018   2019   2020   2021   2022   Thereafter   Totals  

Credit facilities and repurchase agreements

  $ 454,565   $ 20,600   $ 1,835   $   $   $ 53,938   $ 530,938  

Collateralized loan obligations(2)

    209,593     360,833     552,479     263,850     49,519         1,436,274  

Debt Fund(3)

        26,500     35,995     7,505             70,000  

Senior unsecured notes

                97,860             97,860  

Covertible unsecured senior notes

        100,000     143,750                 243,750  

Junor subordinated notes(4)

                        154,336     154,336  

Related party financing(5)

                62,500             62,500  

Outstanding unfunded commitments(6)

    31,669     26,113     10,828                 68,610  

Operating leases(7)

    4,361     3,719     3,143     1,725     1,597     5,329     19,874  

Totals

  $ 700,188   $ 537,765   $ 748,030   $ 433,440   $ 51,116   $ 213,603   $ 2,684,142  

(1)
Represents principal amounts due based on contractual maturities. Excludes the total projected interest payments on our debt obligations of $88.9 million in 2018, $81.7 million in 2019, $62.1 million in 2020, $34.1 million in 2021, $13.7 million in 2022 and $103.5 million thereafter based on current LIBOR rates.

(2)
Comprised of debt totaling $267.8 million for CLO V, $250.3 million for CLO VI, $279.0 million for CLO VII, $282.9 million for CLO VIII and $356.4 million for CLO IX with a weighted average contractual maturity of 1.95 years, 2.64 years, 1.94 years, 2.19 years and 2.99 years, respectively, as of December 31, 2017.

(3)
The weighted average contractual maturity of the underlying loans is 2.45 years.

(4)
Represents the face amount due upon maturity. The carrying value is $139.6 million, which is net of a deferred amount of $12.5 million and deferred financing fees of $2.2 million at December 31, 2017.

(5)
Represents the total amount due at maturity, including scheduled increases to the principal balance if the debt remained outstanding until the end of the five-year term. In January 2018, we paid $50.0 million in full satisfaction of this debt.

(6)
In accordance with certain loans and investments, we have outstanding unfunded commitments that we are obligated to fund as the borrowers meet certain requirements. Specific requirements include, but are not limited to, property renovations, building construction and building conversions based on criteria met by the borrower in accordance with the loan agreements. The payment due by period is based on the maturity date of underlying loans and is included in loans and investments, net in the consolidated balance sheet.

(7)
Represents the operating lease payments due in connection with our lease of office space for our corporate headquarters and loan origination, support and servicing offices located throughout the U.S. Certain of the office leases have escalation clauses. The total rent expense was $4.6 million and $1.9 million in 2017 and 2016, respectively.

        Off-Balance-Sheet Arrangements.    At December 31, 2017, we had no off-balance-sheet arrangements.

19


        Inflation.    Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation generally have little effect on our income because the majority of our interest-earning assets and interest-bearing liabilities have floating rates of interest. See "Quantitative and Qualitative Disclosures about Market Risk" below.

        Agreements and Transactions with Related Parties.    On May 31, 2017, we exercised our option to fully internalize our management team and terminated the existing management agreement with our Former Manager for $25.0 million. See Note 20—Agreements and Transactions with Related Parties for details of our related party transactions.

Derivative Financial Instruments

        We enter into derivative financial instruments in the normal course of business through the origination and sale of mortgage loans and the management of potential loss exposure caused by fluctuations of interest rates. See Note 14—Derivative Financial Instruments for details surrounding our derivative financial instruments.

Significant Accounting Estimates

        Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the Financial Accounting Standards Board Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the U.S. ("GAAP"). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates.

        A summary of our significant accounting policies is presented in Note 2—Basis of Presentation and Significant Accounting Policies. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. Each quarter, we assess these estimates and assumptions based on several factors, including historical experience, which we believe to be reasonable under the circumstances. These estimates are subject to change in the future if any of the underlying assumptions or factors change.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

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

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

20


real estate as an extension of the asset management of our loans, thus a recovery of principal or additional loss on our initial investment.

