10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32136
Arbor Realty Trust,
Inc.
(Exact name of registrant as
specified in its charter)
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Maryland
(State or other
jurisdiction
of incorporation)
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20-0057959
(I.R.S. Employer
Identification No.)
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333 Earle Ovington Boulevard, Suite 900
Uniondale, NY
(Address of principal
executive offices)
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11553
(Zip
Code)
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(516) 832-8002
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.01 per share
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The New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the proceeding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this Form
10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common
stock, all of which is voting, held by non-affiliates of the
registrant as of June 30, 2007 (computed based on the
closing price on such date as reported on the NYSE) was
$464.6 million. As of February 15, 2008, the
registrant had 20,606,107 shares of common stock
outstanding (excluding 279,400 shares held in treasury).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the
registrants 2008 Annual Meeting of Stockholders (the
2008 Proxy Statement), to be filed within
120 days after the end of the registrants fiscal year
ended December 31, 2007, are incorporated by reference into
Part III of this Annual Report on Form
10-K.
FORWARD
LOOKING STATEMENTS
This report contains certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
relate to, among other things, the operating performance of our
investments and financing needs. Forward-looking statements are
generally identifiable by use of forward-looking terminology
such as may, will, should,
potential, intend, expect,
endeavor, seek, anticipate,
estimate, overestimate,
underestimate, believe,
could, project, predict,
continue or other similar words or expressions.
Forward-looking statements are based on certain assumptions,
discuss future expectations, describe future plans and
strategies, contain projections of results of operations or of
financial condition or state other forward-looking information.
Our ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Although we believe
that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set
forth in the forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that
may cause our actual results in future periods to differ
materially from forecasted results. Factors that could have a
material adverse effect on our operations and future prospects
include, but are not limited to, changes in economic conditions
generally and the real estate market specifically; adverse
changes in the financing markets we access affecting our ability
to finance our loan and investment portfolio; changes in
interest rates; the quality and size of the investment pipeline
and the rate at which we can invest our cash; impairments in the
value of the collateral underlying our loans and investments;
changes in the markets; legislative/regulatory changes;
completion of pending investments; the availability and cost of
capital for future investments; competition within the finance
and real estate industries; and other risks detailed from time
to time in our SEC reports. Readers are cautioned not to place
undue reliance on any of these forward-looking statements, which
reflect our managements views as of the date of this
report. The factors noted above could cause our actual results
to differ significantly from those contained in any
forward-looking statement. For a discussion of our critical
accounting policies, see Managements Discussion and
Analysis of Financial Condition and Results of Operations of
Arbor Realty Trust, Inc. and Subsidiaries
Significant Accounting Estimates and Critical Accounting
Policies under Item 7 of this report.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
We are under no duty to update any of the forward-looking
statements after the date of this report to conform these
statements to actual results.
i
PART I
Overview
We are a specialized real estate finance company which invests
in a diversified portfolio of structured finance assets in the
multi-family and commercial real estate markets. We invest
primarily in real estate-related bridge and mezzanine loans,
including junior participating interests in first mortgages,
preferred and direct equity, and in limited cases, discounted
mortgage notes and other real estate-related assets, which we
refer to collectively as structured finance investments. We also
invest in mortgage-related securities. Our principal business
objective is to maximize the difference between the yield on our
investments and the cost of financing these investments to
generate cash available for distribution, facilitate capital
appreciation and maximize total return to our stockholders.
We are organized to qualify as a real estate investment trust
(REIT) for federal income tax purposes. A REIT is
generally not subject to federal income tax on that portion of
its REIT taxable income (Taxable Income) which is
distributed to its stockholders, provided that at least 90% of
Taxable Income is distributed and provided that certain other
requirements are met. Certain of our assets that produce
non-qualifying income are held in taxable REIT subsidiaries.
Unlike other subsidiaries of a REIT, the income of a taxable
REIT subsidiary is subject to federal and state income taxes.
We commenced operations in July 2003 and conduct substantially
all of our operations and investing activities through our
operating partnership, Arbor Realty Limited Partnership, and its
wholly-owned subsidiaries. We serve as the general partner of
our operating partnership, and own an approximately 84%
partnership interest in our operating partnership as of
December 31, 2007.
We are externally managed and advised by Arbor Commercial
Mortgage, LLC (ACM), a national commercial real
estate finance company which specializes in debt and equity
financing for multi-family and commercial real estate, pursuant
to the terms of a management agreement described below. We
believe ACMs experience and reputation positions it to
originate attractive investment opportunities for us. Our
management agreement with ACM was developed to capitalize on
synergies with ACMs origination infrastructure, existing
business relationships and management expertise.
We believe the financing of multi-family and commercial real
estate offers significant growth opportunities that demand
customized financing solutions. ACM has granted us a right of
first refusal to pursue all structured finance investment
opportunities in the multi-family or commercial real estate
markets that are identified by ACM or its affiliates. ACM
continues to originate and service multi-family and commercial
mortgage loans under Fannie Mae, Federal Housing Administration
and conduit commercial lending programs. We believe that the
customer relationships established from these lines of business
may generate additional real estate investment opportunities for
our business.
Our
Corporate History
On July 1, 2003, ACM contributed a portfolio of structured
finance investments to our operating partnership. Concurrently
with this contribution, we and our operating partnership entered
into a management agreement with ACM pursuant to which ACM
manages our investments for a base management fee and incentive
compensation, and the nine person asset management group of ACM
became our employees.
In exchange for ACMs contribution of structured finance
investments, our operating partnership issued approximately
3.1 million units of limited partnership interest, or
operating partnership units, and approximately 0.6 million
warrants to purchase additional operating partnership units at
an initial exercise price of $15.00 per operating partnership
unit to ACM. Concurrently, we, our operating partnership and ACM
entered into a pairing agreement. Pursuant to the pairing
agreement, each operating partnership unit issued to ACM and
issuable to ACM upon exercise of its warrants for additional
operating partnership units in connection with the contribution
of initial assets was paired with one share of the
Companys special voting preferred stock. In October 2004,
ACM exercised these warrants and currently holds approximately
3.8 million operating partnership units, constituting an
approximately 16% limited partnership interest in our operating
partnership. ACM may redeem each of these operating
1
partnership units for cash or, at our election, one share of our
common stock. We granted ACM certain demand and other
registration rights with respect to the shares of common stock
that may be issued upon redemption of these operating
partnership units. Each of these operating partnership units is
also paired with one share of our special voting preferred stock
entitling ACM to one vote on all matters submitted to a vote of
our stockholders. ACM currently holds approximately 20% of the
voting power of our outstanding stock. If ACM redeems these
operating partnership units, an equivalent number of shares of
our special voting preferred stock will be redeemed and
cancelled.
Concurrently with ACMs contribution of investments to our
operating partnership, we sold approximately 1.6 million of
our units, each consisting of five shares of our common stock
and one warrant to purchase an additional share of common stock
at an initial exercise price of $15.00 per share, for $75.00 per
unit in a private placement and agreed to register the shares of
common stock underlying these units and warrants for resale
under the Securities Act of 1933. In July 2004, we registered
approximately 9.6 million shares of common stock underlying
these units and warrants. As of December 31, 2005,
approximately 1.6 million warrants were exercised, of which
0.5 million were exercised cashless, for a
total of 1.3 million common shares issued pursuant to their
exercise.
In April 2004, we closed our initial public offering in which we
issued and sold 6.3 million shares of common stock and a
selling stockholder sold 22,500 shares of common stock,
each at $20.00 per share. Concurrently with the initial public
offering, we sold 0.5 million shares of common stock at the
initial public offering price directly to an entity wholly-owned
by one of our directors. The underwriters of our initial public
offering exercised their overallotment option and, in May 2004,
we issued and sold an additional 0.5 million shares of our
common stock pursuant to such exercise.
In March 2007, we filed a shelf registration statement on
Form S-3
with the SEC under the Securities Act of 1933, as amended (the
1933 Act) with respect to an aggregate of
$500.0 million of debt securities, common stock, preferred
stock, depositary shares and warrants, that may be sold by us
from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the SEC declared this
shelf registration statement effective.
In June 2007, we sold 2,700,000 shares of our common stock
registered on the shelf registration statement in a public
offering at a price of $27.65 per share, for net proceeds of
approximately $73.6 million after deducting the
underwriting discount and the other estimated offering expenses.
We used the proceeds to pay down debt and finance our loan and
investment portfolio. The underwriters did not exercise their
over allotment option for additional shares.
Since January 2005, we completed three non-recourse
collateralized debt obligation (CDO) transactions,
whereby $1.44 billion of real estate related and other
assets were contributed to three newly-formed consolidated
subsidiaries, which issued $1.21 billion of investment
grade-rated floating-rate notes in three separate private
placements. These proceeds were used to repay outstanding debt
and resulted in a decreased cost of funds relating to the CDO
assets.
Since March 2005, we issued a total of $276.1 million of
junior subordinated notes in nine separate private placements.
The junior subordinated notes are unsecured, have a maturity of
29 to 30 years, pay interest quarterly at a floating rate
of interest based on three-month LIBOR and, absent the
occurrence of special events, are not redeemable during the
first five years.
Our
Investment Strategy
Our principal business objectives are to invest in bridge and
mezzanine loans, including junior participating interests in
first mortgages, preferred and direct equity and other real
estate related assets in the multifamily and commercial real
estate markets and actively manage our investment portfolio in
order to generate cash available for distribution, facilitate
capital appreciation and maximize total return to our
stockholders. We believe we can achieve these objectives through
the following business and growth strategies:
Provide Customized Financing. We provide
financing customized to the needs of our borrowers. We target
borrowers who have demonstrated a history of enhancing the value
of the properties they operate, but
2
whose options may be limited by conventional bank financing and
who may benefit from the sophisticated structured finance
products we offer.
Execute Transactions Rapidly. We act quickly
and decisively on proposals, provide commitments and close
transactions within a few weeks and sometimes days, if required.
We believe that rapid execution attracts opportunities from both
borrowers and other lenders that would not otherwise be
available. We believe our ability to structure flexible terms
and close loans in a timely manner gives us a competitive
advantage over lending firms that also primarily serve this
market.
Manage and Maintain Credit Quality. A critical
component of our success in the real estate finance sector is
our ability to manage the real estate risk that is underwritten
by our manager and us. We actively manage and maintain the
credit quality of our portfolio by using the expertise of our
asset management group, which has a proven track record of
structuring and repositioning structured finance investments to
improve credit quality and yield.
Use Arbor Commercial Mortgages Relationships with
Existing Borrowers. We capitalize on ACMs
reputation in the commercial real estate finance industry. ACM
has relationships with a large borrower base nationwide. Since
ACMs originators offer senior mortgage loans as well as
our structured finance products, we are able to benefit from its
existing customer base and use its senior lending business as a
potential refinance vehicle for our structured finance assets.
Offer Broader Products and Expand Customer
Base. We have the ability to offer a larger
number of financing alternatives than ACM has been able to offer
to its customers in the past. Our potential borrowers are able
to choose from products offering longer maturities and larger
principal amounts than ACM could previously offer.
Leverage the Experience of Executive Officers and Arbor
Commercial Mortgage and Our Employees. Our
executive officers and employees, and those of ACM, have
extensive experience originating and managing structured
commercial real estate investments. Our senior management team
has on average over 20 years of experience in the financial
services industry.
Our
Targeted Investments
We actively pursue lending and investment opportunities with
property owners and developers who need interim financing until
permanent financing can be obtained. We primarily target
transactions under $40 million where we believe we have
competitive advantages, particularly our lower cost structure
and in-house underwriting capabilities. Our structured finance
investments generally have maturities of two to five years,
depending on type, have extension options when appropriate, and
generally require a balloon payment of principal at maturity.
Borrowers in the market for these types of loans include, but
are not limited to, owners or developers seeking either to
acquire or refurbish real estate or to pay down debt and
reposition a property for permanent financing.
Our investment program emphasizes the following general
categories of real estate related activities:
Bridge Financing. We offer bridge financing
products to borrowers who are typically seeking short term
capital to be used in an acquisition of property. The borrower
has usually identified an undervalued asset that has been under
managed
and/or is
located in a recovering market. From the borrowers
perspective, shorter term bridge financing is advantageous
because it allows time to improve the property value through
repositioning the property without encumbering it with
restrictive long term debt.
The bridge loans we make typically range in size from
$1 million to $75 million and are predominantly
secured by first mortgage liens on the property. The term of
these loans typically is up to five years. Historically,
interest rates have typically ranged from 2.50% to 9.00% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 13.00%. In 2007,
interest rates have typically ranged from 1.15% to 6.00% over
30-day
LIBOR, with fixed rates ranging from 6.30% to 12.00%. Additional
yield enhancements may include origination fees, deferred
interest, yield look-backs, and participating interests, which
are equity interests in the borrower that share in a percentage
of the underlying cash flows of the property. Borrowers
generally use the proceeds of a conventional mortgage to repay a
bridge loan.
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Junior Participation Financing. We offer
junior participation financing in the form of junior
participating interest in the senior debt. Junior participation
financings have the same obligations, collateral and borrower as
the senior debt. The junior participation interest is
subordinated to the senior debt by virtue of a contractual
agreement between the senior debt lender and the junior
participating interest lender.
Our junior participation loans typically range in size from
$1 million to $60 million and have terms of up to ten
years. Historically, interest rates have typically ranged from
2.75% to 9.75% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 12.80%. In 2007,
interest rates have typically ranged from 2.75% to 4.50% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 12.80%. As in the
case with our bridge loans, the yield on these investments may
be enhanced by prepaid and deferred interest payments, yield
look-backs and participating interests.
Mezzanine Financing. We offer mezzanine
financing in the form of loans that are subordinate to a
conventional first mortgage loan and senior to the
borrowers equity in a transaction. Mezzanine financing may
take the form of loans secured by pledges of ownership interests
in entities that directly or indirectly control the real
property or subordinated loans secured by second mortgage liens
on the property. We may also require additional security such as
personal guarantees, letters of credit
and/or
additional collateral unrelated to the property.
Our mezzanine loans typically range in size from $1 million
to $50 million and have terms of up to ten years.
Historically, interest rates have typically ranged from 2.00% to
12.00% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 15.00%. In 2007,
interest rates have typically ranged from 2.50% to 8.15% over
30-day
LIBOR, with fixed rates ranging from 6.00% to 10.70%. As in the
case with our bridge loans, the yield on these investments may
be enhanced by prepaid and deferred interest payments, yield
look-backs and participating interests.
We hold a majority of our mezzanine loans through subsidiaries
of our operating partnership that are pass-through entities for
tax purposes or taxable subsidiary corporations.
Preferred Equity Investments. We provide
financing by making preferred equity investments in entities
that directly or indirectly own real property. In cases where
the terms of a first mortgage prohibit additional liens on the
ownership entity, investments structured as preferred equity in
the entity owning the property serve as viable financing
substitutes. With preferred equity investments, we typically
become a special limited partner or member in the ownership
entity.
Our preferred equity investments typically range in size from
$0.3 million to $11.0 million, have terms up to ten
years and interest rates that have typically ranged from 4.50%
to 5.50% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 15.00%. In 2007,
our preferred equity investments ranged in size from
$0.3 million to $115.0 million and interest rates have
typically ranged from 3.75% to 6.00% over
30-day
LIBOR, with fixed rates ranging from 7.75% to 11.40%.
Real Property Acquisitions. We may purchase
existing domestic real estate for repositioning
and/or
renovation and then disposition at an anticipated significant
return. From time to time, we may identify real estate
investment opportunities. In these situations, we may act solely
on our own behalf or in partnership with other investors.
Typically, these transactions are analyzed with the expectation
that we will have the ability to sell the property within a one
to three year time period, achieving a significant return on
invested capital. In connection with these transactions, speed
of execution is often the most critical component to success. We
may seek to finance a portion of the acquisition price through
short term financing. Repayment of the short term financing will
either come from the sale of the property or conventional
permanent debt.
Note Acquisitions. We may acquire real estate
notes from lenders in situations where the borrower wishes to
restructure and reposition its short term debt and the lender
wishes, for a variety of reasons (such as risk mitigation,
portfolio diversification or other strategic reasons), to divest
certain assets from its portfolio. These notes may be acquired
at a discount. In such cases, we intend to use our management
resources to resolve any dispute concerning the note or the
property securing it and to identify and resolve any existing
operational or any other problems at the property. We will then
either restructure the debt obligation for
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immediate resale or sale at a later date, or reposition it for
permanent financing. In some instances, we may take title to the
property underlying the real estate note.
Agency Sponsored Whole Loan Pool
Certificates. We have and may, in the future,
invest in certificates issued by the Government National
Mortgage Association, or Ginnie Mae, Federal National Mortgage
Association, or Fannie Mae, or the Federal Home Loan Mortgage
Association, or Freddie Mac, that are collateralized by whole
pools of residential or commercial, fixed or adjustable rate
mortgage loans. These certificates entitle the investor to
monthly payments of interest and principal that, in effect, are
a pass-through of the monthly payments made by the
borrowers on the underlying mortgage loans and the repayment of
the principal of the underlying mortgage loans, whether prepaid
or paid at maturity. Their yield and maturity characteristics
differ from conventional fixed-income securities because their
principal amount may be prepaid at any time without penalty due
to the fact that the underlying mortgage loans may be prepaid at
any time. Therefore, they may have less potential for growth in
value than conventional fixed-income securities with comparable
maturities. To the extent that we purchase agency-sponsored
whole loan pool certificates at a premium, prepayments may
result in loss of our principal investment to the extent of the
premium paid.
Our
Structured Finance Investments
We own a diversified portfolio of structured finance investments
consisting primarily of real estate-related bridge, junior
participation interests in first mortgages, and mezzanine loans
as well as preferred equity investments and mortgage-related
securities.
At December 31, 2007, we had 147 loans and investments in
our portfolio, totaling $2.6 billion. These loans and
investments were for 70 multi-family properties, 34 office
properties, 15 hotel properties, 12 land properties, seven
commercial properties, five condominium properties, and four
retail properties. We have an allowance for loan losses of
$2.5 million at December 31, 2007 related to two
multifamily loans in our portfolio with an aggregate outstanding
principal balance of $58.5 million. The loan loss reserves
were the result of our regular quarterly risk rating review
process which is based on several factors including current
market conditions, values and the operating status of these
properties. We continue to actively manage all loans and
investments in the portfolio and believe that our strict
underwriting and active asset management enable us to maintain
the credit quality of our portfolio.
The overall yield on our portfolio in 2007 was 9.34%, excluding
the impact from the recognition of $37.6 million of
interest income from equity and profits interests in our loans
and investment portfolio for 2007, on average assets of
$2.4 billion. This yield was computed by dividing the
interest income earned during the year by the average assets
during the year. Our cost of funds in 2007 was 6.76% on average
borrowings of $2.2 billion. This cost of funds was computed
by dividing the interest expense incurred during the year by the
average borrowings during the year.
Our average net investment (average assets less average
borrowings) in 2007 was $255.2 million, resulting in
average leverage (average borrowings divided by average assets)
of 89.5%. Including average trust preferred securities of
$261.3 million as equity, our average leverage was 78.8%.
The net interest income earned in 2007 yielded a 46.1% return on
our average net investment during the year. This yield was
computed by dividing net interest (interest income less interest
expense) earned in 2007 by average equity (computed as average
assets minus average borrowings) invested during the year.
Our business plan contemplates that our leverage ratio,
including our trust preferred securities as equity, will be
approximately 70% to 80% of our assets in the aggregate.
However, including our trust preferred securities as equity, our
leverage will not exceed 80% of the value of our assets in the
aggregate unless approval to exceed the 80% limit is obtained
from our board of directors. At December 31, 2007, our
overall leverage ratio including the trust preferred securities
as equity was 74%.
5
The following table set forth information regarding our loan and
investment portfolio as of December 31, 2007:
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Weighted Average
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Unpaid Principal
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Weighted Average
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Remaining
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Type
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Asset Class
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Number
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(Dollars in thousands)
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Pay Rate
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Maturity (months)
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Bridge Loans
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Multi Family
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24
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$
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497,360
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7.37
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%
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27.5
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Office
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14
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336,348
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7.17
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%
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42.3
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Hotel
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8
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285,806
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7.23
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%
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8.9
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Condo
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3
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179,953
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8.37
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%
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15.2
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Commercial
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3
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58,943
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7.38
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%
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23.3
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Land
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11
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279,598
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9.99
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%
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15.8
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Retail
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2
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8,498
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8.21
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%
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6.6
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65
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1,646,506
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7.86
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%
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23.7
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Mezzanine Loans
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Multi Family
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24
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122,208
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10.04
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%
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41.1
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Office
|
|
|
9
|
|
|
|
153,171
|
|
|
|
9.26
|
%
|
|
|
38.6
|
|
|
|
Hotel
|
|
|
2
|
|
|
|
30,000
|
|
|
|
7.60
|
%
|
|
|
17.0
|
|
|
|
Condo
|
|
|
2
|
|
|
|
40,291
|
|
|
|
10.71
|
%
|
|
|
13.7
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
25,810
|
|
|
|
8.35
|
%
|
|
|
37.3
|
|
|
|
Land
|
|
|
1
|
|
|
|
10,000
|
|
|
|
|
|
|
|
41.0
|
|
|
|
Retail
|
|
|
1
|
|
|
|
3,000
|
|
|
|
9.60
|
%
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
384,480
|
|
|
|
9.23
|
%
|
|
|
34.8
|
|
Junior Participations
|
|
Multi Family
|
|
|
5
|
|
|
|
98,400
|
|
|
|
7.52
|
%
|
|
|
51.6
|
|
|
|
Office
|
|
|
9
|
|
|
|
186,550
|
|
|
|
7.56
|
%
|
|
|
65.0
|
|
|
|
Hotel
|
|
|
3
|
|
|
|
38,726
|
|
|
|
8.53
|
%
|
|
|
21.5
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
3,645
|
|
|
|
7.77
|
%
|
|
|
34.0
|
|
|
|
Retail
|
|
|
1
|
|
|
|
13,500
|
|
|
|
8.51
|
%
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
340,821
|
|
|
|
7.70
|
%
|
|
|
53.4
|
|
Preferred Equity
|
|
Multi Family
|
|
|
17
|
|
|
|
81,888
|
|
|
|
8.48
|
%
|
|
|
110.0
|
|
|
|
Office
|
|
|
2
|
|
|
|
23,500
|
|
|
|
9.83
|
%
|
|
|
53.1
|
|
|
|
Hotel
|
|
|
1
|
|
|
|
115,000
|
|
|
|
10.00
|
%
|
|
|
54.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
220,388
|
|
|
|
9.42
|
%
|
|
|
74.7
|
|
Other
|
|
Hotel
|
|
|
1
|
|
|
|
1,790
|
|
|
|
7.39
|
%
|
|
|
188.0
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
9,610
|
|
|
|
8.10
|
%
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
11,400
|
|
|
|
7.99
|
%
|
|
|
76.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
147
|
|
|
$
|
2,603,595
|
|
|
|
8.18
|
%
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth geographic and asset class
information regarding our loan and investment portfolio as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
Geographic Location
|
|
(Dollars in thousands)
|
|
|
Percentage(1)
|
|
|
Asset Class
|
|
(Dollars in thousands)
|
|
|
Percentage(1)
|
|
|
New York
|
|
$
|
1,167,138
|
|
|
|
44.8
|
%
|
|
Multi Family
|
|
$
|
799,855
|
|
|
|
30.7
|
%
|
Florida
|
|
|
291,766
|
|
|
|
11.2
|
%
|
|
Office
|
|
|
699,569
|
|
|
|
26.9
|
%
|
California
|
|
|
221,799
|
|
|
|
8.5
|
%
|
|
Hotel
|
|
|
471,323
|
|
|
|
18.1
|
%
|
Michigan
|
|
|
103,602
|
|
|
|
4.0
|
%
|
|
Land
|
|
|
289,598
|
|
|
|
11.1
|
%
|
Maryland
|
|
|
100,790
|
|
|
|
3.9
|
%
|
|
Condo
|
|
|
220,244
|
|
|
|
8.4
|
%
|
Texas
|
|
|
86,039
|
|
|
|
3.3
|
%
|
|
Commercial
|
|
|
98,008
|
|
|
|
3.8
|
%
|
Other(2)
|
|
|
275,905
|
|
|
|
10.6
|
%
|
|
Retail
|
|
|
24,998
|
|
|
|
1.0
|
%
|
Diversified
|
|
|
356,556
|
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,603,595
|
|
|
|
100
|
%
|
|
Total
|
|
$
|
2,603,595
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on a percentage of the total
unpaid principal balance of the underlying loans.
|
|
(2)
|
|
No other individual state makes up
more than 2% of the total.
|
6
Our
Investments in Available for Sale Securities
Agency Sponsored Whole Loan Pool
Certificates. We purchased $57.4 million
face amount of
agency-sponsored
whole loan pool certificates in 2004 and we sold these
investments in the first quarter of 2007. The underlying
mortgage loans bore interest at a fixed rate for the first three
years and adjusted annually thereafter, beginning in March 2007,
and had a weighted average coupon rate of 3.8%. As of
December 31, 2006, we financed these investments pursuant
to a $100.0 million repurchase agreement, maturing in July
2007, at a rate of one-month LIBOR plus 0.20%. As of
December 31, 2006, the amortized cost of these investments
was $22.2 million and the amount outstanding on the related
repurchase agreement was $20.7 million. These investments
had been in an unrealized loss position for more than twelve
months as of December 31, 2006, but they recovered their
fair value during the first quarter of 2007 in conjunction with
a change in their interest rates. When we sold these securities
in 2007, we recorded a gain of $30,182 on the sale and also
repaid the related repurchase agreement.
Equity Securities. During 2007, we purchased
2,939,465 shares of common stock of CBRE Realty Finance,
Inc., a commercial real estate specialty finance company, which
had a fair value of $15.7 million, at December 31,
2007. We also have a margin loan agreement with a financial
institution related to the purchases of this security which may
not exceed $7.0 million, bears interest at pricing over
LIBOR, and is due upon demand from the lender. The balance of
the margin loan agreement was approximately $7.0 million at
December 31, 2007.
Regulatory
Aspects of Our Investment Strategy
Real Estate Exemption from Investment Company
Act. We believe that we conduct, and we intend to
conduct, our business at all times in a manner that avoids
registration as an investment company under the Investment
Company Act of 1940, as amended, or the Investment Company Act.
Entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate, are exempt from
registration under the Investment Company Act if they maintain
at least 55% of their assets directly in qualifying real estate
assets and meet certain other requirements. Assets that qualify
for purposes of this 55% test include, among other things,
direct investments in real estate, mortgage loans and
agency-sponsored whole loan pool certificates. Our bridge loans,
which are secured by first mortgage liens on the underlying
properties, and our loans that are secured by second mortgage
liens on the underlying properties generally qualify for
purposes of this 55% test. These two types of loans constituted
more than 55% of our assets as of December 31, 2007.
During the first quarter of 2004, we purchased
$57.4 million face amount of aggregate principal amount of
agency-sponsored whole loan pool certificates and sold them in
March 2007. We may invest in additional
agency-sponsored
whole loan pool certificates in the future if we determine that
we need to purchase such certificates for purposes of meeting
the 55% test. If the SEC takes a position or makes an
interpretation more favorable to us, we may have greater
flexibility in the investments we may make. Our investment
guidelines provide that no more than 15% of our assets may
consist of any type of mortgage-related securities, such as
agency-sponsored whole loan pool certificates, and that the
percentage of our investments in mortgage-related securities as
compared to our structured finance investments be monitored on a
regular basis.
Management
Agreement
On July 1, 2003, we and our operating partnership entered
into a management agreement with ACM. On January 19, 2005,
we, our operating partnership, Arbor Realty SR, Inc., one of our
subsidiaries and ACM entered into an amended and restated
management agreement with substantially the same terms as the
original management agreement in order to add Arbor Realty SR,
Inc. as a beneficiary of ACMs services. Pursuant to the
terms of the management agreement, our manager has agreed to
service and manage our investments and to provide us with
multi-family and commercial real estate-related structured
finance investment opportunities, finance and other services
necessary to operate our business. Our manager is required to
provide a dedicated management team to provide these services to
us, the members of which will devote such of their time to our
management as our independent directors reasonably deem
necessary and appropriate, commensurate with our level of
activity from time to time. We rely to a significant extent on
the facilities and resources of our manager to conduct our
operations. For performing services under the management
agreement, ACM receives a base management fee and incentive
7
compensation calculated as described in Managements
Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this report.
Operations
Our Managers Investment Services. Under
the management agreement, ACM is responsible for sourcing
originations, providing underwriting services and processing
approvals for all loans and other investments in our portfolio.
ACM also provides certain administrative loan servicing
functions with respect to our loans and investments. We are able
to capitalize on ACMs well established operations and
services in each area described below.
Origination. Our manager sources the
origination of most of our investments. ACM has a network of
seven sales offices located in Bloomfield Hills, Michigan;
Boston, Massachusetts; Seattle, Washington; Plano, Texas;
Dallas, Texas; New York, New York; and Uniondale, New York.
These offices are staffed by approximately 14 loan originators
who solicit property owners, developers and mortgage loan
brokers. In some instances, the originators accept loan
applications meeting our underwriting criteria from a select
group of mortgage loan brokers. While a large portion of
ACMs marketing effort occurs at the branch level, ACM also
markets its products in national industry publications and
targeted direct mailings. ACM markets structured finance
products and our product offerings using the same methods. Once
potential borrowers have been identified, ACM determines which
financing products best meet the borrowers needs. Loan
originators in every branch office are able to offer borrowers
the full array of ACMs and our structured finance
products. After identifying a suitable product, ACM works with
the borrower to prepare a loan application. Upon completion by
the borrower, the application is forwarded to ACMs
underwriters for due diligence.
Underwriting. ACMs loan originators work
in conjunction with its underwriters who perform due diligence
on all proposed transactions prior to loan approval and
commitment. The underwriters analyze each loan application in
accordance with the guidelines set forth below in order to
determine the loans conformity with respect to such
guidelines. In general, ACMs underwriting guidelines
require it to evaluate the following: the historic and current
property revenues and expenses; the potential for near-term
revenue growth and opportunity for expense reduction and
increased operating efficiencies; the propertys location,
its attributes and competitive position within its market; the
proposed ownership structure, financial strength and real estate
experience of the borrower and property management; third party
appraisal, environmental and engineering studies; market
assessment, including property inspection, review of tenant
lease files, surveys of property comparables and an analysis of
area economic and demographic trends; review of an acceptable
mortgagees title policy and an as built
survey; construction quality of the property to determine future
maintenance and capital expenditure requirements; and the
requirements for any reserves, including those for immediate
repairs or rehabilitation, replacement reserves, tenant
improvement and leasing commission costs, real estate taxes and
property casualty and liability insurance. Key factors
considered in credit decisions include, but are not limited to,
debt service coverage, loan to value ratios and property,
financial and operating performance. Consideration is also given
to other factors, such as additional forms of security and
identifying likely strategies to effect repayment. ACM will
refine its underwriting criteria based upon actual loan
portfolio experience and as market conditions and investor
requirements evolve.
Investment Approval Process. ACM applies its
established investment approval process to all loans and other
investments proposed for our portfolio before submitting each
proposal to us for final approval. A written report is generated
for every loan or other investment that is submitted to
ACMs credit committee for approval. The report includes a
description of the prospective borrower and any guarantors, the
collateral and the proposed use of investment proceeds, as well
as borrower and property consolidated financial statements and
analysis. In addition, the report includes an analysis of
borrower liquidity, net worth, cash investment, income, credit
history and operating experience. If the transaction is approved
by a majority of ACMs credit committee, it is presented
for approval to our credit committee, which consists of our
chief executive officer, chief credit officer, and executive
vice president of structured finance. All transactions require
the approval of a majority of the members of our credit
committee. Following the approval of any such transaction,
ACMs underwriting and servicing departments, together with
our asset management group, assure that all loan approval terms
have been satisfied and that they conform with lending
requirements established for that particular transaction. If our
credit committee rejects the
8
loan and our independent directors allow ACM or one of its
affiliates to pursue it, ACM will have the opportunity to
execute the transaction.
Servicing. ACM services our loans and
investments through its internal servicing operations. Our
manager currently services an expanding portfolio, consisting of
approximately 794 loans with outstanding balances of
$5.3 billion through its loan administration department in
Buffalo, New York. ACMs loan servicing operations are
designed to provide prompt customer service and accurate and
timely information for account follow up, financial reporting
and management review. Following the funding of an approved
loan, all pertinent loan data is entered into ACMs data
processing system, which provides monthly billing statements,
tracks payment performance and processes contractual interest
rate adjustments on variable rate loans. Our manager utilizes
the operations of its loan administration department to service
our portfolio with the same efficiency, accuracy, and
promptness. ACM also works closely with our asset management
group to ensure the appropriate level of customer service and
monitoring of these loans.
Our Asset Management Operations. Our asset
management group is comprised of 19 of our employees. Prior to
our formation, the asset management group successfully managed
numerous transactions, including complex restructurings,
refinancings and asset dispositions for ACM.
Effective asset and portfolio management is essential to
maximizing the performance and value of a real estate
investment. The asset management group customizes an asset
management plan with the loan originators and underwriters to
track each investment from origination through disposition. This
group monitors each investments operating history, local
economic trends and rental and occupancy rates and evaluates the
underlying propertys competitiveness within its market.
This group assesses ongoing and potential operational and
financial performance of each investment in order to evaluate
and ultimately improve its operations and financial viability.
The asset management group performs frequent onsite inspections,
conducts meetings with borrowers and evaluates and participates
in the budgeting process, financial and operational review and
renovation plans of each of the underlying properties. As an
asset and portfolio manager, the asset management group focuses
on increasing the productivity of onsite property managers and
leasing brokers. This group communicates the status of each
transaction against its established asset management plan to
senior management, in order to enhance and preserve capital, as
well as to avoid litigation and potential exposure.
Timely and accurate identification of an investments
operational and financial issues and each borrowers
objectives is essential to implementing an executable loan
workout and restructuring process, if required. Since existing
property management may not have the requisite expertise to
manage the workout process effectively, the asset management
group determines current operating and financial status of an
asset or portfolio and performs liquidity analysis of properties
and ownership entities and then, if appropriate, identifies and
evaluates alternatives in order to maximize the value of an
investment.
Our asset management group continues to provide its services to
ACM on a limited basis pursuant to an asset management services
agreement between ACM and us. The asset management services
agreement will be effective throughout the term of our
management agreement and during the origination period described
in the management agreement. In the event the services provided
by our asset management group pursuant to this agreement exceed
by more than 15% per quarter the level anticipated by our board
of directors, we will negotiate in good faith with our manager
an adjustment to our managers base management fee under
the management agreement, to reduce the scope of the services,
the quantity of serviced assets or the time required to be
devoted to the services by our asset management group.
Operating
Policies and Strategies
Investment Guidelines. Our board of directors
has adopted general guidelines for our investments and
borrowings to the effect that: (1) no investment will be
made that would cause us to fail to qualify as a REIT;
(2) no investment will be made that would cause us to be
regulated as an investment company under the Investment Company
Act; (3) no more than 25% of our equity (including trust
preferred securities as equity), determined as of the date of
such investment, will be invested in any single asset;
(4) no single mezzanine loan or preferred equity investment
will exceed $75 million; (5) our leverage (including
trust preferred securities as equity) will generally not exceed
80% of the value of our assets, in the aggregate; (6) we
will not co-invest with our manager or any of its
9
affiliates unless such co-investment is otherwise in accordance
with these guidelines and its terms are at least as favorable to
us as to our manager or the affiliate making such co-investment;
(7) no more than 15% of our gross assets may consist of
mortgage-related securities. Any exceptions to the above general
guidelines require the approval of our board of directors.
Financing Policies. We finance the acquisition
of our structured finance investments primarily by borrowing
against or leveraging our existing portfolio and
using the proceeds to acquire additional mortgage assets. We
expect to incur debt such that we will maintain an equity to
assets ratio no less than 20% (including trust preferred
securities as equity), although the actual ratio may be lower
from time to time depending on market conditions and other
factors deemed relevant by our manager. Our charter and bylaws
do not limit the amount of indebtedness we can incur, and the
board of directors has discretion to deviate from or change our
indebtedness policy at any time. However, we intend to maintain
an adequate capital base to protect against various business
environments in which our financing and hedging costs might
exceed the interest income from our investments.
Our investments are financed primarily by collateralized debt
obligations, our variable rate junior subordinate notes, and
through our floating rate warehouse lines of credit, term and
revolving credit agreements, loan repurchase agreements and
other financing facilities with institutional lenders. Although
we expect that these will be the principal means of leveraging
our investments, we may issue preferred stock or secured or
unsecured notes of any maturity if it appears advantageous to do
so.
Credit Risk Management Policy. We are exposed
to various levels of credit and special hazard risk depending on
the nature of our underlying assets and the nature and level of
credit enhancements supporting our assets. We originate or
purchase mortgage loans that meet our minimum debt service
coverage standards. ACM, as our manager, our chief credit
officer, and our asset management group, reviews and monitors
credit risk and other risks of loss associated with each
investment. In addition, ACM seeks to diversify our portfolio of
assets to avoid undue geographic, issuer, industry and certain
other types of concentrations. Our board of directors monitors
the overall portfolio risk and reviews levels of provision for
loss.
Interest Rate Risk Management Policy. To the
extent consistent with our election to qualify as a REIT, we
follow an interest rate risk management policy intended to
mitigate the negative effects of major interest rate changes. We
minimize our interest rate risk from borrowings by attempting to
structure the key terms of our borrowings to generally
correspond to the interest rate term of our assets.
We may enter into hedging transactions to protect our investment
portfolio from interest rate fluctuations and other changes in
market conditions. These transactions may include interest rate
swaps, the purchase or sale of interest rate collars, caps or
floors, options, mortgage derivatives and other hedging
instruments. These instruments may be used to hedge as much of
the interest rate risk as ACM determines is in the best interest
of our stockholders, given the cost of such hedges and the need
to maintain our status as a REIT. In general, income from
hedging transactions does not constitute qualifying income for
purposes of the REIT gross income requirements. To the extent,
however, that a hedging contract reduces interest rate risk on
indebtedness incurred to acquire or carry real estate assets,
any income that is derived from the hedging contract, while
comprising non-qualifying income for purposes of the REIT 75%
gross income test, would not give rise to non-qualifying income
for purposes of the 95% gross income test. ACM may elect to have
us bear a level of interest rate risk that could otherwise be
hedged when it believes, based on all relevant facts, that
bearing such risk is advisable.
To date, we have entered into various interest rate swaps in
connection with the issuance of floating rate secured notes, the
issuance of variable rate junior subordinate notes, and to hedge
the interest risk on forecasted outstanding LIBOR based debt.
The notional amount of each interest rate swap agreement and the
related terms have been designed to protect our investment
portfolio from interest rate risk and to match the payment and
receipts of interest on the underlying debt instruments, where
applicable.
Disposition Policies. Although there are no
current plans to dispose of properties or other assets within
our portfolio, ACM evaluates our asset portfolio on a regular
basis to determine if it continues to satisfy our investment
criteria. Subject to certain restrictions applicable to REITs,
ACM may cause us to sell our investments opportunistically and
use the proceeds of any such sale for debt reduction, additional
acquisitions, or working capital purposes.
10
Equity Capital Policies. Subject to applicable
law, our board of directors has the authority, without further
stockholder approval, to issue additional authorized common
stock and preferred stock or otherwise raise capital, including
through the issuance of senior securities, in any manner and on
the terms and for the consideration it deems appropriate,
including in exchange for property. We may in the future issue
common stock in connection with acquisitions. We also may issue
units of partnership interest in our operating partnership in
connection with acquisitions of property. We may, under certain
circumstances, repurchase our common stock in private
transactions with our stockholders, if those purchases are
approved by our board of directors. In August 2006, our board of
directors approved a stock repurchase plan pursuant to which we
purchased an aggregate of 279,400 shares. The plan expired
in February 2007.
Conflicts of Interest Policies. We, our
executive officers, and ACM face conflicts of interests because
of our relationships with each other. ACM currently has an
approximate 16% limited partnership interest in our operating
partnership. Mr. Kaufman, our chairman and chief executive
officer, is the chief executive officer of ACM and beneficially
owns approximately 90% of the outstanding membership interests
of ACM. Mr. Martello, one of our directors, is the chief
operating officer of Arbor Management, LLC (the managing member
of ACM) and a trustee of two trusts which own minority
membership interests in ACM. Mr. Elenio, our chief
financial officer and treasurer, is the chief financial officer
of ACM. Mr. Horn, our secretary and one of our directors,
is the secretary of ACM. Each of Messrs. Kaufman, Martello,
Elenio and Horn, as well as Mr. Weber, our executive vice
president of structured finance and Mr. Kilgore, our
executive vice president of structured securitization are
members of ACMs executive committee. Each of
Messrs. Kaufman, Martello, Elenio, Horn, Weber, Kilgore,
and Mr. Fogel, our senior vice president of asset
management, own minority membership interests in ACM.
We have implemented several policies, through board action and
through the terms of our charter and our agreements with ACM, to
help address these conflicts of interest, including the
following:
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Our charter requires that a majority of our board of directors
be independent directors and that only our independent directors
make any determination on our behalf with respect to the
relationships or transactions that present a conflict of
interest for our directors or officers.
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Our board of directors has adopted a policy that decisions
concerning our management agreement with ACM, including
termination, renewal and enforcement thereof or our
participation in any transactions with ACM or its affiliates
outside of the management agreement, including our ability to
purchase securities and mortgages or other assets from ACM, or
our ability to sell securities and assets to ACM, must be
reviewed and approved by a majority of our independent directors.
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Our management agreement provides that our determinations to
terminate the management agreement for cause or because the
management fees are unfair to us or because of a change in
control of our manager, will be made by a majority vote of our
independent directors.
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Our independent directors will periodically review the general
investment standards established by ACM under the management
agreement.
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Our management agreement with ACM provides that ACM may not
assign duties under the management agreement, except to certain
affiliates of ACM, without the approval of a majority of our
independent directors.
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Our management agreement provides that decisions to approve or
reject investment opportunities rejected by our credit committee
that ACM or Mr. Kaufman wish to pursue will be made by a
majority of our independent directors.
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Our board of directors has approved the operating policies and
the strategies set forth above. Our board of directors has the
power to modify or waive these policies and strategies, or amend
our agreements with ACM, without the consent of our stockholders
to the extent that the board of directors (including a majority
of our independent directors) determines that such modification
or waiver is in the best interest of our stockholders. Among
other factors, developments in the market that either affect the
policies and strategies mentioned herein or that change our
assessment of the market may cause our board of directors to
revise its policies and strategies. However, if such
modification or waiver involves the relationship of, or any
transaction between, us and our
11
manager or any affiliate of our manager, the approval of a
majority of our independent directors is also required. We may
not, however, amend our charter to change the requirement that a
majority of our board consist of independent directors or the
requirement that our independent directors approve related party
transactions without the approval of two thirds of the votes
entitled to be cast by our stockholders.
Compliance
with Federal, State and Local Environmental Laws
Properties that we may acquire directly or indirectly through
partnerships, and the properties underlying our structured
finance investments and mortgage-related securities, are subject
to various federal, state and local environmental laws,
ordinances and regulations. Under these laws, ordinances and
regulations, a current or previous owner of real estate
(including, in certain circumstances, a secured lender that
succeeds to ownership or control of a property) may become
liable for the costs of removal or remediation of certain
hazardous or toxic substances or petroleum product releases at,
on, under or in its property. These laws typically impose
cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the
release or presence of the hazardous or toxic substances. The
costs of investigation, remediation or removal of these
substances may be substantial and could exceed the value of the
property. An owner or control party of a site may be subject to
common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a
site. Certain environmental laws also impose liability in
connection with the handling of or exposure to materials
containing asbestos. These laws allow third parties to seek
recovery from owners of real properties for personal injuries
associated with materials containing asbestos. Our operating
costs and the values of these assets may be adversely affected
by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the
cost of complying with future legislation, and our income and
ability to make distributions to our stockholders could be
affected adversely by the existence of an environmental
liability with respect to properties we may acquire. We will
endeavor to ensure that these properties are in compliance in
all material respects with all federal, state and local laws,
ordinances and regulations regarding hazardous or toxic
substances or petroleum products.
Competition
Our net income depends, in large part, on our managers
ability to originate structured finance investments with spreads
over our borrowing costs. In originating these investments, our
manager competes with other mortgage REITs, specialty finance
companies, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, institutional
investors, investment banking firms, other lenders, governmental
bodies and other entities, some of which may have greater
financial resources and lower costs of capital available to
them. In addition, there are numerous mortgage REITs with asset
acquisition objectives similar to ours, and others may be
organized in the future. The effect of the existence of
additional REITs may be to increase competition for the
available supply of structured finance assets suitable for
purchase by us. Competitive variables include market presence
and visibility, size of loans offered and underwriting
standards. To the extent that a competitor is willing to risk
larger amounts of capital in a particular transaction or to
employ more liberal underwriting standards when evaluating
potential loans, our origination volume and profit margins for
our investment portfolio could be impacted. Our competitors may
also be willing to accept lower returns on their investments and
may succeed in buying the assets that we have targeted for
acquisition. Although management believes that we are well
positioned to continue to compete effectively in each facet of
our business, there can be no assurance that we will do so or
that we will not encounter further increased competition in the
future that could limit our ability to compete effectively.
Employees
We have 29 employees, including Messrs Weber, Kilgore,
Fogel and Horn, Mr. Kovarik, our chief credit officer, and
Mr. House, our senior vice president of loan acquisitions
and a 19 person asset management group. Mr. Kaufman,
our chief executive officer and Mr. Elenio, our chief
financial officer are full time employees of ACM and are not
compensated by us (other than pursuant to our equity incentive
plans).
12
Corporate
Governance and Internet Address
We have adopted corporate governance guidelines and a code of
business conduct and ethics, which delineate our standards for
our directors, officers and employees, and the employees of our
manager who provide services to us. We emphasize the importance
of professional business conduct and ethics through our
corporate governance initiatives.
Our internet address is www.arborrealtytrust.com. We make
available, free of charge through a link on our site, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to such reports, if any, as filed with the SEC as
soon as reasonably practicable after such filing. Our site also
contains our code of business conduct and ethics, code of ethics
for chief executive and senior financial officers, corporate
governance guidelines, stockholder communications with the board
of directors, and the charters of the audit committee,
nominating/corporate governance committee, and compensation
committee of our board of directors. No information contained in
or linked to our website is incorporated by reference in this
report.
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Our business is subject to various risks, including the risks
listed below. If any of these risks actually occur, our
business, financial condition and results of operations could be
materially adversely affected and the value of our common stock
could decline.
Risks
Related to Our Business
We may
not be able to access the debt or equity capital markets on
favorable terms, or at all, for additional liquidity, which
could adversely affect our business, financial condition and
operating results.
In order to obtain additional liquidity, future equity or debt
financing may not be available on terms that are favorable to
us, or at all. Our ability to access additional debt and equity
capital depends on various conditions in these markets, which
are beyond our control. If we are able to complete future equity
offerings, they could be dilutive to our existing shareholders
or could result in the issuance of securities that have rights,
preferences and privileges that are senior to those of our other
securities. Our inability to obtain adequate capital could have
a material adverse effect on our business, financial condition
and operating results.
We may
be unable to invest excess equity capital on acceptable terms or
at all, which would adversely affect our operating
results.
We may not be able to identify investments that meet our
investment criteria and we may not be successful in closing the
investments that we identify. Unless and until we identify
investments consistent with our investment criteria, any excess
equity capital may be used to repay borrowings under our
warehouse credit facility, bridge loan warehouse facility, term
and revolving credit agreements and repurchase agreements, which
would not produce a return on capital. In addition, the
investments that we acquire with our equity capital may not
produce a return on capital. There can be no assurance that we
will be able to identify attractive opportunities to invest our
equity capital which would adversely affect our results of
operations.
Changes
in market conditions could adversely affect the market price of
our common stock.
As with other publicly traded equity securities, the value of
our common stock depends on various market conditions which may
change from time to time. Among the market conditions that may
affect the value of our common stock are the following:
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the general reputation of REITs and the attractiveness of our
equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
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our financial performance; and
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general stock and bond market conditions.
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The market value of our common stock is based primarily upon the
markets perception of our growth potential and our current
and potential future earnings and cash dividends. Consequently,
our common stock may trade at prices that are higher or lower
than our book value per share of common stock. If our future
earnings or cash dividends are less than expected, it is likely
that the market price of our common stock will diminish.
A
prolonged economic slowdown, a lengthy or severe recession, or
declining real estate values could harm our
operations.
We believe the risks associated with our business is more severe
during periods of economic slowdown or recession if these
periods are accompanied by declining real estate values.
Declining real estate values will likely reduce our level of new
mortgage loan originations, since borrowers often use increases
in the value of their existing properties to support the
purchase or investment in additional properties. Borrowers may
also be less able to pay principal and interest on our loans if
the real estate economy weakens. Declining real estate values
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 in our portfolio as
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well as our ability to originate, sell and securitize loans,
which would significantly harm our revenues, results of
operations, financial condition, business prospects and our
ability to make distributions to the stockholders.
We
depend on key personnel with long standing business
relationships, the loss of whom could threaten our ability to
operate our business successfully.
Our future success depends, to a significant extent, upon the
continued services of ACM as our manager and our and ACMs
officers and employees. In particular, the mortgage lending
experience of Mr. Kaufman and Mr. Weber and the extent
and nature of the relationships they have developed with
developers and owners of multi-family and commercial properties
and other financial institutions are critical to the success of
our business. We cannot assure you of their continued employment
with ACM or service as our officers. The loss of services of one
or more members of our or ACMs management team could harm
our business and our prospects.
The
real estate investment business is highly competitive. Our
success depends on our ability to compete with other providers
of capital for real estate investments.
Our business is highly competitive. Competition may cause us to
accept economic or structural features in our investments that
we would not have otherwise accepted and it may cause us to
search for investments in markets outside of our traditional
product expertise. We compete for attractive investments with
traditional lending sources, such as insurance companies and
banks, as well as other REITs, specialty finance companies and
private equity vehicles with similar investment objectives,
which may make it more difficult for us to consummate our target
investments. Many of our competitors have greater financial
resources and lower costs of capital than we do, which provides
them with greater operating flexibility and a competitive
advantage relative to us.
We may
not achieve our targeted rate of return on our
investments.
We originate or acquire investments based on our estimates or
projections of overall rates of return on such investments,
which in turn are based upon, among other considerations,
assumptions regarding the performance of assets, the amount and
terms of available financing to obtain desired leverage and the
manner and timing of dispositions, including possible asset
recovery and remediation strategies, all of which are subject to
significant uncertainty. In addition, events or conditions that
we have not anticipated may occur and may have a significant
effect on the actual rate of return received on an investment.
As we acquire or originate investments for our balance sheet
portfolio, whether as new additions or as replacements for
maturing investments, there can be no assurance that we will be
able to originate or acquire investments that produce rates of
return comparable to returns on our existing investments.
Our
due diligence may not reveal all of a borrowers
liabilities and may not reveal other weaknesses in its
business.
Before investing in a company or making a loan to a borrower, we
will assess the strength and skills of such entitys
management and other factors that we believe are material to the
performance of the investment. In making the assessment and
otherwise conducting customary due diligence, we will rely on
the resources available to us and, in some cases, an
investigation by third parties. This process is particularly
important and subjective with respect to newly organized
entities because there may be little or no information publicly
available about the entities. There can be no assurance that our
due diligence processes will uncover all relevant facts or that
any investment will be successful.
We
invest in junior participation notes which may be subject to
additional risks relating to the privately negotiated structure
and terms of the transaction, which may result in losses to
us.
We invest in junior participation loans which is a mortgage loan
typically (i) secured by a first mortgage on a single
commercial property or group of related properties and
(ii) subordinated to a senior note secured by the same
first mortgage on the same collateral. As a result, if a
borrower defaults, there may not be sufficient funds remaining
for the junior participation loan after payment is made to the
senior note holder. Since each transaction is privately
negotiated, junior participation loans can vary in their
structural characteristics and risks. For example, the rights of
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holders of junior participation loans to control the process
following a borrower default may be limited in certain
investments. We cannot predict the terms of each junior
participation investment. A junior participation may not be
liquid and, consequently, we may be unable to dispose of
underperforming or non-performing investments. The higher risks
associated with a subordinate position in any investments we
make could subject us to increased risk of losses.
We
invest in mezzanine loans which are subject to a greater risk of
loss than loans with a first priority lien on the underlying
real estate.
We invest in mezzanine loans that take the form of subordinated
loans secured by second mortgages on the underlying property or
loans secured by a pledge of the ownership interests of either
the entity owning the property or a pledge of the ownership
interests of the entity that owns the interest in the entity
owning the property. These types of investments involve a higher
degree of risk than long term senior mortgage lending secured by
income producing real property because the investment may become
unsecured as a result of foreclosure by the senior lender. In
the event of a bankruptcy of the entity providing the pledge of
its ownership interests as security, we may not have full
recourse to the assets of such entity, or the assets of the
entity may not be sufficient to satisfy our mezzanine loan. If a
borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine
loan will be satisfied only after the senior debt. As a result,
we may not recover some or all of our investment. In addition,
mezzanine loans may have higher loan to value ratios than
conventional mortgage loans, resulting in less equity in the
property and increasing the risk of loss of principal.