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

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

 
  Year Ended December 31,  
 
  2017   2016   2015  

Net income attributable to common stockholders

  $ 65,835   $ 42,796   $ 45,875  

Adjustments:

                   

Gain on sale of real estate

        (11,631 )   (7,784 )

Net income attributable to noncontrolling interest

    24,120     12,131      

Impairment loss on real estate owned

    3,200     11,200      

Depreciation—real estate owned

    769     2,012     5,436  

Depreciation—investments in equity affiliates

    406     375     375  

Funds from operations(1)

  $ 94,330   $ 56,883   $ 43,902  

Adjustments:

                   

Income from mortgage servicing rights

    (76,820 )   (44,941 )    

Impairment loss on real estate owned

    (3,200 )   (11,200 )    

Deferred tax benefit

    (7,399 )   (1,532 )    

Amortization and write-offs of MSRs

    63,034     21,704      

Depreciation and amortization

    7,697     3,170      

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

    1,398     (499 )    

Gain on sale of real estate

        11,631     7,784  

Stock-based compensation

    4,840     3,514     3,442  

Acquisition costs

        10,262     3,134  

Adjusted funds from operations(1)

  $ 83,880   $ 48,992   $ 58,262  

Diluted FFO per share(1)

  $ 1.17   $ 0.92   $ 0.86  

Diluted AFFO per share(1)

  $ 1.04   $ 0.79   $ 1.14  

Diluted weighted average shares outstanding(1)

    80,311,252     61,649,847     51,007,328  

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

21


        Note: The information contained in this Item 8 has been updated for the cash flow presentation requirements associated with the adoption of ASU 2016-18, as if it was adopted by the Company as of December 31, 2017. Within this Item 8, updates have been made to the Consolidated Statements of Cash Flows, as well as Note 2—Basis of Presentation and Significant Accounting Policies, as applicable. There have been no other changes made since the filing of the 2017 10-K. For significant developments since the filing of the 2017 10-K, refer to other periodic reports filed with the SEC through the date of this Current Report on Form 8-K.

Item 8.    Financial Statements and Supplementary Data

 
  Page  

Reports of Independent Registered Public Accounting Firms

    23  

Consolidated Balance Sheets

   
25
 

Consolidated Statements of Income

   
26
 

Consolidated Statements of Comprehensive Income

   
27
 

Consolidated Statements of Changes in Equity

   
28
 

Consolidated Statements of Cash Flows

   
29
 

Notes to Consolidated Financial Statements

   
31
 

Schedule IV—Loans and Other Lending Investments

   
106
 

        All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

22


Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Arbor Realty Trust, Inc. and Subsidiaries

Opinion on the Financial Statements

        We have audited the accompanying consolidated balance sheets of Arbor Realty Trust, Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

        We did not audit the 2016 financial statements of Cardinal Financial Company, Limited Partnership, in which the Company has a 16.3% interest as of December 31, 2016. In the consolidated financial statements, the Company's investment in Cardinal Financial Company, Limited Partnership is stated at $25,765,775 as of December 31, 2016 and the Company's equity in the net income of Cardinal Financial Company, Limited Partnership is stated at $9,487,795 in 2016. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Cardinal Financial Company, Limited Partnership, is based solely on the report of the other auditors.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

        These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

        We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2003.

New York, New York
February 23, 2018, except for the effects of the retrospective adoption of the updated accounting standard discussed in Note 2, as to which the date is May 29, 2018.

23



Report of Independent Registered Public Accounting Firm

To the Partners
Cardinal Financial Company, Limited Partnership
Charlotte, North Carolina

        We have audited the balance sheet of Cardinal Financial Company, Limited Partnership (the "Company") as of December 31, 2016, and the related statements of operations, changes in partners' equity, and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Financial Company, Limited Partnership as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Richey, May & Co., LLP
Englewood, Colorado

February 13, 2017

24



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 
  December 31,  
 
  2017   2016  

Assets:

             

Cash and cash equivalents

  $ 104,374   $ 138,645  

Restricted cash

    139,398     29,315  

Loans and investments, net

    2,579,127     1,695,732  

Loans held-for-sale, net

    297,443     673,367  

Capitalized mortgage servicing rights, net

    252,608     227,743  

Securities held-to-maturity, net

    27,837      

Investments in equity affiliates

    23,653     33,949  

Real estate owned, net

    16,787     19,492  

Due from related party

    688     1,465  

Goodwill and other intangible assets

    121,766     97,490  

Other assets

    62,264     53,588  

Total assets

  $ 3,625,945   $ 2,970,786  

Liabilities and Equity:

             

Credit facilities and repurchase agreements

  $ 528,573   $ 906,637  

Collateralized loan obligations

    1,418,422     728,441  

Debt fund

    68,084      

Senior unsecured notes

    95,280     94,522  

Convertible senior unsecured notes, net

    231,287     80,660  

Junior subordinated notes to subsidiary trust issuing preferred securities

    139,590     157,859  

Related party financing

    50,000     50,000  

Due to related party

        6,039  

Due to borrowers

    99,829     81,019  

Allowance for loss-sharing obligations

    30,511     32,408  

Other liabilities

    99,813     86,163  

Total liabilities

    2,761,389     2,223,748  

Commitments and contingencies (Note 16)

             

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; 61,723,387 and 51,401,295 shares issued and outstanding, respectively

    617     514  

Additional paid-in capital

    707,450     621,932  

Accumulated deficit

    (101,926 )   (125,134 )

Accumulated other comprehensive income

    176     321  

Total Arbor Realty Trust, Inc. stockholders' equity

    695,825     587,141  

Noncontrolling interest

    168,731     159,897  

Total equity

    864,556     747,038  

Total liabilities and equity

  $ 3,625,945   $ 2,970,786  

   

See Notes to Consolidated Financial Statements.

25



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 
  Year Ended December 31,  
 
  2017   2016   2015  

Interest income

  $ 156,177   $ 116,173   $ 106,769  

Other interest income, net

        2,539     7,884  

Interest expense

    90,072     63,623     49,720  

Net interest income

    66,105     55,089     64,933  

Other revenue:

                   

Gain on sales, including fee-based services, net

    72,799     24,594      

Mortgage servicing rights

    76,820     44,941      

Servicing revenue, net

    29,210     9,054      

Property operating income

    10,973     14,881     27,666  

Other income, net

    685     1,041     270  

Total other revenue

    190,487     94,511     27,936  

Other expenses:

                   

Employee compensation and benefits

    92,126     38,647     17,500  

Selling and administrative

    30,738     17,587     9,392  

Acquisition costs

        10,262     3,134  

Property operating expenses

    10,482     13,501     23,238  

Depreciation and amortization

    7,385     5,022     5,436  

Impairment loss on real estate owned

    3,200     11,200      

Provision for loss sharing (net of recoveries)

    (259 )   2,235      

Provision for loan losses (net of recoveries)

    (456 )   (134 )   4,467  

Management fee—related party

    6,673     12,600     10,900  

Total other expenses

    149,889     110,920     74,067  

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

    106,703     38,680     18,802  

Gain on extinguishment of debt

    7,116          

Gain on acceleration of deferred income

            19,172  

Loss on termination of swaps

            (4,630 )

Gain on sale of real estate

        11,631     7,784  

(Loss) income from equity affiliates

    (2,951 )   12,995     12,301  

Provision for income taxes

    (13,359 )   (825 )    

Net income

    97,509     62,481     53,429  

Preferred stock dividends

    7,554     7,554     7,554  

Net income attributable to noncontrolling interest

    24,120     12,131      

Net income attributable to common stockholders

  $ 65,835   $ 42,796   $ 45,875  

Basic earnings per common share

  $ 1.14   $ 0.83   $ 0.90  

Diluted earnings per common share

  $ 1.12   $ 0.83   $ 0.90  

Weighted average shares outstanding:

                   

Basic

    57,890,574     51,305,095     50,857,750  

Diluted

    80,311,252     51,730,553     51,007,328  

   

See Notes to Consolidated Financial Statements.

26



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 
  Year Ended December 31,  
 
  2017   2016   2015  

Net income

  $ 97,509   $ 62,481   $ 53,429  

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

    (382 )   147     71  

Unrealized loss on derivative financial instruments, net

        (193 )   (1,019 )

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

    237     5,208     6,149  

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

            4,626  

Comprehensive income

    97,364     67,643     63,256  

Less:

                   

Comprehensive income attributable to noncontrolling interest

    24,091     12,883      

Preferred stock dividends

    7,554     7,554     7,554  

Comprehensive income attributable to common stockholders

  $ 65,719   $ 47,206   $ 55,702  

   

See Notes to Consolidated Financial Statements.