Preferred
equity investments involve a greater risk of loss than
traditional debt financing.
We invest in preferred equity investments, which involve a
higher degree of risk than traditional debt financing due to a
variety of factors, including that such investments are
subordinate to other loans and are not secured by property
underlying the investment. Furthermore, should the issuer
default on our investment, we would only be able to proceed
against the partnership in which we have an interest, and not
the property underlying our investment. As a result, we may not
recover some or all of our investment.
We
invest in multi-family and commercial real estate loans, which
may involve a greater risk of loss than single family real
estate loans.
Our investments include multi-family and commercial real estate
loans that are considered to involve a higher degree of risk
than single family residential lending because of a variety of
factors, including generally larger loan balances, dependency
for repayment on successful operation of the mortgaged property
and tenant businesses operating therein, and loan terms that
include amortization schedules longer than the stated maturity
and provide for balloon payments at stated maturity rather than
periodic principal payments. In addition, the value of
commercial real estate can be affected significantly by the
supply and demand in the market for that type of property.
Volatility
of values of multi-family and commercial properties may
adversely affect our loans and investments.
Multi-family and commercial property values and net operating
income derived from such properties are subject to volatility
and may be affected adversely by a number of factors, including,
but not limited to, events such as natural disasters, including
hurricanes and earthquakes, acts of war
and/or
terrorism and others that may cause unanticipated and uninsured
performance declines
and/or
losses to us or the owners and operators of the real estate
securing our investment; national, regional and local economic
conditions (which may be adversely affected by industry
slowdowns and other factors); local real estate conditions (such
as an oversupply of housing, retail, industrial, office or other
commercial space); changes or continued weakness in specific
industry segments; construction quality, construction cost, age
and design; demographic factors; retroactive changes to building
or similar codes; and increases in operating expenses (such as
energy costs). In the event a propertys net operating
income decreases, a borrower may have difficulty repaying our
loan, which could result in losses to us. In addition, decreases
in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay our loans,
which could also cause us to suffer losses.
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Prepayment
rates can increase, adversely affecting yields.
The value of our assets may be affected by prepayment rates on
mortgage loans. If we acquire additional agency whole loan pool
certificates, we anticipate that the underlying mortgages will
prepay at a projected rate generating an expected yield. When
borrowers prepay their mortgage loans faster than expected, this
results in corresponding prepayments on the mortgage-related
securities which may reduce the expected yield.
Prepayment rates on loans are influenced by changes in current
interest rates on adjustable-rate and fixed-rate mortgage loans
and a variety of economic, geographic and other factors beyond
our control. Consequently, such prepayment rates cannot be
predicted with certainty and no strategy can completely insulate
us from prepayment or other such risks. In periods of declining
interest rates, prepayments on loans generally increase. If
general interest rates decline as well, the proceeds of such
prepayments received during such periods are likely to be
reinvested by us in assets yielding less than the yields on the
assets that were prepaid. In addition, the market value of the
assets may, because of the risk of prepayment, benefit less than
other fixed income securities from declining interest rates.
Under certain interest rate and prepayment scenarios we may fail
to recoup fully our cost of acquisition of certain investments.
A portion of our investments require payments of prepayment fees
upon prepayment or maturity of the investment. We may not be
able to structure future investments that contain similar
prepayment penalties. Some of our assets may not have prepayment
protection.
We may
not have control over certain of our loans and
investments.
Our ability to manage our portfolio of loans and investments may
be limited by the form in which they are made. In certain
situations, we may acquire investments subject to rights of
senior classes and servicers under inter-creditor or servicing
agreements; acquire only a participation in an underlying
investment; co-invest with third parties through partnerships,
joint ventures or other entities, thereby acquiring
non-controlling interests; or rely on independent third party
management or strategic partners with respect to the management
of an asset.
Therefore, we may not be able to exercise control over the loan
or investment. Such financial assets may involve risks not
present in investments where senior creditors, servicers or
third party controlling investors are not involved. Our rights
to control the process following a borrower default may be
subject to the rights of senior creditors or servicers whose
interests may not be aligned with ours. A third party partner or
co-venturer may have financial difficulties resulting in a
negative impact on such asset, may have economic or business
interests or goals which are inconsistent with ours. In
addition, we may, in certain circumstances, be liable for the
actions of our third party partners or co-venturers.
The
impact of any future terrorist attacks and the availability of
terrorism insurance expose us to certain risks.
The terrorist attacks on September 11, 2001 disrupted the
U.S. financial markets, including the real estate capital
markets, and negatively impacted the U.S. economy in
general. Any future terrorist attacks, the anticipation of any
such attacks, and the consequences of any military or other
response by the United States and its allies may have a further
adverse impact on the U.S. financial markets and the
economy generally. We cannot predict the severity of the effect
that any such future events would have on the
U.S. financial markets, the economy or our business. Any
future terrorist attacks could adversely affect the credit
quality of some of our loans and investments. Some of our loans
and investments will be more susceptible to such adverse effects
than others. We may suffer losses as a result of the adverse
impact of any future terrorist attacks and these losses may
adversely impact our results of operations.
In addition, the enactment of the Terrorism Risk Insurance Act
of 2002, or the TRIA, and the subsequent enactment of the
Terrorism Risk Insurance Program Reauthorization Act of 2007,
which extended TRIA through the end of 2014, requires insurers
to make terrorism insurance available under their property and
casualty insurance policies in order to receive federal
compensation under TRIA for insured losses. However, this
legislation does not regulate the pricing of such insurance. The
absence of affordable insurance coverage may adversely affect
the general real estate lending market, lending volume and the
markets overall liquidity and may reduce the number of
suitable investment opportunities available to us and the pace
at which we are able to make investments. If the
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properties that we invest in are unable to obtain affordable
insurance coverage, the value of those investments could decline
and in the event of an uninsured loss, we could lose all or a
portion of our investment.
We are
required to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and furnish a report on our internal control over
financial reporting.
We are required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires us to
assess and attest to the effectiveness of our internal control
over financial reporting and requires our independent registered
public accounting firm to opine as to the adequacy of our
assessment and effectiveness of our internal control over
financial reporting. We may not receive an unqualified opinion
from our independent registered public accounting firm with
regard to our internal control over financial reporting.
Failure
to maintain an exemption from regulation as an investment
company under the Investment Company Act would adversely affect
our results of operations.
We believe that we conduct, and we intend to conduct our
business in a manner that allows us to avoid being regulated as
an investment company under the Investment Company Act. Pursuant
to Section 3(c) (5) (C) of the Investment Company Act,
entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate are exempted from
regulation thereunder. The staff of the SEC has provided
guidance on the availability of this exemption. Specifically,
the staffs position generally requires us to maintain at
least 55% of our assets directly in qualifying real estate
interests. To constitute a qualifying real estate interest
under this 55% test, an interest in real estate must meet
various criteria. Loans that are secured by equity interests in
entities that directly or indirectly own the underlying real
property, rather than a mortgage on the underlying property
itself, and ownership of equity interests in real property
owners may not qualify for purposes of the 55% test depending on
the type of entity. Mortgage-related securities that do not
represent all of the certificates issued with respect to an
underlying pool of mortgages may also not qualify for purposes
of the 55% test. Therefore, our ownership of these types of
loans and equity interests may be limited by the provisions of
the Investment Company Act. To the extent that we do not comply
with the SEC staffs 55% test, another exemption or
exclusion from registration as an investment company under the
Investment Company Act or other interpretations under the
Investment Company Act, we may be deemed to be an investment
company. If we fail to maintain an exemption or other exclusion
from registration as an investment company we could, among other
things, be required either (a) to substantially change the
manner in which we conduct our operations to avoid being
required to register as an investment company or (b) to
register as an investment company, either of which could have an
adverse effect on us and the market price of our common stock.
If we were required to register as an investment company under
the Investment Company Act, we would become subject to
substantial regulation with respect to our capital structure
(including our ability to use leverage), management, operations,
transactions with affiliated persons (as defined in the
Investment Company Act), portfolio composition, including
restrictions with respect to diversification and industry
concentration and other matters.
Risks
Related to Our Financing and Hedging Activities
We may
not be able to access financing sources on favorable terms, or
at all, which could adversely affect our ability to execute our
business plan.
We finance our assets over the long-term through a variety of
means, including repurchase agreements, credit facilities, CDOs
and other structured financings. We have also financed our
investments through the issuance of $276.1 million of trust
preferred securities. Our ability to execute this strategy
depends on various conditions in the markets for financing in
this manner which are beyond our control, including lack of
liquidity and wider credit spreads. We cannot assure you that
these markets will remain an efficient source of long-term
financing for our assets as there can be no assurance that these
agreements will be renewed or extended at expiration. If our
strategy is not viable, we will have to find alternative forms
of long-term financing for our assets, as secured revolving
credit facilities and repurchase facilities may not accommodate
long-term financing. This could subject us to more recourse
indebtedness and the risk that debt service on less efficient
forms of financing would require a larger portion of our cash
flows, thereby reducing cash available for distribution to our
stockholders, funds available for operations as well as for
future business opportunities.
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Investor
demand for commercial real estate CDOs has been substantially
curtailed.
The recent turmoil in the structured finance markets, in
particular the sub-prime residential loan market, has negatively
impacted the credit markets generally. As a result, investor
demand for commercial real estate CDOs has been substantially
curtailed. In recent years, we have relied to a substantial
extent on CDO financings to obtain match-funded financing for
our investments. Until and unless the market for commercial real
estate CDOs recovers, we may be unable to utilize CDOs to
finance our investments and we may need to utilize less
favorable sources of financing to finance our investments on a
long-term basis. There can be no assurance as to when or if the
demand for commercial real estate CDOs will return or the terms
of such securities investors will demand or whether we will be
able to issue CDOs to finance our investments on terms
beneficial to us.
We may
not be able to obtain the level of leverage necessary to
optimize our return on investment.
Our return on investment depends, in part, upon our ability to
grow our balance sheet portfolio of invested assets through the
use of leverage at a cost of debt that is lower than the yield
earned on our investments. We generally obtain leverage through
the issuance of collateralized debt obligations, or CDOs, term
and revolving credit agreements, repurchase agreements and other
borrowings. Our ability to obtain the necessary leverage on
beneficial terms ultimately depends upon the quality of the
portfolio assets that collateralize our indebtedness. Our
failure to obtain
and/or
maintain leverage at desired levels, or to obtain leverage on
attractive terms, would have a material adverse effect on our
performance. Moreover, we are dependent upon a few lenders to
provide financing under credit agreements and repurchase
agreements for our origination or acquisition of loans and
investments and there can be no assurance that these agreements
will be renewed or extended at expiration. Our ability to obtain
financing through CDOs is subject to conditions in the debt
capital markets which are impacted by factors beyond our control
that may at times be adverse and reduce the level of investor
demand for such securities.
The
repurchase agreements and credit facilities that we use to
finance our investments may require us to provide additional
collateral.
We use credit facilities and repurchase agreements to finance
some of our investments. If the market value of the loans
pledged or sold by us to a funding source decline in value, we
may be required by the lending institution to provide additional
collateral or pay down a portion of the funds advanced. We may
not have the funds available to pay down our debt, which could
result in defaults. Posting additional collateral to support our
repurchase and credit facilities would reduce our liquidity and
limit our ability to leverage our assets. In the event we do not
have sufficient liquidity to meet such requirements, lending
institutions can accelerate our indebtedness, increase interest
rates and terminate our ability to borrow. Such a situation
would likely result in a rapid deterioration of our financial
condition and possibly necessitate a filing for protection under
the United States Bankruptcy Code. Further, facility providers
may require us to maintain a certain amount of cash uninvested
or set aside unlevered assets sufficient to maintain a specified
liquidity position which would allow us to satisfy our
collateral obligations. As a result, we may not be able to
leverage our assets as fully as we would choose, which could
reduce our return on assets. In the event that we are unable to
meet these collateral obligations, our financial condition could
deteriorate rapidly.
Our
use of leverage may create a mismatch with the duration and
index of the investments that we are financing.
We attempt to structure our leverage such that we minimize the
difference between the term of our investments and the leverage
we use to finance such an investment. In the event that our
leverage is shorter term than the financed investment, we may
not be able to extend or find appropriate replacement leverage
and that would have an adverse impact on our liquidity and our
returns. In the event that our leverage is longer term than the
financed investment, we may not be able to repay such leverage
or replace the financed investment with an optimal substitute or
at all, which will negatively impact our desired leveraged
returns.
We attempt to structure our leverage such that we minimize the
difference between the index of our investments and the index of
our leverage financing floating rate investments
with floating rate leverage and fixed rate investments with
fixed rate leverage. If such a product is not available to us
from our lenders on reasonable terms, we may use hedging
instruments to effectively create such a match. For example, in
the case of fixed rate
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investments, we may finance such an investment with floating
rate leverage, but effectively convert all or a portion of the
attendant leverage to fixed rate using hedging strategies.
Our attempts to mitigate such risk are subject to factors
outside of our control, such as the availability to us of
favorable financing and hedging options, which is subject to a
variety of factors, of which duration and term matching are only
two such factors.
We
utilize a significant amount of debt to finance our portfolio,
which may subject us to an increased risk of loss, adversely
affecting the return on our investments and reducing cash
available for distribution.
We utilize a significant amount of debt to finance our
operations, which can compound losses and reduce the cash
available for distributions to our stockholders. We generally
leverage our portfolio through the use of bank credit
facilities, repurchase agreements, securitizations, including
the issuance of CDOs and other borrowings. The leverage we
employ varies depending on our ability to obtain credit
facilities, the loan-to-value and debt service coverage ratios
of our assets, the yield on our assets, the targeted leveraged
return we expect from our portfolio and our ability to meet
ongoing covenants related to our asset mix and financial
performance. Substantially all of our assets are pledged as
collateral for our borrowings. Our return on our investments and
cash available for distribution to our stockholders may be
reduced to the extent that changes in market conditions cause
the cost of our financing to increase relative to the income
that we can derive from the assets we acquire.
Our debt service payments, including payments in connection with
any CDOs, reduce the net income available for distributions.
Moreover, we may not be able to meet our debt service
obligations and, to the extent that we cannot, we risk the loss
of some or all of our assets to foreclosure or sale to satisfy
our debt obligations. Currently, neither our charter nor our
bylaws impose any limitations on the extent to which we may
leverage our assets.
We may
guarantee some of our leverage and contingent
obligations.
We guarantee the performance of some of our obligations,
including but not limited to some of our repurchase agreements,
derivative agreements, and unsecured indebtedness.
Non-performance on such obligations may cause losses to us in
excess of the capital we initially may have invested/committed
under such obligations and there is no assurance that we will
have sufficient capital to cover any such losses.
Our
secured and unsecured credit agreements may impose restrictions
on our operation of the business.
Under our secured and unsecured credit agreements, such as our
repurchase agreements and derivative agreements, we may make
certain representations, warranties and affirmative and negative
covenants that may restrict our ability to operate while still
utilizing those sources of credit. Such representations,
warranties and covenants may include but are not limited to
restrictions on corporate guarantees, the maintenance of certain
financial ratios, including our ratio of debt to equity capital
and our debt service coverage ratio, as well as the maintenance
of a minimum net worth, restrictions against a change of control
of our company and limitations on alternative sources of capital.
We may
not be able to acquire suitable investments for a CDO issuance,
or we may not be able to issue CDOs on attractive terms, or at
all, which may require us to utilize more costly financing for
our investments.
We have financed, and, if the opportunities exist in the future,
we may continue to finance certain of our investments through
the issuance of CDOs. During the period that we are acquiring
investments for eventual long-term financing through CDOs , we
intend to finance these investments through repurchase and
credit agreements. We use these agreements to finance our
acquisition of investments until we have accumulated a
sufficient quantity of investments, at which time we may
refinance them through a securitization, such as a CDO issuance.
As a result, we are subject to the risk that we will not be able
to acquire a sufficient amount of eligible investments to
maximize the efficiency of a CDO issuance. In addition,
conditions in the debt capital markets may make the issuance of
CDOs less attractive to us even when we do have a sufficient
pool of collateral, or we may not be able to execute a CDO
transaction due to substantial curtailment in demand for
commercial real estate CDOs, such as currently
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exists. If we are unable to issue a CDO to finance these
investments, we may be required to utilize other forms of
potentially less attractive financing.
We may
not be able to find suitable replacement investments for CDOs
with reinvestment periods.
Some of our CDOs have periods where principal proceeds received
from assets securing the CDO can be reinvested for a defined
period of time, commonly referred to as a reinvestment period.
Our ability to find suitable investments during the reinvestment
period that meet the criteria set forth in the CDO documentation
and by rating agencies may determine the success of our CDO
investments. Our potential inability to find suitable
investments may cause, among other things, lower returns,
interest deficiencies,
hyper-amortization
of the senior CDO liabilities and may cause us to reduce the
life of our CDOs and accelerate the amortization of certain fees
and expenses.
The
use of CDO financings with over-collateralization and interest
coverage requirements may have a negative impact on our cash
flow.
The terms of CDOs will generally provide that the principal
amount of investments must exceed the principal balance of the
related bonds by a certain amount and that interest income
exceeds interest expense by a certain amount. Generally, CDO
terms provide that, if certain delinquencies
and/or
losses or other factors cause a decline in collateral or cash
flow levels, the cash flow otherwise payable on subordinated
classes may be redirected to repay senior classes of CDOs until
the issuer or the collateral is in compliance with the terms of
the governing documents. Other tests (based on delinquency
levels or other criteria) may restrict our ability to receive
net income from assets pledged to secure CDOs. We cannot assure
you that the performance tests will be satisfied. With respect
to future CDOs we may issue, we cannot assure you, in advance of
completing negotiations with the rating agencies or other key
transaction parties as to the actual terms of the delinquency
tests, over-collateralization and interest coverage terms, cash
flow release mechanisms or other significant factors upon which
net income to us will be calculated. Failure to obtain favorable
terms with regard to these matters may adversely affect the
availability of net income to us. If our investments fail to
perform as anticipated, our overcollateralization, interest
coverage or other credit enhancement expense associated with our
CDO financings will increase.
We may
be required to repurchase loans that we have sold or to
indemnify holders of our CDOs.
If any of the loans we originate or acquire and sell or
securitize through CDOs do not comply with representations and
warranties that we make about certain characteristics of the
loans, the borrowers and the underlying properties, we may be
required to repurchase those loans or replace them with
substitute loans. In addition, in the case of loans that we have
sold instead of retained, we may be required to indemnify
persons for losses or expenses incurred as a result of a breach
of a representation or warranty. Repurchased loans typically
require a significant allocation of working capital to carry on
our books, and our ability to borrow against such assets is
limited. Any significant repurchases or indemnification payments
could adversely affect our financial condition and operating
results.
Our
loans and investments may be subject to fluctuations in interest
rates which may not be adequately protected, or protected at
all, by our hedging strategies.
Our current balance sheet investment program emphasizes loans
with both floating interest rates and fixed interest
rates. Floating rate investments earn interest at rates that
adjust from time to time (typically monthly) based upon an index
(typically LIBOR), allowing this portion of our portfolio to be
insulated from changes in value due specifically to changes in
rates. Fixed interest rate investments, however, do not have
adjusting interest rates and, as prevailing interest rates
change, the relative value of the fixed cash flows from these
investments will cause potentially significant changes in value.
Depending on market conditions, fixed rate assets may become a
greater portion of our new loan originations. We may employ
various hedging strategies to limit the effects of changes in
interest rates (and in some cases credit spreads), including
engaging in interest rate swaps, caps, floors and other interest
rate derivative products. No strategy can completely insulate us
from the risks associated with interest rate changes and there
is a risk that they may provide no protection at all and
potentially compound the impact of changes in interest rates.
Hedging transactions involve certain additional risks such as
counterparty risk, the legal enforceability of hedging
contracts, the early repayment of hedged transactions and the
risk that unanticipated and
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significant changes in interest rates may cause a significant
loss of basis in the contract and a change in current period
expense. We cannot make assurances that we will be able to enter
into hedging transactions or that such hedging transactions will
adequately protect us against the foregoing risks. In addition,
cash flow hedges which are not perfectly correlated (and
appropriately designated and documented as such) with a variable
rate financing will impact our reported income as gains, and
losses on the ineffective portion of such hedges will be
recorded.
Hedging
instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by
any U.S. or foreign governmental authorities and involve risks
and costs.
The cost of using hedging instruments increases as the period
covered by the instrument lengthens and during periods of rising
and volatile interest rates. We may increase our hedging
activity and thus increase our hedging costs during periods when
interest rates are volatile or rising and hedging costs have
increases.
In addition, hedging instruments involve risk since they often
are not traded on regulated exchanges, guaranteed by an exchange
or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial
responsibility or segregation of customer funds and positions.
Furthermore, the enforceability of agreements underlying
derivative transactions may depend on compliance with applicable
statutory and commodity and other regulatory requirements and,
depending on the identity of the counterparty, applicable
international requirements. The business failure of a hedging
counterparty with whom we enter into a hedging transaction will
most likely result in a default. Default by a party with whom we
enter into a hedging transaction may result in the loss of
unrealized profits and force us to cover our resale commitments,
if any, at the then current market price. Although generally we
will seek to reserve the right to terminate our hedging
positions, it may not always be possible to dispose of or close
out a hedging position without the consent of the hedging
counterparty, and we may not be able to enter into an offsetting
contract to cover our risk. We cannot assure you that a liquid
secondary market will exist for hedging instruments purchased or
sold, and we may be required to maintain a position until
exercise or expiration, which could result in losses.
We may
enter into derivative contracts that could expose us to
contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our
investment strategy involves entering into derivative contracts
that could require us to fund cash payments in the future under
certain circumstances (e.g., the early termination of the
derivative agreement caused by an event of default or other
early termination event, or the decision by a counterparty to
request margin securities it is contractually owed under the
terms of the derivative contract). The amount due would be equal
to the unrealized loss of the open swap positions with the
respective counterparty and could also include other fees and
charges. These economic losses will be reflected in our
financial results of operations, and our ability to fund these
obligations will depend on the liquidity of our assets and
access to capital at the time, and the need to fund these
obligations could adversely impact our financial condition.
Risks
Related to Our Corporate and Ownership Structure
We are
substantially controlled by ACM and
Mr. Kaufman.
Mr. Ivan Kaufman, our chairman, chief executive officer and
president and the chief executive officer of ACM, beneficially
owns approximately 90% of the outstanding membership interests
of ACM. ACM owns approximately 3.8 million operating
partnership units, representing a 16% limited partnership
interest in our operating partnership. The operating partnership
units are redeemable for cash or, at our election, for shares of
our common stock generally on a one-for-one basis. Each of the
operating partnership units ACM owns is paired with one share of
our special voting preferred stock, each of which entitle ACM to
one vote on all matters submitted to a vote of our stockholders.
As a result of its ownership of the special voting preferred
stock and 1,134,672 shares of our common stock, ACM
currently has 20.1% of the voting power of our outstanding
stock. As a result of Mr. Kaufmans beneficial
ownership of stock held by ACM as well as his beneficial
ownership of an additional 123,351 shares of our common
stock, Mr. Kaufman currently has 20.6% of the voting power
of our outstanding stock. Because of his position with us and
our manager and his ability to effectively vote a substantial
minority of our outstanding stock, Mr. Kaufman has
significant influence over our policies and strategy.
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Our
charter as amended generally does not permit ownership in excess
of 7.0% of our capital stock, and attempts to acquire our
capital stock in excess of this limit are ineffective without
prior approval from our board of directors.
For the purpose of preserving our REIT qualification, our
charter generally prohibits direct or constructive ownership by
any person of more than 7.0% (by value or by number of shares,
whichever is more restrictive) of the outstanding shares of our
common stock or 7.0% (by value) of our outstanding shares of
capital stock. For purposes of this calculation, warrants held
by such person will be deemed to have been exercised if such
exercise would result in a violation. Our charters
constructive ownership rules are complex and may cause the
outstanding stock owned by a group of related individuals or
entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than
these percentages of the outstanding stock by an individual or
entity could cause that individual or entity to own
constructively in excess of these percentages of the outstanding
stock and thus be subject to our charters ownership limit.
Any attempt to own or transfer shares of our common or preferred
stock in excess of the ownership limit without the consent of
the board of directors will result in the shares being
automatically transferred to a charitable trust or otherwise be
void.
We granted ACM and Mr. Kaufman, as its controlling equity
owner, an exemption from the ownership limitation contained in
our charter in order to acquire the approximately
3.8 million shares of special voting preferred stock that
ACM currently holds. In 2007, we granted Mr. C. Michael
Kojaian, one of our directors, an exemption from this ownership
limitation so that he may own up to 8.3% of the number of shares
of our common stock that may be outstanding at any time.
Our
staggered board and other provisions of our charter and bylaws
may prevent a change in our control.
Our board of directors is divided into three classes of
directors. The current terms of the Class I, Class II
and Class III directors will expire in 2010, 2008 and 2009,
respectively. Directors of each class are chosen for three year
terms upon the expiration of their current terms, and each year
one class of directors is elected by the stockholders. The
staggered terms of our directors may reduce the possibility of a
tender offer or an attempt at a change in control, even though a
tender offer or change in control might be in the best interest
of our stockholders. In addition, our charter and bylaws also
contain other provisions that may delay or prevent a transaction
or a change in control that might involve a premium price for
our common stock or otherwise be in the best interest of our
stockholders.
Risks
Related to Conflicts of Interest with Our Manager
We are
dependent on our manager with whom we have conflicts of
interest.
We have only 29 employees, including Messrs. Weber,
Fogel, Kovarik, Horn, Kilgore, House, and are dependent upon our
manager to provide services to us that are vital to our
operations. ACM, our manager currently has approximately 19.9%
of the voting power of the outstanding shares of our capital
stock and Mr. Kaufman, our chairman and chief executive
officer and the chief executive officer of ACM, beneficially
owns these shares. Mr. Martello, one of our directors, is
the chief operating officer of Arbor Management, LLC (the
managing member of ACM) and a trustee of two trusts which own
minority membership interests in ACM. Mr. Elenio, our chief
financial officer and treasurer, is the chief financial officer
of ACM. Each of Messrs. Kaufman, Martello, Elenio, Horn,
Weber, Kilgore are members of ACMs executive committee and
own minority membership interests in ACM. Mr. Fogel also
owns a minority membership interest in ACM.
We may enter into transactions with ACM outside the terms of the
management agreement with the approval of a majority vote of the
independent members of our board of directors. Transactions
required to be approved by a majority of our independent
directors include, but are not limited to, our ability to
purchase securities, mortgages and other assets from Arbor
Commercial Mortgage or to sell securities and assets to Arbor
Commercial Mortgage. Arbor Commercial Mortgage may from time to
time provide permanent mortgage loan financing to clients of
ours, which will be used to refinance bridge financing provided
by us. We and Arbor Commercial Mortgage may also make loans to
the same borrower or to borrowers that are under common control.
Additionally, our policies and those of Arbor Commercial
Mortgage may require us to enter into intercreditor agreements
in situations where loans are made by us and Arbor Commercial
Mortgage to the same borrower.
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We have entered into a management agreement with our manager
under which our manager provides us with all of the services
vital to our operations other than asset management services.
However, the management agreement was not negotiated at
arms length and its terms, including fees payable, may not
be as favorable to us as if it had been negotiated with an
unaffiliated third party. Certain matters relating to our
organization also were not approved at arms length and the
terms of the contribution of assets to us may not be as
favorable to us as if the contribution was with an unaffiliated
third party.
The results of our operations are dependent upon the
availability of, and our managers ability to identify and
capitalize on, investment opportunities. Our managers
officers and employees are also responsible for providing the
same services for Arbor Commercial Mortgages portfolio of
investments. As a result, they may not be able to devote
sufficient time to the management of our business operations.
Our
directors have approved very broad investment guidelines for our
manager and do not approve each investment decision made by our
manager.
Our manager is authorized to follow very broad investment
guidelines. Our directors will periodically review our
investment guidelines and our investment portfolio. However, our
board does not review each proposed investment. In addition, in
conducting periodic reviews, the directors rely primarily on
information provided to them by our manager. Furthermore,
transactions entered into by our manager may be difficult or
impossible to unwind by the time they are reviewed by the
directors. Our manager has great latitude within the broad
investment guidelines in determining the types of assets it may
decide are proper investments for us.
Our
manager has broad discretion to invest funds and may acquire
structured finance assets where the investment returns are
substantially below expectations or that result in net operating
losses.
Our manager has broad discretion, within the general investment
criteria established by our board of directors, to allocate the
proceeds of the concurrent offerings and to determine the timing
of investment of such proceeds. Such discretion could result in
allocation of proceeds to assets where the investment returns
are substantially below expectations or that result in net
operating losses, which would materially and adversely affect
our business, operations and results.
The management compensation structure that we have agreed to
with our manager may cause our manager to invest in high risk
investments. Our manager is entitled to a base management fee,
which is based on the equity of our operating partnership. The
amount of the base management fee does not depend on the
performance of the services provided by our manager or the types
of assets it selects for our investment, but the value of our
operating partnerships equity will be affected by the
performance of these assets. Our manager is also entitled to
receive incentive compensation based in part upon our
achievement of targeted levels of funds from operations. In
evaluating investments and other management strategies, the
opportunity to earn incentive compensation based on funds from
operations may lead our manager to place undue emphasis on the
maximization of funds from operations at the expense of other
criteria, such as preservation of capital, in order to achieve
higher incentive compensation. Investments with higher yield
potential are generally riskier or more speculative. This could
result in increased risk to the value of our invested portfolio.
Risk
Related to Our Status as a REIT
If we
fail to remain qualified as a REIT, we will be subject to tax as
a regular corporation and could face substantial tax
liability.
We conduct our operations to qualify as a REIT under the
Internal Revenue Code. However, qualification as a REIT involves
the application of highly technical and complex Internal Revenue
Code provisions for which only limited judicial and
administrative authorities exist. Even a technical or
inadvertent mistake could jeopardize our REIT status. Our
continued qualification as a REIT will depend on our
satisfaction of certain asset, income, organizational,
distribution, stockholder ownership and other requirements on a
continuing basis. In particular, our ability to qualify as a
REIT depends in part on the relative values of our common and
special voting preferred stock, which have not been determined
by independent appraisal, are susceptible to fluctuation, and
could, if successfully challenged by the IRS, cause us to fail
to meet the ownership requirements. In addition, our ability to
satisfy the
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requirements to qualify as a REIT depends in part on the actions
of third parties over which we have no control or only limited
influence, including in cases where we own an equity interest in
an entity that is classified as a partnership for
U.S. federal income tax purposes.
Furthermore, new tax legislation, administrative guidance or
court decisions, in each instance potentially with retroactive
effect, could make it more difficult or impossible for us to
qualify as a REIT. If we fail to qualify as a REIT in any tax
year, then:
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we would be taxed as a regular domestic corporation, which,
among other things, means we would be unable to deduct
distributions to stockholders in computing taxable income and
would be subject to federal income tax on our taxable income at
regular corporate rates;
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any resulting tax liability could be substantial and would
reduce the amount of cash available for distribution to
stockholders; and
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unless we were entitled to relief under applicable statutory
provisions, we would be disqualified from treatment as a REIT
for the subsequent four taxable years following the year during
which we lost our qualification, and thus, our cash available
for distribution to stockholders would be reduced for each of
the years during which we did not qualify as a REIT.
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Even
if we remain qualified as a REIT, we may face other tax
liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be
subject to certain federal, state and local taxes on our income
and assets, including taxes on any undistributed income, tax on
income from some activities conducted as a result of a
foreclosure, and state or local income, property and transfer
taxes, such as mortgage recording taxes. Any of these taxes
would decrease cash available for distribution to our
stockholders. In addition, in order to meet the REIT
qualification requirements, or to avert the imposition of a 100%
tax that applies to certain gains derived by a REIT from dealer
property or inventory, we may hold some of our assets through
taxable subsidiary corporations.
The
taxable mortgage pool rules may increase the taxes
that we or our stockholders may incur, and may limit the manner
in which we effect future securitizations.
Certain of our securitizations have resulted in the creation of
taxable mortgage pools for federal income tax purposes. So long
as 100% of the equity interests in a taxable mortgage pool are
owned by an entity that qualifies as a REIT, including our
subsidiary Arbor Realty SR, Inc., we would generally not be
adversely affected by the characterization of the securitization
as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or
other benefits, stockholders with net operating losses, and
certain tax-exempt stockholders that are subject to unrelated
business income tax, could be subject to increased taxes on a
portion of their dividend income from us that is attributable to
the taxable mortgage pool. In addition, to the extent that our
stock is owned by tax-exempt disqualified
organizations, such as certain government-related entities
that are not subject to tax on unrelated business income, under
recently issued IRS guidance, we could incur a corporate level
tax on a portion of our income from the taxable mortgage pool.
In that case, we may reduce the amount of our distributions to
any disqualified organization whose stock ownership gave rise to
the tax. Moreover, we could be precluded from selling equity
interests in these securitizations to outside investors, or
selling any debt securities issued in connection with these
securitizations that might be considered to be equity interests
for tax purposes. These limitations may prevent us from using
certain techniques to maximize our returns from securitization
transactions.
Complying
with REIT requirements may cause us to forego otherwise
attractive opportunities.
To qualify as a REIT for federal income tax purposes we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. We may be required to make distributions
to stockholders at disadvantageous times or when we do not have
funds readily available for distribution. Thus, compliance with
the REIT requirements may hinder our ability to operate solely
on the basis of maximizing profits.
25
Complying
with REIT requirements may force us to liquidate otherwise
attractive investments.
To qualify as a REIT we must ensure that at the end of each
calendar quarter at least 75% of the value of our assets
consists of cash, cash items, government securities and
qualified REIT real estate assets. The remainder of our
investment in securities generally cannot comprise more than 10%
of the outstanding voting securities, or more than 10% of the
total value of the outstanding securities, of any one issuer. In
addition, in general, no more than 5% of the value of our assets
(other than assets which qualify for purposes of the 75% asset
test) may consist of the securities of any one issuer, and no
more than 20% of the value of our total assets may be
represented by securities of one or more taxable REIT
subsidiaries. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct such failure
within 30 days after the end of the calendar quarter to
avoid losing our REIT status and suffering adverse tax
consequences. As a result, we may be required to liquidate
otherwise attractive investments.
Liquidation
of collateral may jeopardize our REIT status.
To continue to qualify as a REIT, we must comply with
requirements regarding our assets and our sources of income. If
we are compelled to liquidate investments to satisfy our
obligations to our lenders, we may be unable to comply with
these requirements, ultimately jeopardizing our status as a REIT.
We may
be unable to generate sufficient revenue from operations to pay
our operating expenses and to pay dividends to our
stockholders.
As a REIT, we are generally required to distribute at least 90%
of our taxable income each year to our stockholders. In order to
qualify for the tax benefits accorded to REITs, we intend to pay
quarterly dividends and to make distributions to our
stockholders in amounts such that we distribute all or
substantially all of our taxable income each year, subject to
certain adjustments. However, our ability to make distributions
may be adversely affected by the risk factors described in this
report. In the event of a downturn in our operating results and
financial performance or unanticipated declines in the value of
our asset portfolio, we may be unable to declare or pay
quarterly dividends or make distributions to our stockholders.
The timing and amount of dividends are in the sole discretion of
our board of directors, which considers, among other factors,
our earnings, financial condition, debt service obligations and
applicable debt covenants, REIT qualification requirements and
other tax considerations and capital expenditure requirements as
our board may deem relevant from time to time.
Among the factors that could adversely affect our results of
operations and impair our ability to make distributions to our
stockholders are:
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our ability to make profitable structured finance investments;
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defaults in our asset portfolio or decreases in the value of our
portfolio;
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the fact that anticipated operating expense levels may not prove
accurate, as actual results may vary from estimates; and
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increased debt service requirements, including those resulting
from higher interest rates on variable rate indebtedness.
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A change in any one of these factors could affect our ability to
make distributions. If we are not able to comply with the
restrictive covenants and financial ratios contained in our
credit facilities, our ability to make distributions to our
stockholders may also be impaired. We cannot assure you that we
will be able to make distributions to our stockholders in the
future or that the level of any distributions we make will
increase over time.
In addition, distributions to stockholders are generally taxable
to our stockholders as ordinary income, but a portion of these
distributions may be designated by us as long-term capital gains
to the extent they are attributable to capital gain income
recognized by us, or may constitute a return of capital to the
extent they exceed our earnings and profits as determined for
tax purposes.
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We may
need to borrow funds under our credit facilities in order to
satisfy our REIT distribution requirements, and a portion of our
distributions may constitute a return of capital. Debt service
on any borrowings for this purpose will reduce our cash
available for distribution.
In order to qualify as a REIT, we must generally, among other
requirements, distribute at least 90% of our taxable income,
subject to certain adjustments, to our stockholders each year.
To the extent that we satisfy the distribution requirement, but
distribute less than 100% of our taxable income, we will be
subject to federal corporate income tax on our undistributed
taxable income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount that we pay out to
our stockholders in a calendar year is less than a minimum
amount specified under federal tax laws.
From time to time, we may generate taxable income greater than
our net income for financial reporting purposes, or our taxable
income may be greater than our cash flow available for
distribution to stockholders (for example, where a borrower
defers the payment of interest in cash pursuant to a contractual
right or otherwise). If we do not have other funds available in
these situations we could be required to borrow funds, sell
investments at disadvantageous prices or find another
alternative source of funds to make distributions sufficient to
enable us to pay out enough of our taxable income to satisfy the
REIT distribution requirement and to avoid corporate income tax
and the 4% excise tax in a particular year.
Our working capital facility, bridge loan warehouse facility and
master repurchase agreements allow us to borrow up to a maximum
amount against each investment we finance under these credit
facilities. If we have not borrowed the maximum amount against
any of these investments, we may borrow funds under our credit
facilities up to these maximum amounts in order to satisfy REIT
distribution requirements. Any required debt service will reduce
cash and net income available for operations or distribution to
our stockholders.
In order to maximize the return on our funds, cash generated
from operations has generally been used to temporarily pay down
borrowings under credit facilities whose primary purpose is to
fund our new loans and investments. When making distributions,
we have borrowed the required funds by drawing on credit
capacity available under our credit facilities. To date, all
distributions have been funded in this manner. All funds
borrowed to make distributions have been repaid by funds
generated from operations. However, in order to maintain
adequate liquidity within our credit facilities for their
primary purpose of funding our new loans and investments, we may
begin to accumulate cash generated from operations to make the
distributions. If distributions exceed cash available in the
future, we may be required to borrow additional funds, which
would reduce the amount of cash available for other purposes, or
sell assets in order to meet our REIT distribution requirements.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our common stock.
At any time, the federal income tax laws governing REITs or the
administrative interpretations of those laws may change. Any
such changes may have retroactive effect, and could adversely
affect us or our stockholders. Legislation enacted in 2003 and
extended in 2006 generally reduced the federal income tax rate
on most dividends paid by corporations to individual investors
to a maximum of 15% (through 2010). REIT dividends, with limited
exceptions, will not benefit from the rate reduction, because a
REITs income generally is not subject to corporate level
tax. As such, this legislation could cause shares in non-REIT
corporations to be a more attractive investment to individual
investors than shares in REITs, and could have an adverse effect
on the value of our common stock.
Restrictions
on share accumulation in REITs could discourage a change of
control of us.
In order for us to qualify as a REIT, not more than 50% of the
value of our outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals during the
last half of a taxable year.
In order to prevent five or fewer individuals from acquiring
more than 50% of our outstanding shares and a resulting failure
to qualify as a REIT, our charter provides that, subject to
certain exceptions, no person, including entities, may own, or
be deemed to own by virtue of the attribution provisions of the
Internal Revenue Code, more than 7.0% of the aggregate value or
number of shares (whichever is more restrictive) of our
outstanding common
27
stock, or more than 7.0%, by value, of our outstanding shares of
capital stock of all classes, in the aggregate. For purposes of
the ownership limitations, warrants held by a person will be
deemed to have been exercised.
Shares of our stock that would otherwise be directly or
indirectly acquired or held by a person in violation of the
ownership limitations are, in general, automatically transferred
to a trust for the benefit of a charitable beneficiary, and the
purported owners interest in such shares is void. In
addition, any person who acquires shares in excess of these
limits is obliged to immediately give written notice to us and
provide us with any information we may request in order to
determine the effect of the acquisition on our status as a REIT.
We granted Arbor Commercial Mortgage and Mr. Kaufman, as
its controlling equity owner, an exemption from the ownership
limitation contained in our charter, in connection with Arbor
Commercial Mortgages acquisition of 3,146,724 shares
of our special voting preferred stock on July 1, 2003,
which exemption also allowed Arbor Commercial Mortgage to
acquire an additional 629,345 shares of special voting
preferred stock. Arbor Commercial Mortgage currently owns
3,776,069 shares of our special voting preferred stock.
During 2007 we granted Mr. C. Michael Kojaian, one of our
directors, an exemption from the ownership limitation contained
in our charter. The exemption granted to Mr. Kojaian sets
his ownership limitation at 8.3%.
While these restrictions are designed to prevent any five
individuals from owning more than 50% of our shares, they could
also discourage a change in control of our company. These
restrictions may also deter tender offers that may be attractive
to stockholders or limit the opportunity for stockholders to
receive a premium for their shares if an investor makes
purchases of shares to acquire a block of shares.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Internal Revenue Code may limit our
ability to hedge our operations. Under current law, any income
that we generate from derivatives or other transactions intended
to hedge our interest rate risks will generally constitute
income that does not qualify for purposes of the 75% income
requirement applicable to REITs, and will also be treated as
nonqualifying income for purposes of the REIT 95% income test
unless specified requirements are met. In addition, any income
from foreign currency or other hedges would generally constitute
nonqualifying income for purposes of both the 75% and 95% REIT
income tests under current law. As a result of these rules, we
may have to limit our use of hedging techniques that might
otherwise be advantageous, which could result in greater risks
associated with interest rate or other changes than we would
otherwise incur.
28
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Arbor Commercial Mortgage, our manager, leases our shared
principal executive and administrative offices, located at 333
Earle Ovington Boulevard in Uniondale, New York.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are not involved in any litigation nor, to our knowledge, is
any litigation threatened against us.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our security holders
during the fourth quarter of 2007.
29
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock has been listed on the New York Stock Exchange
under the symbol ABR since our initial public
offering in April 2004. The following table sets forth for the
indicated periods the high and low sales prices for our common
stock, as reported on the New York Stock Exchange, and the
dividends declared and paid with respect to such periods.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
27.76
|
|
|
$
|
24.80
|
|
|
$
|
0.72
|
|
Second Quarter
|
|
$
|
27.08
|
|
|
$
|
23.26
|
|
|
$
|
0.57
|
|
Third Quarter
|
|
$
|
26.05
|
|
|
$
|
23.89
|
|
|
$
|
0.58
|
|
Fourth Quarter(1)
|
|
$
|
30.57
|
|
|
$
|
24.40
|
|
|
$
|
0.60
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
34.45
|
|
|
$
|
28.01
|
|
|
$
|
0.62
|
|
Second Quarter
|
|
$
|
32.13
|
|
|
$
|
25.41
|
|
|
$
|
0.62
|
|
Third Quarter
|
|
$
|
26.48
|
|
|
$
|
13.91
|
|
|
$
|
0.62
|
|
Fourth Quarter(2)
|
|
$
|
21.26
|
|
|
$
|
16.00
|
|
|
$
|
0.62
|
|
|
|
|
(1) |
|
On January 25, 2007, we declared distributions of $0.60 per
share of common stock, payable with respect to the three months
ended December 31, 2006 to stockholders of record at the
close of business on February 5, 2007. |
|
(2) |
|
On January 25, 2008, we declared distributions of $0.62 per
share of common stock, payable with respect to the three months
ended December 31, 2007 to stockholders of record at the
close of business on February 15, 2008. |
We are organized and conduct our operations to qualify as a real
estate investment trust, or a REIT, which requires that we
distribute at least 90% of taxable income. Therefore, we intend
to continue to declare quarterly distributions on our common
stock. No assurance, however, can be given as to the amounts or
timing of future distributions as such distributions are subject
to our earnings, financial condition, capital requirements and
such other factors as our board of directors deems relevant.
On February 15, 2008, the closing sale price for our common
stock, as reported on the NYSE, was $15.90. As of
February 15, 2008, there were 12,113 record holders of our
common stock, including persons holding shares in broker
accounts under street names.
Equity
Compensation Plan Information
Information regarding securities authorized for issuance under
our equity compensation plans which are set forth under the
caption Equity Compensation Plan Information of the
2008 Proxy Statement is incorporated herein by reference.
Performance
Graph
Set forth below is a line graph comparing the cumulative total
stockholder return on shares of our common stock with the
cumulative total return of the NAREIT All REIT Index and the
Russell 2000 Index. The periods shown commence on April 7,
2004, the date that our common stock began trading on the New
York Stock Exchange after our common stock was first registered
under Section 12 of the Exchange Act, and end on
December 31, 2007, the end of our most recently completed
fiscal year. The graph assumes an investment of $100 on
April 7, 2004 and the reinvestment of any dividends. This
graph is not necessarily indicative of future price performance.
The information included in the graph and table below was
obtained from SNL Financial LC, Charlottesville,
VA.©
2008.
30
Arbor
Realty Trust, Inc.
Total
Return Performance
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|
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|
|
|
|
|
|
Period Ending
|
Index
|
|
04/07/04
|
|
06/30/04
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
Arbor Realty Trust, Inc.
|
|
|
100.00
|
|
|
|
97.32
|
|
|
|
124.28
|
|
|
|
142.84
|
|
|
|
182.82
|
|
|
|
108.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
98.56
|
|
|
|
109.23
|
|
|
|
114.21
|
|
|
|
135.18
|
|
|
|
133.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAREIT All REIT Index
|
|
|
100.00
|
|
|
|
100.07
|
|
|
|
124.09
|
|
|
|
134.37
|
|
|
|
180.53
|
|
|
|
148.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SEC rules, this section entitled
Performance Graph shall not be incorporated by
reference into any of our future filings under the Securities
Act or the Exchange Act, and shall not be deemed to be
soliciting material or to be filed under the Securities Act or
the Exchange Act.
Recent
Issuances of Unregistered Securities
In 2007, we issued 590,864 shares of common stock to ACM as
payment of the incentive compensation earned by ACM for the
quarters ending December 31, 2006, March 31, 2007,
June 30, 2007, and September 30, 2007. The issuance of
these 590,864 shares as payment for ACMs incentive
compensation was not registered under the Securities Act in
reliance on the exemption from registration provided by
Section 4(2) thereof.
Issuer
Purchases of Equity Securities
In August 2006, the Board of Directors authorized a stock
repurchase plan that enabled the Company to buy up to one
million shares of its common stock. At managements
discretion, shares were acquired on the open market, through
privately negotiated transactions or pursuant to a
Rule 10b5-1
plan. A
Rule 10b5-1
plan permits the Company to repurchase shares at times when it
might otherwise be prevented from doing so. As of
December 31, 2006, the Company repurchased
279,400 shares of its common stock in the open market and
under a 10b5-1 plan at a total cost of $7.0 million (an
average cost of $25.10 per share). This plan expired on
February 9, 2007 and the Company did not purchase any
shares during the year ended December 31, 2007.
31
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
SELECTED
CONSOLIDATED FINANCIAL INFORMATION OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
The following tables present selected historical consolidated
financial information for the periods indicated. The selected
historical consolidated financial information presented below
under the captions Consolidated Income Statement
Data and Consolidated Balance Sheet Data have
been derived from our audited consolidated financial statements
and include all adjustments, consisting only of normal recurring
accruals, which management considers necessary for a fair
presentation of the historical consolidated financial statements
for such period. In addition, since the information presented
below is only a summary and does not provide all of the
information contained in our historical consolidated financial
statements, including the related notes, you should read it in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
historical consolidated financial statements, including the
related notes, included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
|
$
|
57,927,230
|
|
|
$
|
10,012,449
|
|
Income from swap derivative
|
|
|
|
|
|
|
696,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
39,503
|
|
|
|
170,197
|
|
|
|
498,250
|
|
|
|
42,265
|
|
|
|
156,502
|
|
Total revenue
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
57,969,495
|
|
|
|
10,168,951
|
|
Management fees related party
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
3,614,830
|
|
|
|
587,734
|
|
Total expenses
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
68,392,843
|
|
|
|
27,545,997
|
|
|
|
5,452,865
|
|
Income from equity affiliates
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
525,000
|
|
|
|
|
|
Income allocated to minority interest
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
|
|
1,308,167
|
|
Provision for income taxes
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
84,533,878
|
|
|
|
50,413,807
|
|
|
|
50,387,023
|
|
|
|
25,072,682
|
|
|
|
3,407,919
|
|
Earnings per share, basic
|
|
|
4.44
|
|
|
|
2.94
|
|
|
|
2.99
|
|
|
|
1.81
|
|
|
|
0.42
|
|
Earnings per share, diluted(1)
|
|
|
4.44
|
|
|
|
2.93
|
|
|
|
2.98
|
|
|
|
1.78
|
|
|
|
0.42
|
|
Dividends declared per common share(2)(3)(4)
|
|
|
2.46
|
|
|
|
2.57
|
|
|
|
2.24
|
|
|
|
1.16
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
2,592,093,930
|
|
|
$
|
1,993,525,064
|
|
|
$
|
1,246,825,906
|
|
|
$
|
831,783,364
|
|
|
$
|
286,036,610
|
|
Related party loans, net
|
|
|
|
|
|
|
7,752,038
|
|
|
|
7,749,538
|
|
|
|
7,749,538
|
|
|
|
35,940,881
|
|
Total assets
|
|
|
2,901,493,534
|
|
|
|
2,204,345,211
|
|
|
|
1,396,075,357
|
|
|
|
912,295,177
|
|
|
|
338,164,432
|
|
Repurchase agreements
|
|
|
244,937,929
|
|
|
|
395,847,359
|
|
|
|
413,624,385
|
|
|
|
409,109,372
|
|
|
|
113,897,845
|
|
Collateralized debt obligations
|
|
|
1,151,009,000
|
|
|
|
1,091,529,000
|
|
|
|
299,319,000
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes to subsidiary trust issuing
preferred securities
|
|
|
276,055,000
|
|
|
|
222,962,000
|
|
|
|
155,948,000
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
596,160,338
|
|
|
|
94,574,240
|
|
|
|
115,400,377
|
|
|
|
165,771,447
|
|
|
|
58,630,626
|
|
Notes payable related party
|
|
|
|
|
|
|
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,433,376,191
|
|
|
|
1,842,765,882
|
|
|
|
1,044,775,284
|
|
|
|
589,292,273
|
|
|
|
183,416,716
|
|
Minority interest
|
|
|
72,854,258
|
|
|
|
65,468,252
|
|
|
|
63,691,556
|
|
|
|
60,249,731
|
|
|
|
43,631,602
|
|
Total stockholders equity
|
|
|
395,263,085
|
|
|
|
296,111,077
|
|
|
|
287,608,517
|
|
|
|
262,753,173
|
|
|
|
111,116,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations(5)
|
|
$
|
2,007,838,793
|
|
|
$
|
1,458,153,387
|
|
|
$
|
953,937,330
|
|
|
$
|
782,301,133
|
|
|
$
|
186,289,922
|
|
|
|
|
(1)
|
|
The warrants underlying the units
issued in the private placement at $75.00 per unit had an
initial exercise price of $15.00 per share and expired on
July 1, 2005. This exercise price is equal to the price per
share of common stock underlying the units and approximates the
market value of our common stock at December 31, 2003.
Therefore, the assumed exercise of the warrants was not
considered to be dilutive for purposes of calculating diluted
earnings per share.
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32
|
|
|
(2)
|
|
On January 25, 2008, our board
of directors authorized and we declared a distribution to our
stockholders of $0.62 per share of common stock, payable with
respect to the quarter ended December 31, 2007, to
stockholders of record at the close of business on
February 15, 2008. We made this distribution on
February 26, 2008.
|
(3)
|
|
On January 25, 2007, our board
of directors authorized and we declared a distribution to our
stockholders of $0.60 per share of common stock, payable with
respect to the quarter ended December 31, 2006, to
stockholders of record at the close of business on
February 5, 2007. We made this distribution on
February 20, 2007.
|
(4)
|
|
On January 11, 2006, our board
of directors authorized and we declared a distribution to our
stockholders of $0.70 per share of common stock, payable with
respect to the quarter ended December 31, 2005, to
stockholders of record at the close of business on
January 23, 2006. We made this distribution on
February 6, 2006.
|
|
(5)
|
|
Year ended December 31, 2005
originations are net of a $59.4 million participation in
one of our loans.
|
33
SELECTED
CONSOLIDATED FINANCIAL INFORMATION OF THE
STRUCTURED FINANCE BUSINESS OF ARBOR COMMERCIAL
MORTGAGE, LLC AND SUBSIDIARIES
On July 1, 2003, Arbor Commercial Mortgage contributed a
portfolio of structured finance investments and related
liabilities to our operating partnership. In addition, certain
employees of Arbor Commercial Mortgage became our employees.