27


ARBOR REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

($ in thousands, except shares)

 
  Preferred
Stock
Shares
  Preferred
Stock
Value
  Common
Stock
Shares
  Common
Stock
Par Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Income
(Loss)
  Total Arbor
Realty
Trust, Inc.
Stockholders'
Equity
  Noncontrolling
Interest
  Total Equity  

Balance—December 31, 2014

    3,711,500   $ 89,296     50,477,308   $ 505   $ 612,806   $ (152,483 ) $ (14,668 ) $ 535,456   $   $ 535,456  

Stock-based compensation

                486,124     5     3,438                 3,443           3,443  

Forfeiture of unvested restricted stock

                (916 )                                      

Distributions—common stock

                                  (29,495 )         (29,495 )         (29,495 )

Distributions—preferred stock

                                  (7,554 )         (7,554 )         (7,554 )

Distributions—preferred stock of private REIT

                                  (14 )         (14 )         (14 )

Net income

                                  53,429           53,429           53,429  

Unrealized gain on securities available-for-sale

                                        71     71           71  

Unrealized loss on derivative financial instruments, net

                                        (1,019 )   (1,019 )         (1,019 )

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

                                        4,626     4,626           4,626  

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

                                        6,149     6,149           6,149  

Balance—December 31, 2015

    3,711,500   $ 89,296     50,962,516   $ 510   $ 616,244   $ (136,117 ) $ (4,841 ) $ 565,092   $   $ 565,092  

Issuance of special voting preferred shares and operating partnership units

    21,230,769     212                                   212     154,560     154,772  

Stock-based compensation

                439,780     4     3,509                 3,513           3,513  

Forfeiture of unvested restricted stock

                (1,001 )                                      

Issuance of convertible senior unsecured notes, net

                            2,179                 2,179           2,179  

Distributions—common stock

                                  (31,798 )         (31,798 )         (31,798 )

Distributions—preferred stock

                                  (7,554 )         (7,554 )         (7,554 )

Distributions—preferred stock of private REIT

                                  (15 )         (15 )         (15 )

Distributions—noncontrolling interest

                                                    (6,794 )   (6,794 )

Net income

                                  50,350           50,350     12,131     62,481  

Unrealized gain on securities available-for-sale

                                        147     147           147  

Unrealized loss on derivative financial instruments, net

                                        (193 )   (193 )         (193 )

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

                                        5,208     5,208           5,208  

Balance—December 31, 2016

    24,942,269   $ 89,508     51,401,295   $ 514   $ 621,932   $ (125,134 ) $ 321   $ 587,141   $ 159,897   $ 747,038  

Issuance of common stock

                9,500,000     95     76,130                 76,225           76,225  

Stock-based compensation

                827,283     8     4,832                 4,840           4,840  

Forfeiture of unvested restricted stock

                (5,191 )                                      

Issuance of convertible senior unsecured notes, net

                            4,556                 4,556           4,556  

Distributions—common stock

                                  (42,612 )         (42,612 )         (42,612 )

Distributions—preferred stock

                                  (7,554 )         (7,554 )         (7,554 )

Distributions—preferred stock of private REIT

                                  (15 )         (15 )         (15 )

Distributions—noncontrolling interest

                                                    (15,286 )   (15,286 )

Net income

                                  73,389           73,389     24,120     97,509  

Unrealized loss on securities available-for-sale

                                        (382 )   (382 )         (382 )

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

                                        237     237           237  

Balance—December 31, 2017

    24,942,269   $ 89,508     61,723,387   $ 617   $ 707,450   $ (101,926 ) $ 176   $ 695,825   $ 168,731   $ 864,556  

See Notes to Consolidated Financial Statements.

28



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Year Ended December 31,  
 
  2017   2016   2015  

Operating activities:

                   

Net income

  $ 97,509   $ 62,481   $ 53,429  

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

                   

Depreciation and amortization

    7,385     5,022     5,436  

Stock-based compensation

    4,840     3,514     3,443  

Amortization and accretion of interest and fees, net

    4,682     4,563     1,575  

Amortization of capitalized mortgage servicing rights

    47,202     21,705      

Originations of loans held-for-sale

    (4,444,939 )   (2,154,732 )    

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

    4,814,906     1,916,470      

Payoffs and paydowns of loans held-for-sale

    132          

Mortgage servicing rights

    (76,820 )   (44,941 )    

Write-off of capitalized mortgage servicing rights from payoffs

    15,832     5,796      

Impairment loss on real estate owned

    3,200     11,200      

Provision for loan losses (net of recoveries)

    (456 )   (134 )   4,467  

Provision for loss sharing (net of recoveries)

    (259 )   2,235      

Net charge-offs for loss sharing obligations

    (1,638 )   (2,444 )    

Gain on extinguishment of debt

    (7,116 )        

Gain on sale of real estate

        (11,631 )   (7,784 )

Deferred tax benefit

    (7,399 )        

Loss (income) from equity affiliates

    2,951     (12,995 )   (12,301 )

Loss on termination of swaps

            4,630  

Gain on acceleration of deferred income

            (19,172 )

Changes in operating assets and liabilities

    796     (4,624 )   2,535  

Net cash provided by (used in) operating activities

    460,808     (198,515 )   36,258  

Investing Activities:

                   

Loans and investments funded, originated and purchased, net

    (1,867,393 )   (870,166 )   (985,008 )

Payoffs and paydowns of loans and investments

    959,696     667,902     985,789  

Internalization of management team

    (25,000 )        

Acquisition of the Agency Business, net of cash acquired

        (63,356 )    

Deferred fees

    10,982     11,938     4,876  

Investments in real estate, net

    (672 )   (588 )   (2,224 )

Contributions to equity affiliates

    (693 )   (6,091 )   (19,324 )

Distributions from equity affiliates

    4,671     12,452      

Proceeds from sale of real estate, net

        49,030     40,077  

Proceeds from sale of available-for-sale securities

        1,567      

Due to borrowers and reserves

    38,372     395      

Purchases of securities held-to-maturity, net

    (27,173 )        

Payoffs and paydowns of securities held-to-maturity

    460          

Purchases of capitalized mortgage servicing rights

    (1,199 )        

Purchases of securities, net

            (1,552 )

Principal collection on securities, net

            2,100  

Net cash (used in) provided by investing activities

    (907,949 )   (196,917 )   24,734  

Financing activities:

                   

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

    8,215,669     3,922,394     593,878  

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

    (8,593,411 )   (3,571,929 )   (636,940 )

Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities

    (12,691 )        

Paydowns and payoffs of mortgage note payable—real estate owned

        (27,155 )   (30,984 )

Proceeds from collateralized loan obligations

    918,274     250,250     486,750  

Proceeds from Debt Fund

    70,000          

Payoffs and paydowns of collateralized loan obligations

    (219,000 )   (281,250 )   (177,000 )

Proceeds from convertible senior unsecured notes

    157,500     86,250      

Payoffs and paydowns of collateralized debt obligations

            (312,071 )

Proceeds from mortgage note payable—real estate owned

            27,155  

Receipts on swaps and returns of margin calls from counterparties

    430     4,600     4,840  

Distributions paid on common stock

    (42,612 )   (31,798 )   (29,495 )

Distributions paid on noncontrolling interest

    (15,286 )   (6,794 )    

Distributions paid on preferred stock

    (7,554 )   (7,554 )   (7,554 )

Distributions paid on preferred stock of private REIT

    (15 )   (15 )   (14 )

Payment of deferred financing costs

    (24,576 )   (10,617 )   (10,776 )

Payments on swaps and margin calls to counterparties

            (290 )

Proceeds from issuance of common stock

    76,225          

Net cash provided by (used in) financing activities

    522,953     326,382     (92,501 )

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

    75,812     (69,050 )   (31,509 )

Cash, cash equivalents and restricted cash at beginning of period

    167,960     237,010     268,519  

Cash, cash equivalents and restricted cash at end of period

  $ 243,772   $ 167,960   $ 237,010  

   

See Notes to Consolidated Financial Statements.