These assets, liabilities and employees represented a
substantial portion of Arbor Commercial Mortgages
structured finance business.
The tables below present selected historical consolidated
financial information of the structured finance business of
Arbor Commercial Mortgage at the dates and for the periods
indicated. The structured finance business did not operate as a
separate legal entity or business division or segment of Arbor
Commercial Mortgage, but as an integrated part of Arbor
Commercial Mortgages consolidated business. Accordingly,
the statements of revenue and direct operating expenses do not
include charges from Arbor Commercial Mortgage for corporate
general and administrative expense because Arbor Commercial
Mortgage considered such items to be corporate expenses and did
not allocate them to individual business units. These expenses
included costs for Arbor Commercial Mortgages executive
management, corporate facilities and overhead costs, corporate
accounting and treasury functions, corporate legal matters and
other similar costs. The selected consolidated financial
information presented under the caption Consolidated
Statement of Revenue and Direct Operating Expenses Data
for the six months ended June 30, 2003 was derived from the
audited consolidated financial statements of the structured
finance business of Arbor Commercial Mortgage. The selected
consolidated financial information presented under the caption
Consolidated Statement of Revenue and Direct Operating
Expenses Data for the six months ended June 30, 2003
is not necessarily indicative of the results of any other
interim period or the year ended December 31, 2003.
Consolidated
Statement of Revenue and Direct Operating Expenses
Data:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2003
|
|
|
Interest income
|
|
$
|
7,688,465
|
|
Other income
|
|
|
1,552,414
|
|
Total revenue
|
|
|
9,240,879
|
|
Total direct operating expenses
|
|
|
5,737,688
|
|
Revenue in excess of direct operating expenses before gain on
sale of loans and real estate and income from equity affiliates
|
|
|
3,503,191
|
|
Gain on sale of loans and real estate
|
|
|
1,024,268
|
|
Income from equity affiliates
|
|
|
|
|
Revenue, gain on sale of loans and real estate and income from
equity affiliates in excess of direct operating expenses
|
|
|
4,527,459
|
|
Other
Data (Unaudited):
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2003
|
|
|
Total originations
|
|
$
|
117,965,000
|
|
34
|
|
ITEM 7.
|
MANAGEMENTS
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 Risk Factors,
Forward-Looking Statements, and Selected
Consolidated Financial Information of Arbor Realty Trust, Inc.
and Subsidiaries and the historical consolidated financial
statements of Arbor Realty Trust, Inc. and Subsidiaries,
including related notes, included elsewhere in this report.
Overview
We are a Maryland corporation that was formed in June 2003 to
invest in multi-family and commercial real estate-related
bridge, junior participating interests in first mortgages,
mezzanine loans, preferred and direct equity and, in limited
cases, discounted mortgage notes and other real estate-related
assets, which we refer to collectively as structured finance
investments. We also invest in mortgage-related securities. We
conduct substantially all of our operations through our
operating partnership and its wholly-owned subsidiaries.
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 earned
on our assets increases or the cost of borrowings decreases,
this will have a positive impact on earnings. Net interest
income is also directly impacted by the size of our asset
portfolio.
|
|
|
|
Credit quality of our assets Effective asset
and portfolio management is essential to maximizing the
performance and value of a real estate/mortgage investment.
Maintaining the credit quality of our loans and investments is
of critical importance. Loans that do not perform in accordance
with their terms may have a negative impact on earnings.
|
|
|
|
Cost control We seek to minimize our
operating costs, which consist primarily of employee
compensation and related costs, management fees and other
general and administrative expenses. As the size of the
portfolio increases, certain of these expenses, particularly
employee compensation expenses, may increase.
|
We are organized and conduct our operations to qualify as a real
estate investment trust, or a REIT and to comply with the
provisions of the Internal Revenue Code with respect thereto. A
REIT is generally not subject to federal income tax on that
portion of its REIT-taxable income which 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. Certain of our assets that produce
non-qualifying income may be held in taxable REIT subsidiaries.
Unlike other subsidiaries of a REIT, the income of a taxable
REIT subsidiary is subject to Federal and state income taxes. We
recorded a $16.9 million provision for income taxes related
to the assets that are held in taxable REIT subsidiaries for the
year ended December 31, 2007.
On July 1, 2003, ACM, our manager, contributed
$213.1 million of structured finance assets, encumbered by
$169.2 million of borrowings in exchange for an equity
interest in our operating partnership represented by
3,146,724 units of limited partnership interest and 629,345
warrants to acquire additional units of limited partnership
interest. In addition, certain employees of ACM became our
employees. We are externally managed and advised by ACM and pay
ACM a management fee in accordance with a management agreement.
ACM originates, underwrites and services all structured finance
assets on behalf of our operating partnership.
Concurrently with ACMs asset contribution, we consummated
a private placement of 1.6 million units, each consisting
of five shares of our common stock and one warrant to purchase
one share of common stock, for $75.00 per unit, resulting in
gross proceeds of $120.2 million. Gross proceeds from the
private placement combined with the concurrent equity
contribution by ACM totaled approximately $164.1 million in
equity capital.
On April 13, 2004, we sold 6,750,000 shares of our
common stock at a price to the public of $20.00 per share, for
net proceeds of approximately $124.4 million after
deducting the underwriting discount and the other estimated
offering expenses. On May 11, 2004, we issued and sold
524,200 additional shares of common stock, for net proceeds of
approximately $9.8 million after deducting the underwriting
discount pursuant to the exercise of a
35
portion of the over-allotment option granted to the underwriters
of our initial public offering. Additionally, as of
December 31, 2005, we issued 1,256,130 shares of
common stock from the exercise of warrants originally issued as
a component of units on July 1, 2003, for proceeds of
$17.1 million.
Sources
of Operating Revenues
We derive our operating revenues primarily through interest
received from making real estate-related bridge, mezzanine and
junior participation loans and preferred equity investments.
Interest income earned on these loans and investments
represented approximately 90%, 93%, and 84% of our total
revenues in 2007, 2006, and 2005, respectively.
Interest income is also derived from profits of equity
participation interests. In 2007, 2006 and 2005 interest income
from participation interests represented approximately 10%, 6%,
and 14% of total revenues, respectively.
We also derive interest income from our investments in mortgage
related securities. Interest on these investments represented
less than 1% of our total revenues in 2007, 2006 and 2005.
In addition, we derived operating revenue from income from swap
derivative which represented income from interest rate swaps on
junior subordinated notes relating to trust preferred
securities. In 2006, income from swap derivative represented
less than 1% of our total revenues. There was no such revenue in
2007 and 2005.
Additionally, we derive operating revenues from other income
that represents loan structuring and miscellaneous asset
management fees associated with our loans and investments
portfolio. Revenue from other income represented less than 1% of
our total revenues in 2007, 2006 and 2005.
Income
from Equity Affiliates and Gain on Sale of Loans and Real
Estate
We derive income from equity affiliates relating to joint
ventures that were formed with equity partners to acquire,
develop
and/or sell
real estate assets. These joint ventures are not majority owned
or controlled by us, and are not consolidated in our financial
statements. These investments are recorded under either the
equity or cost method of accounting as appropriate. We record
our share of net income and losses from the underlying
properties on a single line item in the consolidated income
statements as income from equity affiliates. In 2007, 2006 and
2005, income from equity affiliates totaled $34.6 million,
$4.8 million and $8.5 million, respectively.
We also may derive income from the gain on sale of loans and
real estate. We may acquire (1) real estate for our own
investment and, upon stabilization, dispose at an anticipated
return and (2) real estate notes generally at a discount
from lenders in situations where the borrower wishes to
restructure and reposition its short term debt and the lender
wishes to divest certain assets from its portfolio. No such
income has been recorded to date.
Significant
Accounting Estimates and Critical Accounting Policies
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with U.S. Generally Accepted Accounting Principles
(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 of the Notes to
Consolidated Financial Statements set forth in Item 8
hereof. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the
consolidated financial statements included in this report.
Certain of the accounting policies used in the preparation of
these consolidated financial statements are particularly
important for an understanding of the financial position and
results of operations presented in the historical consolidated
financial statements included in this report and require the
application of significant judgment by management and, as a
result, are subject to a degree of uncertainty.
Loans and
Investments
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS 115) requires that
at the time of purchase, we designate a security as held to
maturity,
36
available for sale, or trading depending on ability and intent.
Securities available for sale are reported at fair value, while
securities and investments held to maturity are reported at
amortized cost. We do not have any trading securities at this
time.
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 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 allow us to
participate in a percentage of the underlying propertys
cash flows from operations and proceeds from a sale or
refinancing. At the inception of each such investment,
management must determine whether such investment should be
accounted for as a loan, joint venture or as real estate. To
date, management has determined that all such investments are
properly accounted for and reported as loans.
Loans are considered impaired when, based upon current
information and events, it is probable that we will be unable to
collect all amounts due for both principal and interest
according to the contractual terms of the loan agreement.
Specific valuation allowances are established for impaired loans
based on the fair value of collateral on an individual loan
basis. The fair value of the collateral is determined by
selecting the most appropriate valuation methodology, or
methodologies, among several generally available and accepted in
the commercial real estate industry. The determination of the
most appropriate valuation methodology is based on the key
characteristics of the collateral type. These methodologies
include the evaluation of operating cash flow from the property
during the projected holding period, and estimated sales value
of the collateral computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs, discounted at market
discount rates.
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 believed
adequate by management to absorb probable losses. We established
a $2.5 million allowance for loan losses at
December 31, 2007 related to two multifamily loans in our
portfolio with an aggregate outstanding principal balance of
$58.5 million. At December 31, 2006, no impairment had
been identified and no valuation allowance had been established.
Repurchase
Obligations
In certain circumstances, we have financed the purchase of
investments from a counterparty through a repurchase agreement
with that same counterparty. We currently record these
investments in the same manner as other investments financed
with repurchase agreements, with the investment recorded as an
asset and the related borrowing under the repurchase agreement
as a liability on our consolidated balance sheet. Interest
income earned on the investments and interest expense incurred
on the repurchase obligations are reported separately on the
consolidated income statement. These transactions may not
qualify as a purchase by us under FSP FAS 140-3 which is
effective for fiscal years beginning after November 15,
2008. We would be required to present the net investment on our
balance sheet as a derivative with the corresponding change in
fair value of the derivative being recorded in the income
statement. The value of the derivative would reflect not only
changes in the value of the underlying investment, but also
changes in the value of the underlying credit provided by the
counterparty. See Note 2 Summary of Significant
Accounting Policies Recently Issued Accounting
Pronouncements of the Notes to Consolidated
Financial Statements set forth in Item 8 hereof.
Capitalized
Interest
We capitalize interest in accordance with SFAS No. 58
Capitalization of Interest Costs in Financial Statements
that Include Investments Accounted for by the Equity
Method. This statement amended SFAS No. 34
37
Capitalization of Interest Costs to include
investments (equity, loans and advances) accounted for by the
equity method as qualifying assets of the investor while the
investee has activities in progress necessary to commence its
planned principal operations, provided that the investees
activities include the use of funds to acquire qualifying assets
for its operations. One of our joint ventures, which is
accounted for using the equity method, has used funds to acquire
qualifying assets for its planned principal operations. During
2007, the joint venture sold both of the acquired properties and
we discontinued the capitalization of interest on its remaining
investment in the joint venture as activities required under
SFAS No. 34 ceased to continue. We capitalized
$0.3 million, $0.9 million, and $0.5 million of
interest during the year ended December 31, 2007, 2006 and
2005, respectively, relating to this investment.
Revenue
Recognition
Interest Income. Interest income is recognized
on the accrual basis as it is earned from loans, investments and
available-for-sale
securities. In many instances, the borrower pays an additional
amount of interest at the time the loan is closed, an
origination fee, and deferred interest upon maturity. In some
cases interest income may also include the amortization or
accretion of premiums and discounts arising at the loan purchase
or origination. This additional income, net of any direct loan
origination costs incurred, is deferred and accreted into
interest income on an effective yield or interest
method adjusted for actual prepayment activity over the life of
the related loan or
available-for-sale
security as a yield adjustment. Income recognition is suspended
for loans when in the opinion of management a full recovery of
income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and
performance is demonstrated to be resumed. Several of the loans
provide for accrual of interest at specified rates, which differ
from current payment terms. Interest is recognized on such loans
at the accrual rate subject to managements determination
that accrued interest and outstanding principal are ultimately
collectible, based on the underlying collateral and operations
of the borrower. If management cannot make this determination
regarding collectibility, interest income above the current pay
rate is recognized only upon actual receipt. Additionally,
interest income is recorded when earned from equity
participation interests, referred to as equity kickers. These
equity kickers have the potential to generate additional
revenues to us as a result of excess cash flows being
distributed
and/or as
appreciated properties are sold or refinanced.
Variable
Interest Entities
In December 2003, the Financial Accounting Standards Board
issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46R) as a
revision to FIN No. 46, which requires a variable
interest entity (VIE) to be consolidated by its
primary beneficiary (PB). The PB is the party that
absorbs a majority of the VIEs anticipated losses
and/or a
majority of the expected returns.
On a quarterly basis, we evaluate our loans and investments and
investments in equity affiliates to determine whether they are
VIEs. This evaluation resulted in us determining that our bridge
loans, junior participation loans, mezzanine loans, preferred
equity investments and investments in equity affiliates were
potential variable interests. For each of these investments, we
have evaluated (1) the sufficiency of the fair value of the
entities equity investments at risk to absorb losses,
(2) that as a group the holders of the equity investments
at risk have (a) the direct or indirect ability through
voting rights to make decisions about the entities
significant activities, (b) the obligation to absorb the
expected losses of the entity and their obligations are not
protected directly or indirectly, (c) the right to receive
the expected residual return of the entity and their rights are
not capped, (3) the voting rights of some of these
investors are proportional to their obligations to absorb the
expected losses of the entity, their rights to receive the
expected returns of the equity, or both, and that substantially
all of the entities activities do not involve or are not
conducted on behalf of an investor that has disproportionately
few voting rights. As of December 31, 2007, we have
identified 42 loans and investments which were made to entities
determined to be VIEs. However, for the 42 VIEs identified, we
have determined that we are not the primary beneficiaries and as
such the VIEs should not be consolidated in our financial
statements. For all other investments, we have determined they
are not VIEs. As such, we have continued to account for these
loans and investments as a loan or joint venture, as
appropriate. A summary of our identified VIEs is presented in
Note 8 of our consolidated financial statements, which
appear in Financial Statements and Supplementary
Data.
38
Derivatives
and Hedging Activities
In accordance with SFAS No. 133, the carrying values
of interest rate swaps and the underlying hedged liabilities are
reflected at their fair value. As of December 31, 2007 we
have retained the services of Chatham Financial Corporation, a
Statement on Auditing Standards No. 70 (SAS
70), Service Organizations compliant, third
party financial services company to determine these fair values.
Changes in the fair value of these derivatives are either offset
against the change in the fair value of the hedged liability
through earnings or recognized in other comprehensive income
(loss) until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value
is immediately recognized in earnings. Derivatives that do not
qualify for cash flow hedge accounting treatment are adjusted to
fair value through earnings.
Because the valuations of our hedging activities are based on
estimates, the fair value may change if our estimates are
inaccurate. For the effect of hypothetical changes in market
interest rates on our interest rate swaps, see Interest
Rate Risk in Quantitative and Qualitative
Disclosures About Market Risk, set forth in Item 7A
hereof.
Recently
Issued Accounting Pronouncements
For a discussion of the impact of new accounting pronouncements
on our financial condition or results of operations, see
Note 2 Summary of Significant Accounting
Policies Recently Issued Accounting
Pronouncements of the Notes to Consolidated
Financial Statements, set forth in Item 8 hereof.
Changes
in Financial Condition
Our loan portfolio balance increased $598.6 million, or
30%, to $2.6 billion at December 31, 2007, with a
weighted average current interest pay rate of 8.18%, as compared
to $2.0 billion, with a weighted average current interest
pay rate of 9.06%, at December 31, 2006. At
December 31, 2007, advances on financing facilities totaled
$2.3 billion, with a weighted average funding cost of
6.16%, as compared to $1.8 billion, with a weighted average
funding cost of 6.70% (6.55% excluding a $59.4 million
participation in one of our loans), at December 31, 2006.
In 2007, we originated 86 loans and investments totaling
$2.0 billion, of which $1.8 billion was funded as of
December 31, 2007. Of the new loans and investments, 46
were bridge loans totaling $1.3 billion, 26 were mezzanine
loans totaling $255.0 million, seven were junior
participating interests totaling $148.7 million, six were
preferred equity loans totaling $291.8 million, and one
other loan totaling $10.0 million. We have received full
satisfaction of 41 loans totaling $1.2 billion and partial
repayment on loans totaling $117.2 million.
Since December 31, 2007, we have originated five loans
totaling approximately $91.0 million. In addition, we have
received $102.1 million for the repayment in full of five
loans of which $67.2 million were loans on properties that
were either sold or refinanced outside of Arbor and
$34.9 million was concurrent with an Arbor refinance.
Lastly we have received $71.0 million for the partial
repayment of one loan.
Restricted cash increased $54.4 million, or 64%, to
$139.1 million at December 31, 2007 compared to
$84.8 million at December 31, 2006. Restricted cash is
kept on deposit with the trustees for our collateralized debt
obligations (CDOs), and primarily represents
proceeds from loan repayments which will be used to purchase
replacement loans as collateral for the CDOs. The increase was
primarily due to proceeds received near the end of the year from
the full satisfaction of loans held in the CDO for which funds
had not yet been reinvested into other appropriate investments.
We sold all of our mortgage related securities during the
quarter ended March 31, 2007. These securities had a
balance of $22.1 million at December 31, 2006 and had
been in an unrealized loss position for more than twelve months.
The securities recovered their fair value in conjunction with a
change in interest rates at which time we sold the securities
and recorded a gain of $30,182. These securities were pledged as
collateral for borrowings under a repurchase agreement and the
proceeds of the sale were utilized to repay the repurchase
agreement.
During 2007, we purchased 2,939,465 shares of common stock
of CBRE Realty Finance, Inc., a commercial real estate specialty
finance company, which had a fair value of $15.7 million,
at December 31, 2007. We also have a margin loan agreement
with a financial institution related to the purchases of this
security. The margin loan may not
39
exceed $7.0 million, bears interest at pricing over LIBOR,
and is due upon demand from the lender. The balance of the
margin loan agreement was approximately $7.0 million at
December 31, 2007.
Our investment in equity affiliates increased $4.2 million,
or 17%, to $29.6 million at December 31, 2007 compared
to $25.4 million at December 31, 2006. The increase
was the result of approximately $20.7 million of new
investments and additional contributions, $34.7 million of
gains recognized on the sale of certain properties held by one
our equity affiliates, partially offset by $51.2 million of
return of capital also related to the sales of certain
properties.
Prepaid management fee was $19.0 million at
December 31, 2007 and relates to the incentive management
fee on the deferred revenue recognized on the transfer of
control of the 450 West
33rd
Street property of one of our equity affiliates. The transaction
was structured to provide a tax deferral for an estimated period
of seven years. See Note 5 of the Notes to the
Consolidated Financial Statements set forth in Item 8
hereof for further description of this transaction.
Other assets increased $20.6 million, or 33%, to
$83.7 million at December 31, 2007 compared to
$63.1 million at December 31, 2006. The increase was
primarily due to funding additional cash collateral for a
portion of our interest rate swaps whose value has declined as a
result of reductions in the LIBOR rate, as well as an increase
in the fair value of other interest rate swaps that hedge our
exposure to the risk of changes in the difference between the
three-month LIBOR and one-month LIBOR rates. See Item 7A
Quantitative and Qualitative Disclosures About Market
Risk for further information relating to our derivatives.
Deferred revenue totaled $77.1 million at December 31,
2007 representing a deferred gain recognized on the transfer of
control of the 450 West
33rd
Street property of one of our equity affiliates. The transaction
was structured to provide a tax deferral for an estimated period
of seven years. See Note 5 of the Notes to the
Consolidated Financial Statements set forth in Item 8
hereof for further description of this transaction.
Other liabilities increased $49.6 million from
$17.8 million at December 31, 2006 compared to
$67.4 million at December 31, 2007. The increase was
primarily due to a $29.9 million unrealized loss on the
fair value of our interest rate swaps, due to a reduction in
LIBOR rates, with a corresponding offset to other comprehensive
loss. The increase also included a $7.0 million margin loan
related to the purchase of investment securities, a
$5.7 million deferred gain on the sale of 50% of the
economic interest in the property of one of our investment in
equity affiliates, and an increase in accrued interest expense
for CDOs due to the issuance of our third CDO at the end of 2006.
On June 12, 2007, we sold 2,700,000 shares of our
common stock in a public offering at a price of $27.65 per
share, for net proceeds of approximately $73.6 million
after deducting the underwriting discount and the other
estimated offering expenses. We used the proceeds to pay down
debt and finance our loan and investment portfolio.
40
Comparison
of Results of Operations for Year Ended 2007 and 2006
The following table sets forth our results of operations for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
|
$
|
101,150,956
|
|
|
|
59
|
%
|
Income from swap derivative
|
|
|
|
|
|
|
696,960
|
|
|
|
(696,960
|
)
|
|
|
nm
|
|
Other income
|
|
|
39,503
|
|
|
|
170,197
|
|
|
|
(130,694
|
)
|
|
|
(77
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
100,323,302
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
147,710,194
|
|
|
|
92,693,419
|
|
|
|
55,016,775
|
|
|
|
59
|
%
|
Employee compensation and benefits
|
|
|
9,381,055
|
|
|
|
6,098,826
|
|
|
|
3,282,229
|
|
|
|
54
|
%
|
Selling and administrative
|
|
|
5,593,175
|
|
|
|
5,192,526
|
|
|
|
400,649
|
|
|
|
8
|
%
|
Provision for loan losses
|
|
|
2,500,000
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
nm
|
|
Management fee related party
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
12,173,184
|
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
73,372,837
|
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income from equity affiliates, minority interest
and provision for income taxes
|
|
|
83,834,461
|
|
|
|
56,883,996
|
|
|
|
26,950,465
|
|
|
|
47
|
%
|
Income from equity affiliates
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
29,789,302
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
118,408,055
|
|
|
|
61,668,288
|
|
|
|
56,739,767
|
|
|
|
92
|
%
|
Income allocated to minority interest
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
5,884,696
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
101,418,878
|
|
|
|
50,563,807
|
|
|
|
50,855,071
|
|
|
|
101
|
%
|
Provision for income taxes
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
16,735,000
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
|
$
|
34,120,071
|
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Interest income increased $101.2 million, or 59%, to
$274.0 million in 2007 from $172.8 million in 2006.
This increase was due in part to the recognition of
$37.6 million of interest income from profits and equity
interests from our investment in equity affiliates during 2007
as compared to $10.4 million in 2006.
Excluding these transactions, interest income increased
$74.0 million, or 46%, over the same period. This increase
was primarily due to a $938.7 million, or 63%, increase in
the average balance of the loan and investment portfolio from
$1.5 billion in 2006 to $2.4 billion in 2007 due to
increased loan and investment originations. This was partially
offset by an 11% decrease in the average yield on assets from
10.48% in 2006 to 9.34% in 2007. This decrease in yield was the
result of a reduction in yield on new originations compared to
higher yielding loan payoffs during 2006 and 2007, partially
offset by an increase in LIBOR over the same period. Interest
income from cash equivalents increased $4.2 million to
$8.9 million for 2007 compared to $4.7 million for
2006 as a result of increased restricted cash balances due to
the issuance of CDO III in December 2006.
Income from swap derivative totaled $0.7 million during
2006 and was the result of a change in accounting treatment
according to a new technical clarification of accounting for
interest rate swaps in 2006 on one of our junior subordinated
notes relating to trust preferred securities. This reflected the
cumulative fair value of the interest rate swap on one of our
trust preferred securities on the date it was deemed an
ineffective cash flow hedge. This swap was terminated in January
2007.
41
Other income decreased $0.1 million, or 77%, to
$0.1 million from $0.2 million in 2006. This was
primarily due to decreased miscellaneous asset management fees
on our loan and investment portfolio.
Expenses
Interest expense increased $55.0 million, or 59%, to
$147.7 million in 2007 from $92.7 million in 2006.
This increase was primarily due to an $897.0 million, or
70%, increase in the average balance of our debt facilities from
$1.3 billion in 2006 to $2.2 billion in 2007 as a
result of increased portfolio growth and financing facilities.
This was partially offset by a 5% decrease in the average cost
of these borrowings from 7.11% for 2006 to 6.76% for 2007, due
to reduced borrowing costs primarily as a result of an increase
in average CDO debt combined with an increase in income from
interest rate swaps on our variable rate debt associated with
certain of our fixed rate loans, partially offset by an increase
in average LIBOR.
Employee compensation and benefits expense increased
$3.3 million, or 54%, to $9.4 million in 2007 from
$6.1 million in 2006. This increase was primarily due to
the expansion of staffing needs associated with the areas of
asset management, structured securitization and underwriting due
to the growth of the business and increased size of our
portfolio. These expenses represent salaries, benefits,
stock-based compensation related to employees, and incentive
compensation for those employed by us during these periods.
Selling and administrative expense increased $0.4 million,
or 8%, to $5.6 million in 2007 from $5.2 million in
2006. Theses costs include, but are not limited to, professional
and consulting fees, marketing costs, insurance expense,
directors fees, licensing fees, travel and placement fees,
and stock-based compensation relating to the cost of restricted
stock granted to our directors and certain employees of our
manager. The increase is primarily due to professional fees,
including legal, accounting services, and consulting fees
relating to investor relations, Sarbanes-Oxley compliance and
regulatory filings.
Provision for loan losses totaled $2.5 million for the year
ended December 31, 2007 and there was no provision for loan
losses for the year ended December 31, 2006. The provision
recorded was based on our normal quarterly loan review at
December 31, 2007, where it was determined that two
multi-family loans were impaired. We performed an evaluation of
the loans and determined that the fair value of the underlying
collateral securing the impaired loans was less than the net
carrying value of the loan resulting in us recording a
$2.5 million provision for loan losses.
Management fee expense increased $12.2 million, or 95%, to
$25.0 million in 2007 from $12.8 million in 2006.