29



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

 
  Year Ended December 31,  
 
  2017   2016   2015  

Supplemental cash flow information:

                   

Cash used to pay interest

  $ 75,582   $ 53,012   $ 43,939  

Cash used to pay taxes

  $ 20,823   $ 264   $ 287  

Supplemental schedule of non-cash investing and financing activities:

                   

Distributions accrued on 8.25% Series A preferred stock

  $ 267   $ 267   $ 267  

Distributions accrued on 7.75% Series B preferred stock

  $ 203   $ 203   $ 203  

Distributions accrued on 8.50% Series C preferred stock

  $ 159   $ 159   $ 159  

Fair value of conversion feature of convertible senior unsecured notes

  $ 4,703   $ 2,280   $  

Related party financing

  $   $ 50,000   $  

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

  $   $ 154,772   $  

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

  $   $   $ 26,186  

Loan transferred to real estate owned, net

  $   $   $ 5,900  

Satisfaction of participation loan

  $   $   $ 1,300  

Retirement of participation liability

  $   $   $ 1,300  

Reclassification of deferred financing costs from other assets to debt

  $   $   $ 17,429  

   

See Notes to Consolidated Financial Statements.

30



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017

Note 1—Description of Business

        Arbor is a Maryland corporation formed in 2003. 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 Fannie Mae, Freddie Mac, Ginnie Mae, FHA, HUD and CMBS programs. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We are an approved Fannie Mae 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 SBL lender, seller/servicer, nationally and a HUD MAP and LEAN senior housing/healthcare lender nationally.

        Prior to May 31, 2017, we were externally managed and advised by ACM. Effective May 31, 2017, we exercised our option to fully internalize our management team and terminate the existing management agreement. See Note 3—Acquisition of Our Former Manager's Agency Platform for details.

        Substantially all of our operations are conducted through our operating partnership, ARLP, for which we serve as the general partner, and ARLP's subsidiaries. We are organized to qualify as a REIT for federal income tax purposes. See Note 19—Income Taxes for details.

Note 2—Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        The consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. In the opinion of management, all adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows have been included and are of a normal and recurring nature.

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

Principles of Consolidation

        The accompanying 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 17—Variable Interest Entities for information about our VIEs. All significant inter-company transactions and balances have been eliminated in consolidation.

31



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

Use of Estimates

        The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that could materially affect the amounts reported in the consolidated financial statements and accompanying notes. As future events cannot be determined with precision, actual results could differ from those estimates.

Significant Accounting Policies

        Cash and Cash Equivalents.    All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. We place our cash and cash equivalents in high quality financial institutions. The consolidated account balances at each institution periodically exceed Federal Deposit Insurance Corporation (FDIC) insurance coverage and we believe that this risk is not significant.

        Loans, Investments and Securities.    Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. We invest in preferred equity interests that, in some cases, allow us to participate in a percentage of the underlying property's cash flows from operations and proceeds from a sale or refinancing. At the inception of each such investment, we determine whether such investment should be accounted for as a loan, equity interest or as real estate. To date, we have determined that all such investments are properly accounted for and reported as loans.

        At the time of purchase, we designate a security as available-for-sale, held-to-maturity, or trading depending on our ability and intent for the security. Securities available-for-sale, which are included as a component of other assets in the consolidated balance sheets, are reported at fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income. Unrealized losses that are determined to be other-than-temporary are recognized in earnings up to their credit component. Held-to-maturity securities are carried at cost net of any unamortized premiums or discounts, which are amortized or accreted over the life of the securities. For securities classified as held-to-maturity, an evaluation is performed of whether a decline in fair value below the amortized cost basis is other-than-temporary.

        The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions and is not necessarily intended to indicate a permanent decline in value. The process includes, but is not limited to, assessment of recent market events and prospects for near-term recovery, assessment of cash flows, internal review of the underlying assets securing the investments, credit of the issuer and the rating of the security, as well as our ability and intent to hold the investment to maturity. We closely monitor market conditions on which we base such decisions.