These amounts represent compensation in the form of base
management fees and incentive compensation management fees as
provided for in the management agreement with our manager. The
base management fee expense increased by $0.6 million, or
22%, to $3.2 million in 2007 from $2.6 million in
2006. This increase is primarily due to increased
stockholders equity directly attributable to greater
undistributed profits and capital raised from the June 2007
public offering of our common stock over the same period in
2006. The incentive compensation management fee expense
increased $11.6 million, or 114%, to $21.8 million in
2007 from $10.2 million in 2006. This increase was due in
part to the recognition of $37.6 million of interest income
from profits and equity interests and $34.6 million of
income from equity affiliates during 2007 as compared to
$10.4 million of interest income from profits and equity
interest and $4.8 million of income from equity investments
in 2006.
Income
From Equity Affiliates
Income from equity affiliates increased $29.8 million to
$34.6 million in 2007 from $4.8 million for 2006. This
increase was due to a $24.8 million and $4.8 million
gain recognized on the sale of properties within one of our
equity affiliates, and $5.0 million of income from excess
proceeds received from the sale and refinancing of certain
properties in the portfolio of another of our investments in
equity affiliates. During 2006, we recognized $4.8 million
of revenue from excess proceeds received from the refinancing of
properties of one of our investments in equity affiliates.
42
Income
Allocated to Minority Interest
Income allocated to minority interest increased
$5.9 million, or 53%, to $17.0 million in 2007 from
$11.1 million in 2006. These amounts represent the portion
of our income allocated to our manager. This increase was
primarily due to a 65% increase in income before minority
interest reduced by the provision for income taxes over the
prior year, partially offset by a decrease in our managers
limited partnership interest in us. Our manager had a weighted
average limited partnership interest of 16.6% and 18.0% in our
operating partnership in 2007 and 2006, respectively. At
December 31, 2007, our manager had a limited partnership
interest of 15.5% in our operating partnership.
Provision
for Income Taxes
We are organized and conduct our operations to qualify as a REIT
and to comply with the provisions of the Internal Revenue Code.
As a REIT, we generally are not subject to federal income tax on
the portion of our REIT taxable income which is distributed to
our stockholders, provided that at least 90% of the taxable
income is distributed and provided that certain other
requirements are met. As of December 31, 2007 and 2006, we
were in compliance with all REIT requirements and, therefore,
have not provided for income tax expense on our REIT taxable
income for the year ended December 31, 2007 and 2006.
We also have certain investments in taxable REIT subsidiaries
which are subject to federal and state income taxes. During the
year ended December 31, 2007 and 2006, we recorded a
$16.9 million and $0.2 million provision,
respectively, on income from these taxable REIT subsidiaries.
The increased provision for the year ended December 31,
2007 compared to the year ended December 31, 2006 resulted
from an increase in taxable income related to the sales of
certain properties of our investments in equity affiliates that
are held in taxable REIT subsidiaries.
43
Comparison
of Results of Operations for Year Ended 2006 and 2005
The following table sets forth our results of operations for the
years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
|
$
|
51,724,244
|
|
|
|
43
|
%
|
Income from swap derivative
|
|
|
696,960
|
|
|
|
|
|
|
|
696,960
|
|
|
|
nm
|
|
Other income
|
|
|
170,197
|
|
|
|
498,250
|
|
|
|
(328,053
|
)
|
|
|
(66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
52,093,151
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
92,693,419
|
|
|
|
45,745,424
|
|
|
|
46,947,995
|
|
|
|
103
|
%
|
Employee compensation and benefits
|
|
|
6,098,826
|
|
|
|
5,172,094
|
|
|
|
926,732
|
|
|
|
18
|
%
|
Selling and administrative
|
|
|
5,192,526
|
|
|
|
5,044,779
|
|
|
|
147,747
|
|
|
|
3
|
%
|
Management fee related party
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
401,245
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
116,816,562
|
|
|
|
68,392,843
|
|
|
|
48,423,719
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income from equity affiliates, minority interest
and provision for income taxes
|
|
|
56,883,996
|
|
|
|
53,214,564
|
|
|
|
3,669,432
|
|
|
|
7
|
%
|
Income from equity affiliates
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
(3,669,148
|
)
|
|
|
(43
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
61,668,288
|
|
|
|
61,668,004
|
|
|
|
284
|
|
|
|
nm
|
|
Income allocated to minority interest
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
(176,500
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
50,563,807
|
|
|
|
50,387,023
|
|
|
|
176,784
|
|
|
|
nm
|
|
Provision for income taxes
|
|
|
150,000
|
|
|
|
|
|
|
|
150,000
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
|
$
|
26,784
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Interest income increased $51.7 million, or 43%, to
$172.8 million in 2006 from $121.1 million in 2005.
Included in interest income is the recognition of
$10.4 million and $17.2 million of income in 2006 and
2005, respectively from a 16.7% carried profits interest in a
$30.1 million mezzanine loan that was repaid in January
2006. This income was a result of excess proceeds from the
refinances of a portfolio of properties securing the loan.
Excluding these transactions, interest income increased
$58.5 million, or 56%, over the same period. This increase
was primarily due to a 53% increase in the average balance of
the loan and investment portfolio from $978.8 million in
2005 to $1.50 billion in 2006 due to increased loan and
investment originations, as well as a 1% increase in the average
yield on assets from 10.4% in 2005 to 10.5% in 2006. This
increase in yield is a result of increased interest rates on our
floating rate portfolio due to the rise in LIBOR, largely offset
by margin compression on new originations compared to loan
payoffs from the same period in 2005 and 2006. In addition,
interest earned on cash balances increased $3.5 million
from 2005 to 2006 as a result of a 123% increase in the average
cash balance directly attributable to the addition of two CDOs
in 2006.
Income from swap derivative totaled $0.7 million and is the
result of a change in accounting treatment according to a new
technical clarification of accounting for interest rate swaps in
2006 on one of our junior subordinated notes relating to trust
preferred securities. This reflects the cumulative fair value of
the interest rate swap on one of our trust preferred securities
on the date it was deemed an ineffective cash flow hedge.
Other income decreased $0.3 million, or 66%, to
$0.2 million from $0.5 million in 2005. This decrease
was primarily due to $0.4 million in structuring fees
received for services rendered in arranging a loan facility for
a
44
borrower in 2005, partially offset by increased miscellaneous
asset management fees on our loan and investment portfolio.
Expenses
Interest expense increased $47.0 million, or 103%, to
$92.7 million in 2006 from $45.7 million in 2005. This
increase was due to a 79% increase in the average debt financing
on our loan and investment portfolio from $717.5 million in
2005 to $1.29 billion in 2006 which was directly
attributable to increased loan and investment originations and
increased leverage. In addition, the average cost of borrowings
increased 15% from 6.2% to 7.1% as a result of increased market
interest rates, partially offset by income from interest rate
swaps on our variable rate debt associated with certain of our
fixed rate loans, as well as reduced borrowing costs primarily
due to an increase in total CDO debt in 2006 from 2005.
Employee compensation and benefits expense increased
$0.9 million, or 18%, to $6.1 million in 2006 from
$5.2 million in 2005. This increase was primarily due to
the expansion of staffing needs associated with the growth of
the business and increased size of our portfolio as well as
increased stock based compensation relating to the cost of
restricted stock granted to certain of our employees. These
expenses represent salaries, benefits, stock based compensation,
and incentive compensation for those employed by us during these
periods.
Selling and administrative expense increased $0.2 million,
or 3%, to $5.2 million in 2006 from $5.0 million in
2005. These expenses remained largely unchanged from 2005 to
2006. They include, but are not limited to, professional and
consulting fees, marketing costs, insurance expense,
directors fees, licensing fees, travel, placement fees,
and stock-based compensation relating to the cost of restricted
stock granted to our directors and certain employees of our
manager.
Management fees increased $0.4 million, or 3%, to
$12.8 million in 2006 from $12.4 million in 2005.
These amounts represent compensation in the form of base
management fees and incentive management fees as provided for in
the management agreement with our manager. The base management
fees increased by $0.1 million, or 4%, to $2.6 million
in 2006 from $2.5 million in 2005. The increase is
primarily due to increased stockholders equity directly
attributable to increased capital over the same period in 2005.
The incentive management fees increased $0.3 million, or
3%, to $10.2 million in 2006 from $9.9 million in
2005. This increase was primarily due to increased profitability
in 2006 as compared to 2005.
Income
From Equity Affiliates
Income from equity affiliates decreased $3.7 million, or
43%, to $4.8 million in 2006 from $8.5 million for
2005. This decrease was primarily due to the recognition of
$4.8 million and $8.0 million of income from excess
proceeds received from the refinance of properties in the
portfolio of one of our equity investments in 2006 as compared
to 2005, respectively.
Income
Allocated to Minority Interest
Income allocated to minority interest decreased
$0.2 million, or 2%, to $11.1 million in 2006 from
$11.3 million in 2005. These amounts represent the portion
of our income allocated to our manager. This decrease was due to
a decrease in our managers limited partnership interest in
us. Our manager had a weighted average limited partnership
interest of 18.0% and 18.3% in our operating partnership in 2006
and 2005, respectively.
Liquidity
and Capital Resources
Sources
of Liquidity
Liquidity is a measurement of the ability to meet potential cash
requirements. Our short-term and long-term liquidity needs
include ongoing commitments to repay borrowings, fund future
loans and investments, fund operating costs and distributions to
our stockholders as well as other general business needs. Our
primary sources of
45
funds for liquidity consist of proceeds from equity offerings,
debt facilities and cash flows from operations. Our equity
sources consist of funds raised from our private equity offering
in July 2003, net proceeds from our initial public offering of
our common stock in April 2004, net proceeds from our public
offering of our common stock in June 2007 and depending on
market conditions, proceeds from capital market transactions
including the future issuance of common, convertible
and/or
preferred equity securities. Our debt facilities include the
issuance of floating rate notes resulting from our CDOs, the
issuance of junior subordinated notes to subsidiary trusts
issuing preferred securities and borrowings under credit
agreements. Net cash provided by operating activities include
interest income from our loan and investment portfolio reduced
by interest expense on our debt facilities, cash from equity
participation interests, repayments of outstanding loans and
investments and funds from junior loan participation
arrangements.
We believe our existing sources of funds will be adequate for
purposes of meeting our short-term and long-term liquidity
needs. Our loans and investments are financed under existing
credit facilities and their credit status is continuously
monitored; therefore, these loans and investments are expected
to generate a generally stable return. Our ability to meet our
long-term liquidity and capital resource requirements is subject
to obtaining additional debt and equity financing. If we are
unable to renew our sources of financing on substantially
similar terms or at all, it would have an adverse effect on our
business and results of operations. Any decision by our lenders
and investors to enter into such transactions with us will
depend upon a number of factors, such as our financial
performance, compliance with the terms of our existing credit
arrangements, industry or market trends, the general
availability of and rates applicable to financing transactions,
such lenders and investors resources and policies
concerning the terms under which they make such capital
commitments and the relative attractiveness of alternative
investment or lending opportunities.
To maintain our status as a REIT under the Internal Revenue
Code, we must distribute annually at least 90% of our taxable
income. These distribution requirements limit our ability to
retain earnings and thereby replenish or increase capital for
operations. However, we believe that our significant 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, including
expected new lending and investment opportunities.
Equity
Offerings
Our authorized capital provides for the issuance of up to
500 million shares of common stock, par value $0.01 per
share, and 100 million shares of preferred stock, par value
$0.01 per share.
In March 2007, we filed a shelf registration statement on
Form S-3
with the SEC under the 1933 Act with respect to an
aggregate of $500.0 million of debt securities, common
stock, preferred stock, depositary shares and warrants, that may
be sold by us from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the Commission declared
this shelf registration statement effective.
In June 2007, we sold 2,700,000 shares of our common stock
registered on the shelf registration statement in a public
offering at a price of $27.65 per share, for net proceeds of
approximately $73.6 million after deducting the
underwriting discount and the other estimated offering expenses.
We used the proceeds to pay down debt and finance our loan and
investment portfolio. The underwriters did not exercise their
over allotment option for additional shares. At
December 31, 2007, we had $425.3 million available
under this shelf registration and 20,519,335 shares
outstanding.
Debt
Facilities
We also maintain liquidity through two term credit agreements,
one of which has a revolving credit component, three master
repurchase agreements, one working capital facility, and one
bridge loan warehousing credit agreement with five different
financial institutions. In addition, we have issued three
collateralized debt obligations (CDOs) and nine
separate junior subordinated notes. London inter-bank offered
rate, or LIBOR, refers to one-month LIBOR unless specifically
stated. As of December 31, 2007, these facilities had an
aggregate capacity of $2.5 billion and borrowings were
approximately $2.3 billion.
46
The following is a summary of our debt facilities as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
Maturity
|
|
Debt Facilities
|
|
Commitment
|
|
|
Carrying Value
|
|
|
Available
|
|
|
Dates
|
|
|
Repurchase agreements. Interest is variable based on pricing
over LIBOR
|
|
$
|
323,321,740
|
|
|
$
|
244,937,929
|
|
|
$
|
78,383,811
|
|
|
|
2008 - 2009
|
|
Collateralized debt obligations. Interest is variable based on
pricing over three-month LIBOR
|
|
|
1,178,809,000
|
|
|
|
1,151,009,000
|
|
|
|
27,800,000
|
|
|
|
2011 - 2013
|
|
Junior subordinated notes. Interest is variable based on pricing
over three-month LIBOR
|
|
|
276,055,000
|
|
|
|
276,055,000
|
|
|
|
|
|
|
|
2034 - 2036
|
|
Notes payable. Interest is variable based on pricing over Prime
or LIBOR
|
|
|
728,595,278
|
|
|
|
596,160,338
|
|
|
|
132,434,940
|
|
|
|
2008 - 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,506,781,018
|
|
|
$
|
2,268,162,267
|
|
|
$
|
238,618,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These debt facilities are described in further detail in
Note 6 of the Notes to the Consolidated Financial
Statements set forth in Item 8 hereof.
Repurchase
Agreements
Repurchase obligation financings provide us with a revolving
component to our debt structure. Repurchase agreements provide
stand alone financing for certain assets and interim, or
warehouse financing, for assets that we plan to contribute to
our CDOs. At December 31, 2007, the aggregate outstanding
balance under these facilities was $244.9 million.
We have a $200.0 million repurchase agreement with a
financial institution, effective October 2006, which was amended
in December 2007 to increase the committed amount of the
facility to $200.0 million from $150.0 million. The
agreement has a term expiring in October 2009 and bears interest
at pricing over LIBOR, varying on the type of asset financed. At
December 31, 2007, the outstanding balance under this
facility was $165.6 million with a current weighted average
note rate of 6.03%.
We have a $100.0 million repurchase agreement with a second
financial institution that was amended in September 2007 from a
$50.0 million warehouse credit facility. The amendment
changed the form of the warehouse credit facility to a
repurchase agreement, increased the committed amount of the
facility to $100.0 million, and extended the maturity date
to September 2008. The repurchase agreement facility bears
interest at pricing over LIBOR. At December 31, 2007, the
outstanding balance under this facility was $56.0 million
with a current weighted average note rate of 6.66%. Subsequent
to December 31, 2007, we were notified that no further
advances could be taken under this facility. The facility
matures in September 2008 and, under the terms of the repurchase
agreement the facility will be paid in its entirety by December
2008.
We have a $100.0 million master repurchase agreement with a
third financial institution that expired in December 2007. We
exercised our right under the repurchase agreement to extend the
repayment date until June 2008. No further advances may be taken
under the agreement. This repurchase agreement bears interest at
pricing over LIBOR, varying on the type of asset financed. At
December 31, 2007, the outstanding balance under this
facility was $23.3 million with a current weighted average
note rate of 7.10%. This facility was repaid in its entirety in
February 2008.
At December 31, 2006, we had a master repurchase agreement
with Wachovia Bank, National Association (Wachovia),
dated December 2003, with an initial term of three years, which
bore interest at pricing over LIBOR, varying on the type of
asset financed. In October 2006, this repurchase agreement was
amended to increase the amount of available financing from
$350.0 million to $500.0 million and extend the
maturity to March 2007. On December 14, 2006,
$200.0 million of this facility was paid down in connection
with the closing of CDO III. This repurchase agreement was also
amended in March 2007 to temporarily increase the amount of
available financing
47
to $775.0 million and extend the maturity to May 2007. The
available financing of $775.0 million was reduced to
$350.0 million at the time of the initial funding of the
repurchase agreement entered into with the Variable Funding
Capital Company, LLC (see below). The agreement was also amended
in June 2007 to increase the committed amount of this facility
to $370.0 million from $350.0 million and extend the
maturity to October 31, 2007. In November 2007, this
facility was replaced when we entered into two new credit
agreements with Wachovia. See Notes Payable
below for further discussion on the new debt facilities.
In addition, we had a $100 million repurchase agreement
with the same financial institution that we entered into for the
purpose of financing our mortgage related securities available
for sale. The repurchase agreement expired in July 2007 and had
an interest rate of pricing over LIBOR. We sold the mortgage
related securities during the first quarter of 2007 and utilized
the proceeds of such sale to repay this facility in its entirety.
In March 2007, we entered into a $425.0 million master
repurchase agreement with Variable Funding Capital Company LLC,
(VFCC) that had a term expiring in March 2010 and
bore interest at pricing over the VFCC commercial paper rate.
This repurchase agreement was amended in June 2007 to decrease
the committed amount of the facility to $387.0 million. In
November 2007, this facility was replaced when we entered into
two new credit agreements with Wachovia. See Notes
Payable below for further discussion on the new debt
facilities.
CDOs
We completed three separate CDOs since 2005 by issuing to third
party investors, tranches of investment grade collateralized
debt obligations through newly-formed wholly-owned subsidiaries
(the Issuers). The Issuers hold assets, consisting
primarily of real-estate related assets and cash which serve as
collateral for the CDOs. The assets pledged as collateral for
the CDOs were contributed from our existing portfolio of assets.
By contributing these real estate assets to the various CDOs,
these transactions resulted in a decreased cost of funds
relating to the corresponding CDO assets and created capacity in
our existing credit facilities.
The Issuers issued tranches of investment grade floating-rate
notes of approximately $305.0 million, $356.0 million
and $447.5 million for CDO I, CDO II and CDO III,
respectively. CDO III also has a $100.0 million revolving
note which was not drawn upon at the time of issuance. The
revolving note facility has a commitment fee of 0.22% per annum
on the undrawn portion of the facility. The tranches were issued
with floating rate coupons based on three-month LIBOR plus
pricing of 0.44% 0.77%. Proceeds from the sale of
the investment grade tranches issued in CDO I, CDO II and
CDO III of $267.0 million, $301.0 million and
$317.1 million, respectively, were used to repay higher
costing outstanding debt under our repurchase agreements and
notes payable. The CDOs may be replenished with substitute
collateral for loans that are repaid during the first four years
for CDO I and the first five years for CDO II and CDO III,
subject to certain customary provisions. Thereafter, the
outstanding debt balance will be reduced as loans are repaid.
Proceeds from the repayment of assets which serve as collateral
for the CDOs must be retained in its structure as restricted
cash until such collateral can be replaced and therefore not
available to fund current cash needs. If such cash is not used
to replenish collateral, it could have a negative impact on our
anticipated returns. Proceeds from CDO I and CDO II are
distributed quarterly with approximately $2.0 million and
$1.2 million, respectively, being paid to investors as a
reduction of the CDO liability. For accounting purposes, CDOs
are consolidated in our financial statements.
At December 31, 2007, the outstanding note balance under
CDO I, CDO II and CDO III was $283.3 million,
$348.0 million and $519.7 million, respectively.
The recent turmoil in the structured finance markets, in
particular the
sub-prime
residential loan market, has negatively impacted the credit
markets generally, and, as a result, investor demand for
commercial real estate collateralized debt obligations has been
substantially curtailed. In recent years, we have relied to a
substantial extent on CDO financings to obtain match funded
financing for our investments. Until the market for commercial
real estate CDOs recovers, we may be unable to utilize CDOs to
finance our investments and we may need to utilize less
favorable sources of financing to finance our investments on a
long-term basis. There can be no assurance as to when demand for
commercial real estate CDOs will return or the terms of such
securities investors will demand or whether we will be able to
issue CDOs to finance our investments on terms beneficial to us.
48
Junior
Subordinated Notes
The junior subordinated notes are unsecured, have a maturity of
29 to 30 years, pay interest quarterly at a floating rate
of interest based on three-month LIBOR and, absent the
occurrence of special events, are not redeemable during the
first five years. Prior to 2007, we issued a total of
$223.0 million of junior subordinated notes in seven
separate private placements. In April 2007, we issued a total of
$53.1 million of junior subordinate notes in two separate
private placements. At December 31, 2007, the aggregate
outstanding balance under these facilities was
$276.1 million with a current weighted average note rate of
7.84%.
Notes
Payable
Notes payable consists of two term credit agreements, a
revolving credit line, a working capital facility, and a bridge
loan warehousing credit agreement. At December 31, 2007,
the aggregate outstanding balance under these facilities was
$596.2 million.
In June 2007, we entered into a $60.0 million working
capital facility with Wachovia. This facility has a maturity
date of June 2008, with two one year extension options, and
bears interest at pricing over one-month LIBOR. At
December 31, 2007, the aggregate outstanding balance under
this facility was $47.9 million with a current weighted
average note rate of 6.96%.
In November 2007, we entered in two new credit agreements with
Wachovia which replaced two of our existing repurchase
agreements totaling $757.0 million with Wachovia and an
affiliate of Wachovia. The outstanding balance under these two
repurchase agreements totaled approximately $542.0 million
at the time the repurchase agreements were replaced. The first
credit agreement consists of a $473.0 million term loan and
a $100.0 million revolving commitment and the second credit
agreement is a $69.0 million term loan. These two new
credit agreements each provide us with a commitment period of
two years with a one year extension option to November 2010,
bear interest at pricing over LIBOR, and have eliminated the
mark to market risk as it relates to interest rate spreads that
existed under the terms of the repurchase agreements.
The $473.0 million term loan has repayment provisions which
included reducing the outstanding balance to $425.0 million
by December 31, 2007 and also requires a further reduction
of the outstanding balance to $300.0 million by
December 31, 2008. The advance rates for this term facility
are similar to the advance rates that existed under the previous
repurchase agreements. At December 31, 2007, the
outstanding balance under this facility was $412.1 million
with a current weighted average note rate of 6.87%. The
$100.0 million revolving commitment is used to finance new
investments and can be increased to $200.0 million when the
term loan is paid down to $400.0 million. The term loan was
paid down to $400.0 million on February 15, 2008. At
December 31, 2007, the outstanding balance under this
revolving facility was $6.8 million with a current weighted
average note rate of 6.89%.
The $69.0 million term loan includes $10.0 million of
annual repayment provisions in quarterly installments. The
advance rate on this term facility is higher than the advance
rate for the collateral that was in the repurchase agreement and
eliminates the mark to market risk as it relates to interest
rate spreads that existed under the terms of the repurchase
agreement. We have also pledged our 24% equity interest in Prime
Outlets Members, LLC (POM) as part of the agreement.
In the second and third year of this term facility, we will be
required to paydown this facility by an additional amount equal
to distributions in excess of $10.0 million per year
received by us from our investment in POM, if any. At
December 31, 2007, the outstanding balance under this
facility was $66.5 million with a current weighted average
note rate of 7.36%.
We have a $90.0 million bridge loan warehousing credit
agreement with a fifth financial institution, effective June
2005, to provide financing for bridge loans. This agreement
bears a variable rate of interest, payable monthly, based on
Prime plus 0% or pricing over 1, 2, 3 or
6-month
LIBOR, at our option. In October 2007, this facility was amended
to extend the maturity date to October 2008 and increase the
amount of available financing from $75 million to
$90 million. At December 31, 2007, the outstanding
balance under this facility was $62.9 million with a
current weighted average note rate of 6.51%.
At December 31, 2006, we had a $50.0 million
warehousing credit facility, effective December 2005, that had a
term expiring in December 2007 that bears interest at pricing
over LIBOR, varying on the type of asset financed. In September
2007, we amended this facility and changed the form of the
warehouse credit facility to a repurchase
49
agreement, increased the committed amount of the facility to
$100.0 million and extended the maturity date to September
2008. The repurchase agreement facility bears interest at
pricing over LIBOR. See Repurchase Agreements
discussed above.
The working capital facility, bridge loan warehousing credit
agreement, term and revolving credit agreements, and the master
repurchase agreements require that we pay interest monthly,
based on pricing over LIBOR. The amount of our pricing over
these rates varies depending upon the structure of the loan or
investment financed pursuant to the specific agreement.
The working capital facility, term and revolving credit
agreements, bridge loan warehousing credit agreement, and the
master repurchase agreements require that we pay down borrowings
under these facilities pro-rata as principal payments on our
loans and investments are received. In addition, if upon
maturity of a loan or investment we decide to grant the borrower
an extension option, the financial institutions have the option
to extend the borrowings or request payment in full on the
outstanding borrowings of the loan or investment extended. The
financial institutions also have the right to request immediate
payment of any outstanding borrowings on any loan or investment
that is at least 60 days delinquent.
Cash
Flow From Operations
We continually monitor our cash position to determine the best
use of funds to both maximize our return on funds while
maintaining an appropriate level of liquidity. Historically, in
order to maximize the return on our funds, cash generated from
operations has generally been used to temporarily pay down
borrowings under credit facilities whose primary purpose is to
fund our new loans and investments. When making distributions,
we have borrowed the required funds by drawing on credit
capacity available under our credit facilities. To date, all
distributions have been funded in this manner. All funds
borrowed to make distributions have been repaid by funds
generated from operations. However, in order to maintain
adequate liquidity within our credit facilities for their
primary purpose of funding our new loans and investments, we may
begin to accumulate cash generated from operations to make the
distributions.
Restrictive
Covenants
Each of the credit facilities contains various financial
covenants and restrictions, including minimum net worth and
debt-to-equity
ratios. In addition to the financial terms and capacities
described above, our credit facilities generally contain
covenants that prohibit us from effecting a change in control,
disposing of or encumbering assets being financed and restrict
us from making any material amendment to our underwriting
guidelines without approval of the lender. If we violate these
covenants in any of our credit facilities, we could be required
to repay all or a portion of our indebtedness before maturity at
a time when we might be unable to arrange financing for such
repayment on attractive terms, if at all.
Violations of these covenants may result in our being unable to
borrow unused amounts under our credit facilities, even if
repayment of some or all borrowings is not required. As of
December 31, 2007, we are in compliance with all covenants
and restrictions under these credit facilities.
Share
Repurchase Plan
In August 2006, the Board of Directors authorized a stock
repurchase plan that enabled us to buy up to one million shares
of our common stock. At managements discretion, shares
were acquired on the open market, through privately negotiated
transactions or pursuant to a
Rule 10b5-1
plan. A
Rule 10b5-1
plan permits us to repurchase shares at times when we might
otherwise be prevented from doing so. As of December 31,
2007, we repurchased 279,400 shares of our common stock in
the open market and under a 10b5-1 plan at a total cost of
$7.0 million (an average cost of $25.10 per share). This
plan expired on February 9, 2007 and we did not purchase
any shares during the year ended December 31, 2007.
50
Contractual
Commitments
As of December 31, 2007, we had the following material
contractual obligations (payments in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period(1)
|
|
Contractual Obligations
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Notes payable(2)
|
|
$
|
232,901
|
|
|
$
|
42,000
|
|
|
$
|
321,259
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
596,160
|
|
Collateralized debt obligations(3)
|
|
|
12,720
|
|
|
|
96,493
|
|
|
|
96,493
|
|
|
|
303,470
|
|
|
|
641,833
|
|
|
|
|
|
|
|
1,151,009
|
|
Repurchase agreements
|
|
|
79,367
|
|
|
|
165,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,938
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276,055
|
|
|
|
276,055
|
|
Outstanding unfunded commitments(4)
|
|
|
94,338
|
|
|
|
41,756
|
|
|
|
9,853
|
|
|
|
7,180
|
|
|
|
1,467
|
|
|
|
899
|
|
|
|
155,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
419,326
|
|
|
$
|
345,820
|
|
|
$
|
427,605
|
|
|
$
|
310,650
|
|
|
$
|
643,300
|
|
|
$
|
276,954
|
|
|
$
|
2,423,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents amounts due based on
contractual maturities.
|
|
(2)
|
|
Maturity date for Wachovia term and
revolving facilities includes the one year extension option.
|
|
(3)
|
|
Comprised of $283.3 million of CDO
I debt, $348.0 million of CDO II debt and $519.7 million of CDO
III debt with a weighted average remaining maturity of 2.48,
3.94 and 4.48 years, respectively, as of December 31, 2007.
|
|
(4)
|
|
In accordance with certain loans
and investments, we have outstanding unfunded commitments of
$155.5 million as of December 31, 2007, 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.
|
Off-Balance-Sheet
Arrangements
We have several off-balance-sheet investments, including joint
ventures and structured finance investments. These investments
all have varying ownership structures. Substantially all of our
joint venture arrangements are accounted for under the equity
method of accounting as we have the ability to exercise
significant influence, but not control over the operating and
financial decisions of these joint venture arrangements. Our
off-balance-sheet arrangements are discussed in Note 5,
Investments in Equity Affiliates of the Notes
to Consolidated Financial Statements set forth in
Item 8 hereof.
Management
Agreement
Base Management Fees. In exchange for the
services that ACM provides us pursuant to the management
agreement, we pay our manager a monthly base management fee in
an amount equal to:
(1) 0.75% per annum of the first $400 million of our
operating partnerships equity (equal to the month-end
value computed in accordance with GAAP of total partners
equity in our operating partnership, plus or minus any
unrealized gains, losses or other items that do not affect
realized net income),
(2) 0.625% per annum of our operating partnerships
equity between $400 million and $800 million, and
(3) 0.50% per annum of our operating partnerships
equity in excess of $800 million.
The base management fee is not calculated based on the
managers performance or the types of assets its selects
for investment on our behalf, but it is affected by the
performance of these assets because it is based on the value of
our operating partnerships equity. We incurred
$3.2 million and $2.6 million in base management fees
for services rendered in 2007 and 2006, respectively.
Incentive Compensation. Pursuant to the
management agreement, our manager is also entitled to receive
incentive compensation in an amount equal to:
(1) 25% of the amount by which:
(a) our operating partnerships funds from operations
per operating partnership unit, adjusted for certain gains and
losses, exceeds
51
(b) the product of (x) the greater of 9.5% per annum or the
Ten Year U.S. Treasury Rate plus 3.5%, and (y) the weighted
average of (i) $15.00, (ii) the offering price per share of our
common stock (including any shares of common stock issued upon
exercise of warrants or options) in any subsequent offerings
(adjusted for any prior capital dividends or distributions), and
(iii) the issue price per operating partnership unit for
subsequent contributions to our operating partnership,
multiplied by
(2) the weighted average of our operating
partnerships outstanding operating partnership units.
In 2007, our manager earned a total of $40.8 million of
incentive compensation which includes $21.8 million
recorded as management fee expense and $19.0 million
recorded as prepaid management fees related to the incentive
management fee on the deferred gain recognized on the transfer
of control of the 450 West
33rd
Street property of one of our equity affiliates. Our manager has
elected to receive these payments in the form of
556,631 shares of common stock with the remainder paid in
cash totaling $27.1 million. In 2006, our manager earned a
total of $10.2 million of incentive compensation and
elected to receive it partially in cash totaling
$1.7 million and partially in 306,764 shares of common
stock.
We pay the annual incentive compensation in four installments,
each within 60 days of the end of each fiscal quarter. The
calculation of each installment is based on results for the
12 months ending on the last day of the fiscal quarter for
which the installment is payable. These installments of the
annual incentive compensation are subject to recalculation and
potential reconciliation at the end of such fiscal year. Subject
to the ownership limitations in our charter, at least 25% of
this incentive compensation is payable to our manager in shares
of our common stock having a value equal to the average closing
price per share for the last 20 days of the fiscal quarter
for which the incentive compensation is being paid.
The incentive compensation is accrued as it is earned. In
accordance with Issue 4(b) of
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, the expense incurred for incentive
compensation paid in common stock is determined using the
valuation method described above and the quoted market price of
our common stock on the last day of each quarter. At December 31
of each year, we remeasure the incentive compensation paid to
our manager in the form of common stock in accordance with Issue
4(a) of
EITF 96-18
which discusses how to measure at the measurement date when
certain terms are not known prior to the measurement date.
Accordingly, the expense recorded for such common stock is
adjusted to reflect the fair value of the common stock on the
measurement date when the final calculation of the annual
incentive compensation is determined. In the event that the
annual incentive compensation calculated as of the measurement
date is less than the four quarterly installments of the annual
incentive compensation paid in advance, our manager will refund
the amount of such overpayment in cash and we would record a
negative incentive compensation expense in the quarter when such
overpayment is determined.
Origination Fees. Our manager is entitled to
100% of the origination fees paid by borrowers on all loans and
investments that do not exceed 1% of the loans principal
amount. We retain 100% of the origination fee that exceeds 1% of
the loans principal amount.
Term and Termination. The management agreement
has an initial term of two years and is renewable automatically
for an additional one year period every year thereafter, unless
terminated with six months prior written notice. If we
terminate or elect not to renew the management agreement in
order to manage our portfolio internally, we are required to pay
a termination fee equal to the base management fee and incentive
compensation for the
12-month
period preceding the termination. If, without cause, we
terminate or elect not to renew the management agreement for any
other reason, including a change of control of us, we are
required to pay a termination fee equal to two times the base
management fee and incentive compensation paid for the
12-month
period preceding the termination.
Inflation
In 2006 and 2005, inflation and changing prices did not have a
material effect on our net income and revenue. 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. However, the significant decline in
interest rates during the latter part of
52
2007 triggered LIBOR floors on certain of our variable rate
interest-earning assets. This resulted in an increase in
interest rate spreads as the rates we pay on variable rate
interest-bearing liabilities declined at a greater pace than the
rates we earned on our variable rate interest-earning assets.
Additionally, we have various fixed rate loans in our portfolio
which are financed with variable rate LIBOR borrowings. In
connection with these loans, we have entered into various
interest swaps to hedge our exposure to the interest rate risk
on our variable rate LIBOR borrowings as it relates to certain
fixed rate loans in our portfolio. However, the value of our
interest-earning assets, our ability to realize gains from the
sale of assets, and the average life of our interest-earning
assets, among other things, may be affected. See
Item 7A Quantitative and Qualitative
Disclosures about Market Risk.
Related
Party Transactions
Related
Party Loans
Due to related party was $2.4 million at December 31,
2007 and consisted of $3.2 million of management fees that
were due to ACM and remitted in February 2008 which was
partially offset by $0.8 million of extension and filing
fees received by ACM which were remitted to us in February 2008.
Due to related party was $4.0 million at December 31,
2006 and consisted of $3.9 million of management fees that
were due to ACM and remitted in February 2007 and
$0.1 million of escrows received at loan closings that were
due to ACM and remitted in January 2007.
As of December 31, 2006 and 2005, we had a
$7.75 million first mortgage loan that bore interest at a
variable rate of one month LIBOR plus 4.25% and was scheduled to
mature in March 2006. In March 2006, this loan was extended for
one year with no other change in terms. The underlying property
was sold to a third party in March 2007. We provided the
financing to the third party and, in conjunction with the sale,
the original loan was repaid in full in March 2007. The original
loan was made to a
not-for-profit
corporation that holds and manages investment property from the
endowment of a private academic institution. Two of our
directors are members of the board of trustees of the original
borrower and the private academic institution. Interest income
recorded from the original loan for the year ended
December 31, 2007, 2006 and 2005, was approximately
$0.1 million, $0.7 million and $0.6 million,
respectively.
At June 30, 2007, we had a $1.3 million first mortgage
co-op loan which was past its maturity date. The loan was
contributed to us by Arbor Commercial Mortgage in 2003 as part
of the initial capitalization for ACMs equity ownership in
ARLP. In July 2007, ACM purchased the $1.3 million loan
back from us at par including all accrued and unpaid interest.
We had also sold a participating interest in the loan for
$125,000 which was recorded as a financing and was included in
notes payable. The loan participation was satisfied in September
2007.
In June 2007, we provided a $0.6 million mezzanine loan for
the development of a 38 unit rental apartment complex in
Connecticut that matures in July 2012 and bears interest at a
fixed rate of 7.97%. The first mortgage loan was originated by
ACM. The borrower was delinquent and in October 2007, ACM
purchased the $0.6 million loan from us at par including
all accrued and unpaid interest.
ACM has a 50% non-controlling interest in an entity, which owns
15% of a real estate holding company that owns and operates a
factory outlet center. At December 31, 2007, ACMs
investment in this joint venture was approximately
$0.2 million. We had a $28.3 million preferred equity
investment to this joint venture, which was collateralized by a
pledge of the ownership interest in this commercial real estate
property. This loan was funded by ACM in September 2005 and was
purchased by us in March 2006. The loan required monthly
interest payments based on one month LIBOR and was due to mature
in September 2007. Interest income recorded from this loan for
the year ended December 31, 2006 was approximately
$2.7 million. The loan was repaid in full in November 2006.
In 2005, ACM received a brokerage fee for services rendered in
arranging a loan facility for a borrower. We provided a portion
of the loan facility. We were credited $0.4 million of this
brokerage fee, which was included in other income.
During the first quarter 2006, ACM originated permanent
financing of $31.5 million to a borrower to repay an
existing $30.0 million bridge loan with us. Pursuant to the
terms of the bridge loan agreement, we had a right of first
offer to provide permanent financing, a right of first refusal
to match the terms and conditions from a third party lender and
a potential prepayment fee of $0.9 million. In August 2006,
ACM received a $0.5 million fee for the securitization of
the $31.5 million permanent financing. This fee was
remitted to us in August 2006 in consideration of us waving our
right of first refusal and potential prepayment fee under the
original terms of the bridge loan.
53
Other
Related Party Transactions
ACM contributed the majority of its structured finance portfolio
to our operating partnership pursuant to a contribution
agreement. The contribution agreement contains representations
and warranties concerning the ownership and terms of the
structured finance assets it contributed and other customary
matters. ACM has agreed to indemnify us and our operating
partnership against breaches of those representations and
warranties. In exchange for ACMs asset contribution, we
issued to ACM approximately 3.1 million operating
partnership units, each of which ACM may redeem for one share of
our common stock or an equivalent amount in cash, at our
election, and 629,345 warrants, each of which entitled ACM to
purchase one additional operating partnership unit at an initial
exercise price of $15.00. The operating partnership units and
warrants for additional operating partnership units issued to
ACM were valued at approximately $43.9 million at
July 1, 2003, based on the price offered to investors in
our units in the private placement, adjusted for the initial
purchasers discount. We also granted ACM certain demand
and other registration rights with respect to the shares of
common stock issuable upon redemption of its operating
partnership units. In 2004, ACM exercised all of its warrants
for a total of 629,345 operating partnership units and proceeds
of $9.4 million.
Each of the approximately 3.8 million operating partnership
units owned by ACM is paired with one share of our special
voting preferred stock that entitles the holder to one vote on
all matters submitted to a vote of our stockholders. As
operating partnership units are redeemed for shares of our
common stock or cash an equivalent number of shares of special
voting preferred stock will be redeemed and cancelled. As a
result of the ACM asset contribution and the related formation
transactions, ACM owns approximately a 16% limited partnership
interest in our operating partnership and the remaining 84%
interest in our operating partnership is owned by us. In
addition, ACM has approximately 20% of the voting power of our
outstanding stock.
We and our operating partnership have entered into a management
agreement with ACM pursuant to which ACM has agreed to provide
us with structured finance investment opportunities and loan
servicing as well as other services necessary to operate our
business. As discussed above in Contractual
Commitments, we have agreed to pay our manager an annual
base management fee and incentive compensation each fiscal
quarter and share with ACM a portion of the origination fees
that we receive on loans we originate with ACM pursuant to this
agreement.
Under the terms of the management agreement, ACM has also
granted us a right of first refusal with respect to all
structured finance investment opportunities in the multi-family
and commercial real estate markets that are identified by ACM or
its affiliates.
In addition, Mr. Kaufman has entered into a non-competition
agreement with us pursuant to which he has agreed not to pursue
structured finance investment opportunities in the multi-family
and commercial real estate markets, except as approved by our
board of directors.
We are dependent upon our manager (ACM), with whom we have a
conflict of interest, to provide services to us that are vital
to our operations. Our chairman, chief executive officer and
president, Mr. Ivan Kaufman, is also the chief executive
officer and president of our manager, and, our chief financial
officer, Mr. Paul Elenio, is the chief financial officer of
our manager. In addition, Mr. Kaufman and the Kaufman
entities together beneficially own approximately 90% of the
outstanding membership interests of ACM and certain of our
employees and directors, also hold an ownership interest in ACM.
Furthermore, one of our directors also serves as the trustee of
one of the Kaufman entities that holds a majority of the
outstanding membership interests in ACM and co-trustee of
another Kaufman entity that owns an equity interest in our
manager. ACM currently holds a 16% limited partnership interest
in our operating partnership and 20% of the voting power of our
outstanding stock.
We and our operating partnership have also entered into a
services agreement with ACM pursuant to which our asset
management group provides asset management services to ACM. In
the event the services provided by our asset management group
pursuant to the agreement exceed by more than 15% per quarter
the level of activity anticipated by our board of directors, we
will negotiate in good faith with our manager an adjustment to
our managers base management fee under the management
agreement, to reflect the scope of the services, the quantity of
serviced assets or the time required to be devoted to the
services by our asset management group.
54
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk is the exposure to loss resulting from changes in
interest rates, foreign currency exchange rates, commodity
prices, equity prices and real estate values. The primary market
risks that we are exposed to are real estate risk and interest
rate risk.
Market
Conditions
We are subject to market changes in the debt and secondary
mortgage markets. These markets are currently experiencing
disruptions, which could have a short term adverse impact on our
earnings and financial condition.
Current conditions in the debt markets include reduced liquidity
and increased risk adjusted premiums. These conditions may
increase the cost and reduce the availability of debt. We
attempt to mitigate the impact of debt market disruptions by
obtaining adequate debt facilities from a variety of financing
sources. There can be no assurance, however, that we will be
successful in these efforts, that such debt facilities will be
adequate or that the cost of such debt facilities will be at
similar terms.
The secondary mortgage markets are also currently experiencing
disruptions resulting from reduced investor demand for
collateralized debt obligations and increased investor yield
requirements for these obligations. In light of these
conditions, we currently expect to finance our loan and
investment portfolio with our current capital and debt
facilities.
Real
Estate Risk
Commercial mortgage assets may be viewed as exposing an investor
to greater risk of loss than residential mortgage assets since
such assets are typically secured by larger loans to fewer
obligors than residential mortgage assets. Multi-family and
commercial property values and net operating income derived from
such properties are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to,
events such as natural disasters including hurricanes and
earthquakes, acts of war
and/or
terrorism (such as the events of September 11,
2001) and others that may cause unanticipated and uninsured
performance declines
and/or
losses to us or the owners and operators of the real estate
securing our investment; national, regional and local economic
conditions (which may be adversely affected by industry
slowdowns and other factors); local real estate conditions (such
as an oversupply of housing, retail, industrial, office or other
commercial space); changes or continued weakness in specific
industry segments; construction quality, construction cost, age
and design; demographic factors; retroactive changes to building
or similar codes; and increases in operating expenses (such as
energy costs). In the event net operating income decreases, a
borrower may have difficulty repaying our loans, which could
result in losses to us. In addition, decreases in property
values reduce the value of the collateral and the potential
proceeds available to a borrower to repay our loans, which could
also cause us to suffer losses. Even when the net operating
income is sufficient to cover the related propertys debt
service, there can be no assurance that this will continue to be
the case in the future.
Interest
Rate Risk
Interest rate risk is highly sensitive to many factors,
including governmental monetary and tax policies, domestic and
international economic and political considerations and other
factors beyond our control.
Our operating results will depend in large part on differences
between the income from our loans and our borrowing costs. Most
of our loans and borrowings are variable-rate instruments, based
on LIBOR. The objective of this strategy is to minimize the
impact of interest rate changes on our net interest income. In
addition, we have various fixed rate loans in our portfolio,
which are financed with variable rate LIBOR borrowings. We have
entered into various interest swaps (as discussed below) to
hedge our exposure to interest rate risk on our variable rate
LIBOR borrowings as it relates to our fixed rate loans. Many of
our loans and borrowings are subject to various interest rate
floors. As a result, the impact of a change in interest rates
may be different on our interest income than it is on our
interest expense.
Based on the loans and liabilities as of December 31, 2007,
and assuming the balances of these loans and liabilities remain
unchanged for the subsequent twelve months, a 1.5% increase in
LIBOR would decrease our
55
annual net income and cash flows by approximately
$1.3 million. This is primarily due to various interest
rate floors that are in effect at a rate that is above a 1.5%
increase in LIBOR which would limit the effect of a 1.5%
increase, and increased expense on variable rate debt, partially
offset by our interest rate swaps that effectively convert a
portion of the variable rate LIBOR based debt, as it relates to
certain fixed rate assets, to a fixed basis that is not subject
to a 1.5% increase. Based on the loans and liabilities as of
December 31, 2007, and assuming the balances of these loans
and liabilities remain unchanged for the subsequent twelve
months, a 1.5% decrease in LIBOR would increase our annual net
income and cash flows by approximately $12.5 million. This
is primarily due to various interest rate floors which limit the
effect of a 1.5% decrease on interest income and decreased
expense on variable rate debt, partially offset by our interest
rate swaps that effectively converted a portion of the variable
rate LIBOR based debt, as it relates to certain fixed rate
assets, to a fixed basis that is not subject to a 1.5% decrease.
As of December 31, 2006, a 1% increase in LIBOR would have
increased our annual net income and cash flows in the subsequent
twelve months by approximately $2.0 million. This is
primarily due to our interest rate swaps that effectively
convert a portion of the variable rate LIBOR based debt, as it
relates to certain fixed rate assets, to a fixed basis that is
not subject to a 1% increase. As of December 31, 2006, a 1%
decrease in LIBOR would have decreased our annual net income and
cash flows in the subsequent twelve months by approximately
$1.5 million. This is primarily due to our interest rate
swaps that effectively convert a portion of the variable rate
LIBOR based debt, as it relates to certain fixed rate assets, to
a fixed basis that is not subject to a 1% decrease, partially
offset by loans currently subject to interest rate floors (and,
therefore, not be subject to the full downward interest rate
adjustment).
In the event of a significant rising interest rate environment
and/or
economic downturn, defaults could increase and result in credit
losses to us, which could adversely affect our liquidity and
operating results. Further, such delinquencies or defaults could
have an adverse effect on the spreads between interest-earning
assets and interest-bearing liabilities.
During the quarter ended March 31, 2007, we sold our entire
securities available for sale portfolio. These securities which
had been designated as held for sale were financed with a
repurchase agreement, and the proceeds of the sale were utilized
to repay the repurchase agreement.
In connection with our CDOs described in Managements
Discussion and Analysis of Financial Condition and Results of
Operations, we entered into interest rate swap agreements
to hedge the exposure to the risk of changes in the difference
between three-month LIBOR and one-month LIBOR interest rates.
These interest rate swaps became necessary due to the
investors return being paid based on a three-month LIBOR
index while the assets contributed to the CDOs are yielding
interest based on a one-month LIBOR index.
As of December 31, 2007 and 2006, we had ten of these
interest rate swap agreements outstanding that have combined
notional values of $1.3 billion and $1.2 billion,
respectively. The market value of these interest rate swaps is
dependent upon existing market interest rates and swap spreads,
which change over time. As of December 31, 2007, and
December 31, 2006, if there were a 50 basis point
increase in forward interest rates, the value of these interest
rate swaps would have decreased by approximately
$0.1 million and $0.7 million, respectively. If there
were a 50 basis point decrease in forward interest rates,
the value of these interest rate swaps would have increased by
approximately $0.1 million and $0.7 million,
respectively.
In connection with the issuance of variable rate junior
subordinate notes during 2007, 2006 and 2005, we entered into
various interest rate swap agreements. These swaps have total
notional values of $191.5 million and $140.0 million,
respectively, as of December 31, 2007 and December 31,
2006. The market value of these interest rate swaps is dependent
upon existing market interest rates and swap spreads, which
change over time. As of December 31, 2007 and
December 31, 2006, if there had been a 50 basis point
increase in forward interest rates, the fair market value of
these interest rate swaps would have increased by approximately
$2.9 million and $2.5 million, respectively. If there
were a 50 basis point decrease in forward interest rates,
the fair market value of these interest rate swaps would have
decreased by approximately $3.0 million and
$2.4 million, respectively.
As of December 31, 2007, we had twenty seven interest rate
swap agreements outstanding that have a combined notional value
of $584.7 million. As of December 31, 2006 we had
eighteen interest rate swap agreements outstanding with combined
notional values of $330.4 million to hedge current and
outstanding LIBOR
56
based debt relating to certain fixed rate loans within our
portfolio. The fair market value of these interest rate swaps is
dependent upon existing market interest rates and swap spreads,
which change over time. As of December 31, 2007 and
December 31, 2006, if there had been a 50 basis point
increase in forward interest rates, the fair market value of
these interest rate swaps would have increased by approximately
$14.9 million and $8.9 million, respectively. If there
were a 50 basis point decrease in forward interest rates,
the fair market value of these interest rate swaps would have
decreased by approximately $15.4 million and
$9.2 million, respectively.
Our hedging transactions using derivative instruments also
involve certain additional risks such as counterparty credit
risk, the enforceability of hedging contracts and the risk that
unanticipated and significant changes in interest rates will
cause a significant loss of basis in the contract. The
counterparties to our derivative arrangements are major
financial institutions with high credit ratings with which we
and our affiliates may also have other financial relationships.
As a result, we do not anticipate that any of these
counterparties will fail to meet their obligations. There can be
no assurance that we will be able to adequately protect against
the foregoing risks and will ultimately realize an economic
benefit that exceeds the related amounts incurred in connection
with engaging in such hedging strategies.
We utilize interest rate swaps to limit interest rate risk.
Derivatives are used for hedging purposes rather than
speculation. We do not enter into financial instruments for
trading purposes.
57
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
THE CONSOLIDATED FINANCIAL STATEMENTS OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Page
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
108
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
58
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Arbor Realty Trust, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Arbor Realty Trust, Inc. and Subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index to the Consolidated
Financial Statements. These financial statements and schedule
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Arbor Realty Trust, Inc. and Subsidiaries
at December 31, 2007 and 2006, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 3, 2008 expressed an unqualified opinion
thereon.