        Impaired Loans, Allowance for Loan Losses and Charge-offs.    We consider a loan impaired when, based upon current information, it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. We evaluate each loan in our portfolio on a quarterly basis. Our loans are individually specific and unique as it relates to product type, geographic location, and collateral type, as well as to the rights and remedies and the

32



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

position in the capital structure our loans have in relation to the underlying collateral. We evaluate this information at both a loan level and general market trends level when determining the appropriate assumptions such as capitalization and market discount rates, as well as the borrower's operating income and cash flows, in estimating the value of the underlying collateral when determining if a loan is impaired. We utilize internally developed valuation models and techniques primarily consisting of discounted cash flow and direct capitalization models in determining the fair value of the underlying collateral on an individual loan. We may also obtain a third party appraisal, which may value the collateral through an "as-is" or "stabilized value" methodology. Such appraisals may be used as an additional source of valuation information only and no adjustments are made to appraisals.

        If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level that we believe to be adequate to absorb probable losses.

        Loan terms may be modified if we determine that based on the individual circumstances of a loan and the underlying collateral, a modification would more likely increase the total recovery of the combined principal and interest from the loan. Any loan modification is predicated upon a goal of maximizing the collection of the loan. Typical triggers for a modification would include situations where the projected cash flow is insufficient to cover required debt service, when asset performance is lagging the initial projections, where there is a requirement for rebalancing, where there is an impending maturity of the loan, and where there is an actual loan default. Loan terms that have been modified have included, but are not limited to, interest rate, maturity date and in certain cases, principal amount. Length and amounts of each modification have varied based on individual circumstances and are determined on a case by case basis. If the loan modification constitutes a concession whereas we do not receive ample consideration in return for the modification, and the borrower is experiencing financial difficulties and cannot repay the loan under the current terms, then the modification is considered by us to be a troubled debt restructuring. If we receive a benefit, either monetary or strategic, and the above criteria are not met, the modification is not considered to be a troubled debt restructuring. We record interest on modified loans on an accrual basis to the extent the modified loan is contractually current.

        Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.

        Loss on restructured loans is recorded when we have granted a concession to the borrower in the form of principal forgiveness related to the payoff or the substitution or addition of a new debtor for the original borrower or when we incur costs on behalf of the borrower related to the modification, payoff or the substitution or addition of a new debtor for the original borrower. When a loan is restructured, we record our investment at net realizable value, taking into account the cost of all concessions at the date of restructuring. In addition, a gain or loss may be recorded upon the sale of a loan to a third party in the consolidated statements of income in the period in which the loan was sold.

33



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

        Loans Held-for-Sale, Net.    Loans held-for-sale, net represents commercial real estate loans originated in our Agency Business, which are generally transferred or sold within 60 days from the date the loan is funded. Such loans are reported at the lower of cost or market on an aggregate basis and include the value allocated to the associated future MSRs. During the period prior to its sale, interest income on a loan held-for-sale is calculated in accordance with the terms of the individual loan and the loan origination fees and direct loan origination costs are deferred until the loan is sold. All of our held-for-sale loans are financed with matched borrowings from credit facilities contracted to finance such loans. Interest income and expense are earned or incurred after a loan is closed and before a loan is sold.

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

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

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

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

34



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

level of risk sharing. We regularly monitor the specific reserves and update loss estimates as current information is received.

        Capitalized Mortgage Servicing Rights.    We recognize, as separate assets, rights to service mortgage loans for others, including such rights from our origination of mortgage loans sold with the servicing rights retained, as well as rights associated with acquired MSRs. Income from MSRs related to loans we originate are recognized when we record a derivative asset upon the commitment to originate a loan with a borrower and sell the loan to an investor. This commitment asset is recognized at fair value based on our internal model, which reflects the estimated fair value of the discounted expected net cash flows associated with the servicing of the loan. When a mortgage loan we originate is sold, we retain the right to service the loan and recognize the MSR at the initial capitalized valuation. We amortize our MSRs using the amortization method, which requires the MSRs to be amortized over the period of estimated net servicing income or loss and that the servicing assets or liabilities be assessed for impairment, or increased obligation, based on the fair value at each reporting date. Amortization of MSRs is recorded as a reduction of servicing revenues, net in the consolidated statements of income. The following assumptions were used in calculating the fair value of our MSRs for the periods presented:

        Key rates:    We used discount rates ranging from 8% to 15%, representing a weighted average discount rate of 13%, based on our best estimate of market discount rates to determine the present value of MSRs. The inflation rate used for adequate compensation was 3%.

        Servicing Cost:    A market participant's estimated future cost to service the loan for the estimated life of the MSR is subtracted from the estimated future cash flows.

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

        MSRs are initially recorded at fair value and are carried at amortized cost. The fair value of MRSs from loans we originate and sell are estimated considering market prices for similar MSRs, when available, and by estimating the present value of the future net cash flows of the capitalized MSRs, net of adequate compensation for servicing. Adequate compensation is based on the market rate of similar servicing contracts. The fair value of MSRs acquired approximate the purchase price paid. We estimate the terms of commercial servicing for each loan by assuming that servicing would not end prior to the yield maintenance date, if applicable, at which point the prepayment penalty expires.

        We evaluate the MSR portfolio for impairment on a quarterly basis based on the difference between the aggregate carrying amount of the MSRs and their aggregate fair value. We engage an independent third-party valuation expert to assist in determining an estimated fair value of our MSR portfolio on a quarterly basis. For purposes of impairment evaluation, the MSRs are stratified based on predominant risk characteristics of the underlying loans, which we have identified as loan type, note rate and yield maintenance provisions. To the extent that the carrying value of the MSRs exceeds fair value, a valuation allowance is established.

35



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

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

        Real Estate Owned and Held-For-Sale.    Real estate acquired is recorded at its estimated fair value at the time of acquisition and is shown net of accumulated depreciation and impairment charges. Costs incurred in connection with the acquisition of a property are expensed as incurred.

        We allocate the purchase price of our real estate acquisitions to land, building, tenant improvements, origination asset of the in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. We finalize our purchase price allocation on these assets within one year of the acquisition date. We amortize the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on our consolidated statements of income. The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

        Real estate assets are depreciated using the straight-line method over their estimated useful lives. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.

        Our properties are reviewed for impairment each quarter, if events or circumstances change indicating that the carrying amount of an asset may not be recoverable. We recognize impairment if the undiscounted estimated cash flows to be generated by an asset is less than the carrying amount of such asset. Measurement of impairment is based on the asset's estimated fair value. In the evaluation of a property for impairment, many factors are considered, including estimated current and expected operating cash flows from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the asset in the ordinary course of business. Impairment charges may be necessary in the event discount rates, capitalization rates, lease-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property.

        Real estate is classified as held-for-sale when we commit to a plan of sale, the asset is available for immediate sale, there is an active program to locate a buyer, and it is probable the sale will be completed within one year. Real estate assets that are expected to be disposed of are valued at the lower of the asset's carrying amount or its fair value less costs to sell.

        We recognize sales of real estate properties upon closing. Payments received from purchasers prior to closing are recorded as deposits. Gain on real estate sold is recognized using the full accrual method when the collectability of the sale price is reasonably assured and we are not obligated to perform significant activities after the sale. A gain may be deferred in whole or in part until collectability of the sales price is reasonably assured and the earnings process is complete.

36



ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

        Investments in Equity Affiliates.    We invest in joint ventures that are formed to invest in real estate related assets or businesses. These joint ventures are not majority owned or controlled by us, or are VIEs for which we are the primary beneficiary, and are not consolidated in our financial statements. These investments are recorded under either the equity or cost method of accounting as deemed appropriate. We evaluate these investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. We recognize an impairment loss if the estimated fair value of the investment is less than its carrying amount and we determine that the impairment is other-than-temporary. We record our share of the net income and losses from the underlying properties of our equity method investments and any other-than-temporary impairment on these investments on a single line item in the consolidated statements of income as income or losses from equity affiliates.

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

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

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

        Goodwill and indefinite-lived intangible assets are not amortized, while finite-lived intangible assets are amortized over the estimated useful lives of the assets on a straight-line basis. Indefinite-lived intangible assets, including goodwill, are tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In addition, with respect to goodwill, an impairment analysis is performed at least annually. We have elected to make the first day of our fiscal fourth quarter the annual impairment assessment date for goodwill. We first assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying value. If, based on that assessment, we believe it is more likely than not that the fair value is less than the carrying value, then a two-step goodwill impairment test is performed. Based on the impairment analysis performed as of October 1, 2017, there was no indication that the indefinite-lived intangible assets, including goodwill, were impaired and there were no events or changes in circumstances indicating impairment at December 31, 2017.

        Business Combinations.    Business combinations are accounted for under the acquisition method of accounting, under which the purchase price is allocated to the