New York, New York
March 3, 2008
59
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
22,219,541
|
|
|
$
|
7,756,857
|
|
Restricted cash
|
|
|
139,136,105
|
|
|
|
84,772,062
|
|
Loans and investments, net
|
|
|
2,592,093,930
|
|
|
|
1,993,525,064
|
|
Related party loans, net
|
|
|
|
|
|
|
7,752,038
|
|
Available-for-sale securities, at fair value
|
|
|
15,696,743
|
|
|
|
22,100,176
|
|
Investment in equity affiliates
|
|
|
29,590,190
|
|
|
|
25,376,949
|
|
Prepaid management fee related party
|
|
|
19,047,949
|
|
|
|
|
|
Other assets
|
|
|
83,709,076
|
|
|
|
63,062,065
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,901,493,534
|
|
|
$
|
2,204,345,211
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Repurchase agreements
|
|
$
|
244,937,929
|
|
|
$
|
395,847,359
|
|
Collateralized debt obligations
|
|
|
1,151,009,000
|
|
|
|
1,091,529,000
|
|
Junior subordinated notes to subsidiary trust issuing preferred
securities
|
|
|
276,055,000
|
|
|
|
222,962,000
|
|
Notes payable
|
|
|
596,160,338
|
|
|
|
94,574,240
|
|
Due to related party
|
|
|
2,429,109
|
|
|
|
3,983,647
|
|
Due to borrowers
|
|
|
18,265,906
|
|
|
|
16,067,295
|
|
Deferred revenue
|
|
|
77,123,133
|
|
|
|
|
|
Other liabilities
|
|
|
67,395,776
|
|
|
|
17,802,341
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,433,376,191
|
|
|
|
1,842,765,882
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
72,854,258
|
|
|
|
65,468,252
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 100,000,000 shares
authorized; 3,776,069 shares issued and outstanding
|
|
|
37,761
|
|
|
|
37,761
|
|
Common stock, $0.01 par value: 500,000,000 shares
authorized; 20,798,735 shares issued,
20,519,335 shares outstanding at December 31, 2007 and
17,388,770 shares issued, 17,109,370 shares
outstanding at December 31, 2006
|
|
|
207,987
|
|
|
|
173,888
|
|
Additional paid-in capital
|
|
|
365,376,136
|
|
|
|
273,037,744
|
|
Treasury stock, at cost 279,400 shares
|
|
|
(7,023,361
|
)
|
|
|
(7,023,361
|
)
|
Retained earnings
|
|
|
65,665,951
|
|
|
|
27,732,489
|
|
Accumulated other comprehensive (loss)/income
|
|
|
(29,001,389
|
)
|
|
|
2,152,556
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
395,263,085
|
|
|
|
296,111,077
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,901,493,534
|
|
|
$
|
2,204,345,211
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
Income from swap derivative
|
|
|
|
|
|
|
696,960
|
|
|
|
|
|
Other income
|
|
|
39,503
|
|
|
|
170,197
|
|
|
|
498,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
147,710,194
|
|
|
|
92,693,419
|
|
|
|
45,745,424
|
|
Employee compensation and benefits
|
|
|
9,381,055
|
|
|
|
6,098,826
|
|
|
|
5,172,094
|
|
Selling and administrative
|
|
|
5,593,175
|
|
|
|
5,192,526
|
|
|
|
5,044,779
|
|
Provision for loan losses
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
Management fee related party
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
68,392,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income from equity affiliates, minority interest
and provision for income taxes
|
|
|
83,834,461
|
|
|
|
56,883,996
|
|
|
|
53,214,564
|
|
Income from equity affiliates, net
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
118,408,055
|
|
|
|
61,668,288
|
|
|
|
61,668,004
|
|
Income allocated to minority interest
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
101,418,878
|
|
|
|
50,563,807
|
|
|
|
50,387,023
|
|
Provision for income taxes
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
4.44
|
|
|
$
|
2.94
|
|
|
$
|
2.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
4.44
|
|
|
$
|
2.93
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
2.46
|
|
|
$
|
2.57
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,022,616
|
|
|
|
17,161,346
|
|
|
|
16,867,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
22,870,159
|
|
|
|
21,001,804
|
|
|
|
20,672,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
YEAR
ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Stock
|
|
|
Common
|
|
|
Stock
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Par
|
|
|
Stock
|
|
|
Par
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Income
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
Balance- January 1, 2005
|
|
|
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
16,467,218
|
|
|
$
|
164,672
|
|
|
$
|
254,267,202
|
|
|
|
|
|
|
$
|
|
|
|
$
|
8,813,138
|
|
|
$
|
(529,600
|
)
|
|
$
|
262,753,173
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,342
|
|
|
|
1,913
|
|
|
|
5,265,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,267,055
|
|
Issuance of common stock from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,776
|
|
|
|
2,828
|
|
|
|
4,189,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,191,855
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,500
|
|
|
|
1,245
|
|
|
|
(1,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,590,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,590,898
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,747,372
|
)
|
|
|
|
|
|
|
(37,747,372
|
)
|
Forfeited unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,445
|
)
|
|
|
(144
|
)
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to minority interest from increased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619,237
|
)
|
Net income
|
|
$
|
50,387,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,387,023
|
|
|
|
|
|
|
|
50,387,023
|
|
Net unrealized loss on securities available for sale
|
|
|
(365,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(365,698
|
)
|
|
|
(365,698
|
)
|
Unrealized gain on derivative financial instruments
|
|
|
2,150,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,150,820
|
|
|
|
2,150,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2005
|
|
$
|
52,172,145
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
17,051,391
|
|
|
$
|
170,514
|
|
|
$
|
264,691,931
|
|
|
|
|
|
|
$
|
|
|
|
$
|
21,452,789
|
|
|
$
|
1,255,522
|
|
|
$
|
287,608,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,129
|
|
|
|
2,431
|
|
|
|
6,277,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,280,213
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279,400
|
)
|
|
|
(7,023,361
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,023,361
|
)
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,695
|
|
|
|
947
|
|
|
|
(947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,329,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,329,689
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,134,107
|
)
|
|
|
|
|
|
|
(44,134,107
|
)
|
Forfeited unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(445
|
)
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to minority interest from increased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,715
|
)
|
Net income
|
|
$
|
50,413,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,413,807
|
|
|
|
|
|
|
|
50,413,807
|
|
Net unrealized gain on securities available for sale
|
|
|
796,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796,922
|
|
|
|
796,922
|
|
Unrealized gain on derivative financial instruments
|
|
|
100,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,112
|
|
|
|
100,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2006
|
|
$
|
51,310,841
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
17,388,770
|
|
|
$
|
173,888
|
|
|
$
|
273,037,744
|
|
|
|
(279,400
|
)
|
|
$
|
(7,023,361
|
)
|
|
$
|
27,732,489
|
|
|
$
|
2,152,556
|
|
|
$
|
296,111,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
27,000
|
|
|
|
73,599,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,626,068
|
|
Issuance of common stock for management incentive fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,864
|
|
|
|
5,909
|
|
|
|
15,971,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,977,425
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,101
|
|
|
|
1,190
|
|
|
|
(1,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,454,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,454,957
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,600,416
|
)
|
|
|
|
|
|
|
(46,600,416
|
)
|
Adjustment to minority interest from decreased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,041
|
|
Net income
|
|
$
|
84,533,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,533,878
|
|
|
|
|
|
|
|
84,533,878
|
|
Net unrealized loss on securities available for sale
|
|
|
(1,018,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,018,841
|
)
|
|
|
(1,018,841
|
)
|
Reclass adjustment of net loss on securities available for sale
realized in net income
|
|
|
98,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,376
|
|
|
|
98,376
|
|
Unrealized loss on derivative financial instruments
|
|
|
(30,233,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,233,480
|
)
|
|
|
(30,233,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2007
|
|
$
|
53,379,933
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
20,798,735
|
|
|
$
|
207,987
|
|
|
$
|
365,376,136
|
|
|
|
(279,400
|
)
|
|
$
|
(7,023,361
|
)
|
|
$
|
65,665,951
|
|
|
$
|
(29,001,389
|
)
|
|
$
|
395,263,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
2,454,957
|
|
|
|
2,329,689
|
|
|
|
1,590,898
|
|
Provision for loan losses
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
Amortization and accretion of interest
|
|
|
1,587,481
|
|
|
|
(219,820
|
)
|
|
|
(165,906
|
)
|
Non-cash incentive compensation to
manager related party
|
|
|
9,146,905
|
|
|
|
8,453,489
|
|
|
|
5,545,506
|
|
Earnings from equity affiliates
|
|
|
(24,150,787
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of securities available for sale
|
|
|
(30,182
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(7,018,970
|
)
|
|
|
(6,336,004
|
)
|
|
|
(7,771,987
|
)
|
Prepaid management fee related party
|
|
|
(14,460,587
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(2,200,000
|
)
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
77,123,133
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,475,857
|
|
|
|
(212,413
|
)
|
|
|
12,207,088
|
|
Deferred origination fees
|
|
|
48,899
|
|
|
|
(471,814
|
)
|
|
|
(130,560
|
)
|
Due to related party
|
|
|
688,620
|
|
|
|
32,956
|
|
|
|
292,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
159,688,381
|
|
|
$
|
65,094,371
|
|
|
$
|
73,235,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments originated and purchased, net
|
|
|
(1,926,833,770
|
)
|
|
|
(1,449,405,924
|
)
|
|
|
(989,797,797
|
)
|
Payoffs and paydowns of loans and investments
|
|
|
1,336,775,919
|
|
|
|
704,467,014
|
|
|
|
574,393,425
|
|
Due to borrowers
|
|
|
2,198,611
|
|
|
|
5,375,940
|
|
|
|
2,104,285
|
|
Purchases of securities available for sale
|
|
|
(16,715,584
|
)
|
|
|
|
|
|
|
|
|
Prepayments on securities available for sale
|
|
|
3,358,184
|
|
|
|
7,897,845
|
|
|
|
15,999,968
|
|
Proceeds from sales of securities available for sale
|
|
|
18,792,594
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
(54,364,043
|
)
|
|
|
(49,275,786
|
)
|
|
|
(35,496,276
|
)
|
Contributions to equity affiliates
|
|
|
(24,455,557
|
)
|
|
|
(7,282,707
|
)
|
|
|
(18,280,824
|
)
|
Distributions from equity affiliates
|
|
|
51,250,063
|
|
|
|
|
|
|
|
5,441,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(609,993,583
|
)
|
|
$
|
(788,223,618
|
)
|
|
$
|
(445,635,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable and repurchase agreements
|
|
|
807,615,891
|
|
|
|
702,024,038
|
|
|
|
759,168,998
|
|
Payoffs and paydowns of notes payable and repurchase agreements
|
|
|
(456,939,223
|
)
|
|
|
(770,627,202
|
)
|
|
|
(775,025,055
|
)
|
Proceeds from issuance of collateralized debt obligation
|
|
|
72,200,000
|
|
|
|
803,750,000
|
|
|
|
305,319,000
|
|
Payoffs and paydowns of collateralized debt obligations
|
|
|
(12,720,000
|
)
|
|
|
(11,540,000
|
)
|
|
|
(6,000,000
|
)
|
Proceeds from issuance of junior subordinated notes
|
|
|
53,093,000
|
|
|
|
67,014,000
|
|
|
|
155,948,000
|
|
Payments on swaps to hedge counterparties
|
|
|
(41,840,000
|
)
|
|
|
|
|
|
|
|
|
Receipts on swaps from hedge counterparties
|
|
|
29,980,000
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
74,655,000
|
|
|
|
|
|
|
|
5,381,172
|
|
Offering expenses paid
|
|
|
(1,001,795
|
)
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
(7,023,361
|
)
|
|
|
|
|
Issuance of ARSR preferred stock
|
|
|
|
|
|
|
116,000
|
|
|
|
|
|
Distributions paid to minority interest
|
|
|
(9,289,130
|
)
|
|
|
(9,704,497
|
)
|
|
|
(8,458,394
|
)
|
Distributions paid on common stock
|
|
|
(46,600,416
|
)
|
|
|
(44,134,107
|
)
|
|
|
(37,747,372
|
)
|
Payment of deferred financing costs
|
|
|
(4,385,441
|
)
|
|
|
(18,416,076
|
)
|
|
|
(13,160,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
464,767,886
|
|
|
$
|
711,458,795
|
|
|
$
|
385,425,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/ (decrease) in cash
|
|
$
|
14,462,684
|
|
|
$
|
(11,670,452
|
)
|
|
$
|
13,025,608
|
|
Cash at beginning of period
|
|
|
7,756,857
|
|
|
|
19,427,309
|
|
|
|
6,401,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
22,219,541
|
|
|
$
|
7,756,857
|
|
|
$
|
19,427,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay interest, net of capitalized interest
|
|
$
|
151,577,313
|
|
|
$
|
85,650,217
|
|
|
$
|
41,376,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay taxes
|
|
$
|
19,032,748
|
|
|
$
|
93,732
|
|
|
$
|
216,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity affiliates
|
|
$
|
6,856,960
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
63
December 31, 2007
|
|
Note 1
|
Description of Business/Form of Ownership
|
Arbor Realty Trust, Inc. (the Company) is a Maryland
corporation that was formed in June 2003 to invest in real
estate related bridge and mezzanine loans, preferred and direct
equity and, in limited cases, mortgage-related securities,
discounted mortgage notes and other real estate related assets.
The Company has not invested in any discounted mortgage notes
for the periods presented. The Company conducts substantially
all of its operations through its operating partnership, Arbor
Realty Limited Partnership (ARLP), and its wholly
owned subsidiaries.
The Company is organized and conducts its operations to qualify
as a real estate investment trust (REIT) and to
comply with the provisions of the Internal Revenue Code with
respect thereto. A REIT is generally not subject to federal
income tax on that portion of its REIT taxable income
(Taxable Income) which is distributed to its
stockholders, provided that at least 90% of Taxable Income is
distributed and provided that certain other requirements are
met. Certain assets of the Company that produce non-qualifying
income are held in taxable REIT subsidiaries. Unlike other
subsidiaries of a REIT, the income of a taxable REIT subsidiary
is subject to federal and state income taxes.
The Companys charter provides for the issuance of up to
500 million shares of common stock, par value $0.01 per
share, and 100 million shares of preferred stock, par value
$0.01 per share. The Company was incorporated in June 2003 and
was initially capitalized through the sale of 67 shares of
common stock for $1,005.
On July 1, 2003, Arbor Commercial Mortgage, LLC
(ACM) contributed $213.1 million of structured
finance assets and $169.2 million of borrowings supported
by $43.9 million of equity in exchange for a commensurate
equity ownership in ARLP. In addition, certain employees of ACM
were transferred to ARLP. These assets, liabilities and
employees represent a substantial portion of ACMs
structured finance business (the SF Business). The
Company is externally managed and advised by ACM and pays ACM a
management fee in accordance with a management agreement. ACM
also sources originations, provides underwriting services and
services all structured finance assets on behalf of ARLP, and
its wholly owned subsidiaries.
On July 1, 2003, the Company completed a private equity
offering of 1,610,000 units (including an overallotment
option), each consisting of five shares of common stock and one
warrant to purchase one share of common stock at $75.00 per
unit. The Company sold 8,050,000 shares of common stock in
the offering. Gross proceeds from the private equity offering
totaled $120.2 million. Gross proceeds from the private
equity offering combined with the concurrent equity contribution
by ACM totaled approximately $164.1 million in equity
capital. The Company paid and accrued offering expenses of
$10.1 million resulting in stockholders equity and
minority interest of $154.0 million as a result of the
private placement.
On April 13, 2004, the Company sold 6,750,000 shares
of its common stock in a public offering at a price of $20.00
per share, for net proceeds of approximately $124.4 million
after deducting the underwriting discount and the other
estimated offering expenses. The Company used the proceeds to
pay down indebtedness. After giving effect to this offering, the
Company had 14,949,567 shares of common stock outstanding.
In May 2004, the underwriters exercised a portion of their
over-allotment option, which resulted in the issuance of 524,200
additional shares. The Company received net proceeds of
approximately $9.8 million after deducting the underwriting
discount. In October 2004, ARLP received proceeds of
approximately $9.4 million from the exercise of warrants
for a total of 629,345 operating partnership units.
Additionally, in 2004 and 2005, the Company issued 973,354 and
282,776 shares of common stock respectively from the
exercise of warrants under its Warrant Agreement dated
July 1, 2003, the (Warrant Agreement) and
received net proceeds of $12.9 million and
$4.2 million, respectively.
On March 2, 2007, the Company filed a shelf registration
statement on
Form S-3
with the SEC under the Securities Act of 1933, as amended (the
1933 Act) with respect to an aggregate of
$500.0 million of debt securities, common stock, preferred
stock, depositary shares and warrants, that may be sold by the
Company from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the Commission declared
this shelf registration statement effective.
64
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
On June 12, 2007, the Company sold 2,700,000 shares of
its common stock registered on the shelf registration statement
in a public offering at a price of $27.65 per share, for net
proceeds of approximately $73.6 million after deducting the
underwriting discount and the other estimated offering expenses.
The Company used the proceeds to pay down debt and finance its
loan and investment portfolio. The underwriters did not exercise
their over allotment option for additional shares. At
December 31, 2007, the Company had $425.3 million
remaining under this shelf registration and
20,519,335 shares of common stock outstanding.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company, its wholly owned
subsidiaries, and partnerships or other joint ventures in which
the Company controls. Entities which the Company does not
control and entities which are variable interest entities which
the Company is not the primary beneficiary, are accounted for
under the equity method. In the opinion of management, all
adjustments considered necessary for a fair presentation have
been included. All significant inter-company transactions and
balances have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to
current period presentation. Stock based compensation was
disclosed in the Companys Consolidated Income Statement
under employee compensation and benefits for
employees and under selling and administrative
expense for non-employees in the current year presentation and
which have been disclosed as a separate line item in prior years
presentation. Provision for income taxes was disclosed as a
separate line item in the Companys Consolidated Income
Statement in the current year presentation and which have been
disclosed as part of selling and administrative expense in prior
years presentations.
The preparation of consolidated financial statements in
conformity with U.S. Generally Accepted Accounting
Principals (GAAP) requires management to make
estimates and assumptions in determining the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
All highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The
Company places its cash and cash equivalents in high quality
financial institutions. The consolidated account balances at
each institution periodically exceeds FDIC insurance coverage
and the Company believes that this risk is not significant.
Restricted
Cash
At December 31, 2007 and 2006, the Company had restricted
cash of $139.1 million and $84.8 million,
respectively, on deposit with the trustees for the
Companys collateralized debt obligations
(CDOs), see Note 6 Debt
Obligations. Restricted cash primarily represents proceeds
from loan repayments which will be used to purchase replacement
loans as collateral for the CDOs and interest payments received
from loans in the CDOs which are remitted to the Company
quarterly in the month following the quarter end.
Loans
and Investments
Statement of Financial Accounting Standards (SFAS)
No. 115 Accounting for Certain Investments in Debt
and Equity Securities, (SFAS 115)
requires that at the time of purchase, the Company designate a
security as held to maturity, available for sale, or trading
depending on ability and intent. Securities available for sale
are
65
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
reported at fair value, while securities and investments held to
maturity are reported at amortized cost. The Company does not
have any trading securities at this time.
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, and net of the allowance for loan
losses when such loan or investment is deemed to be impaired.
The Company invests in preferred equity interests that, in some
cases, allow the Company to participate in a percentage of the
underlying propertys cash flows from operations and
proceeds from a sale or refinancing. At the inception of each
such investment, management must determine whether such
investment should be accounted for as a loan, joint venture or
as real estate. To date, management has determined that all such
investments are properly accounted for and reported as loans.
The Company considers a loan impaired when, based upon current
information and events, it is probable that it will be unable to
collect all amounts due for both principal and interest
according to the contractual terms of the loan agreement.
Specific valuation allowances are established for impaired loans
based on the fair value of collateral on an individual loan
basis. The fair value of the collateral is determined by
selecting the most appropriate valuation methodology, or
methodologies, among several generally available and accepted in
the commercial real estate industry. The determination of the
most appropriate valuation methodology is based on the key
characteristics of the collateral type. These methodologies
include the evaluation of operating cash flow from the property
during the projected holding period, and the estimated sales
value of the collateral computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs, discounted at market
discount rates.
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 believed
adequate by management to absorb probable losses. The Company
had an allowance for loan losses of $2.5 million at
December 31, 2007 related to two multifamily loans with an
aggregate outstanding principal balance of $58.5 million.
At December 31, 2006, no impairment had been identified and
no valuation allowance had been established.
Capitalized
Interest
The Company capitalizes interest in accordance with
SFAS No. 58 Capitalization of Interest Costs in
Financial Statements that Include Investments Accounted for by
the Equity Method. This statement amended
SFAS No. 34 Capitalization of Interest
Costs (SFAS 34) to include investments
(equity, loans and advances) accounted for by the equity method
as qualifying assets of the investor while the investee has
activities in progress necessary to commence its planned
principal operations, provided that the investees
activities include the use of funds to acquire qualifying assets
for its operations. One of the Companys joint ventures,
which is accounted for using the equity method, has used funds
to acquire qualifying assets for its planned principal
operations. During 2007 the joint venture sold both of the
acquired properties and the Company discontinued the
capitalization of interest on its remaining investment in the
joint venture as activities required under SFAS 34 ceased
to continue. During the year ended December 31, 2007, 2006
and 2005 the Company capitalized $0.3 million,
$0.9 million and $0.5 million, respectively of
interest relating to this investment.
Available-For-Sale
Securities
The Company has invested in equity securities of a commercial
real estate specialty finance company. The Company has also
invested in agency-sponsored whole pool mortgage related
securities which were sold during 2007. Pools of Federal
National Mortgage Association, or Fannie Mae, and Federal Home
Loan Mortgage Corporation, or Freddie Mac, adjustable rate
residential mortgage loans underlie these mortgage related
securities. The Company receives payments from the payments that
are made on these underlying mortgage loans, which had a fixed
rate of interest for three years and adjust annually thereafter.
These securities are carried at their estimated fair
66
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
value with unrealized gains and losses excluded from earnings
and reported in other comprehensive income (loss) pursuant to
SFAS 115. Unrealized losses other than temporary losses are
recognized currently in income. The estimated fair value of the
mortgage related securities fluctuate primarily due to changes
in interest rates and other factors; however, given that such
securities are guaranteed as to principal
and/or
interest by an agency of the U.S. Government, such
fluctuations are generally not based on the creditworthiness of
the mortgages securing these securities. Gains or losses on the
sale of securities are recognized using the specific
identification method. See Note 4
Available-For-Sale Securities.
Revenue
Recognition
Interest Income Interest income is recognized
on the accrual basis as it is earned from loans, investments and
available-for-sale securities. In many instances, the borrower
pays an additional amount of interest at the time the loan is
closed, an origination fee, and deferred interest upon maturity.
In some cases interest income may also include the amortization
or accretion of premiums and discounts arising at the purchase
or origination. This additional income, net of any direct loan
origination costs incurred, is deferred and accreted into
interest income on an effective yield or interest
method adjusted for actual prepayment activity over the life of
the related loan or available-for-sale security as a yield
adjustment. Income recognition is suspended for loans when in
the opinion of management a full recovery of income and
principal becomes doubtful. Income recognition is resumed when
the loan becomes contractually current and performance is
demonstrated to be resumed. Several of the loans provide for
accrual of interest at specified rates, which differ from
current payment terms. Interest is recognized on such loans at
the accrual rate subject to managements determination that
accrued interest and outstanding principal are ultimately
collectible, based on the underlying collateral and operations
of the borrower. If management cannot make this determination
regarding collectibility, interest income above the current pay
rate is recognized only upon actual receipt. Additionally,
interest income is recorded when earned from equity
participation interests, referred to as equity kickers. These
equity kickers have the potential to generate additional
revenues to the Company as a result of excess cash flows being
distributed
and/or as
appreciated properties are sold or refinanced. For the years
ended December 31, 2007, 2006 and 2005, the Company
recorded $30.0 million, $13.2 million and
$19.7 million of interest on such loans and investments,
respectively. These amounts represent interest collected in
accordance with the contractual agreement with the borrower.
Other income Other income represents fees
received for loan structuring and miscellaneous asset management
fees associated with the Companys loans and investments
portfolio.
Gain
on Sale of Loans and Real Estate
For the sale of loans and real estate, recognition occurs when
all the incidence of ownership passes to the buyer.
Income
from Equity Affiliates
The Company invests in joint ventures that are formed to
acquire, develop
and/or sell
real estate assets. These joint ventures are not majority owned
or controlled by the Company, and are not consolidated in its
financial statements. These investments are recorded under
either the equity or cost method of accounting as deemed
appropriate. The Company records its share of the net income and
losses from the underlying properties on a single line item in
the consolidated income statements as income from equity
affiliates.
Stock
Based Compensation
The Company records stock-based compensation expense at the
grant date fair value of the related stock-based award in
accordance with SFAS No. 123R, Accounting for
Stock-Based Compensation, (SFAS 123R).
The Company measures the compensation costs for these shares as
of the date of the grant, with subsequent remeasurement for any
unvested shares granted to non-employees of the Company with
such amounts expensed
67
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
against earnings, at the grant date (for the portion that vest
immediately) or ratably over the respective vesting periods. The
cost of these grants is amortized over the vesting term using an
accelerated method in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28
Accounting for Stock Appreciation Rights and Other
Variable Stock Options or Award Plans
(FIN 28), and SFAS 123R. Dividends are
paid on the restricted shares as dividends are paid on shares of
the Companys common stock whether or not they are vested.
Income
Taxes
The Company is organized and conducts its operations to qualify
as a real estate investment trust (REIT) and to
comply with the provisions of the Internal Revenue Code with
respect thereto. A REIT is generally not subject to federal
income tax on Taxable Income which is distributed to its
stockholders, provided that at least 90% of Taxable Income is
distributed and provided that certain other requirements are
met. Certain assets of the Company that produce non-qualifying
income are held in taxable REIT subsidiaries. Unlike other
subsidiaries of a REIT, the income of a taxable REIT subsidiary
is subject to federal and state income taxes.
Other
Comprehensive (Loss) Income
SFAS No. 130 Reporting Comprehensive
Income, divides comprehensive income into net income and
other comprehensive income (loss), which includes unrealized
gains and losses on available for sale securities. In addition,
to the extent the Companys derivative instruments qualify
as hedges under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, net
unrealized gains or losses are reported as a component of
accumulated other comprehensive income, see Derivatives
and Hedging Activities below. At December 31, 2007,
accumulated other comprehensive loss was $29.0 million and
consisted of $1.0 million in unrealized losses related to
available for sale securities and $28.0 million of
unrealized losses on derivatives designated as cash flow hedges.
Earnings
Per Share
In accordance with SFAS No. 128 Earnings Per
Share, the Company presents both basic and diluted
earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net income available to common
stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock, where such exercise or conversion would result in
a lower earnings per share amount.
Derivatives
and Hedging Activities
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), as amended by
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities
(SFAS 138). SFAS 133, as amended by
SFAS 138, requires an entity to recognize all derivatives
as either assets or liabilities in the consolidated balance
sheets and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either
other comprehensive income (loss) in stockholders equity
until the hedged item is recognized in earnings or net income
depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the
hedging activity.
In the normal course of business, the Company may use a variety
of derivative financial instruments to manage, or hedge,
interest rate risk. These derivative financial instruments must
be effective in reducing its interest rate risk exposure in
order to qualify for hedge accounting. When the terms of an
underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of
the instrument are marked-to-market with changes in value
included in net income for each period until the derivative
instrument
68
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
matures or is settled. Any derivative instrument used for risk
management that does not meet the hedging criteria is
marked-to-market with the changes in value included in net
income.
Derivatives are used for hedging purposes rather than
speculation. The Company relies on quotations from a third party
to determine these fair values.
Variable
Interest Entities
FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46),
which requires a variable interest entity (VIE) to
be consolidated by its primary beneficiary (PB). The
PB is the party that absorbs a majority of the VIEs
anticipated losses
and/or a
majority of the expected returns.
The Company has evaluated its loans and investments and
investments in equity affiliates to determine whether they are
VIEs. This evaluation resulted in the Company determining that
its bridge loans, junior participation loans, mezzanine loans,
preferred equity investments and investments in equity
affiliates were potential variable interests. For each of these
investments, the Company has evaluated (1) the sufficiency
of the fair value of the entities equity investments at
risk to absorb losses, (2) that as a group the holders of
the equity investments at risk have (a) the direct or
indirect ability through voting rights to make decisions about
the entities significant activities, (b) the
obligation to absorb the expected losses of the entity and their
obligations are not protected directly or indirectly,
(c) the right to receive the expected residual return of
the entity and their rights are not capped, (3) the voting
rights of these investors are proportional to their obligations
to absorb the expected losses of the entity, their rights to
receive the expected returns of the equity, or both, and that
substantially all of the entities activities do not
involve or are not conducted on behalf of an investor that has
disproportionately few voting rights. As of December 31,
2007, the Company has identified 42 loans and investments which
were made to entities determined to be VIEs.
For the 42 VIEs identified, the Company has determined that it
is not the primary beneficiaries of the VIEs and as such the
VIEs should not be consolidated in the Companys financial
statements. The Companys maximum exposure to loss would
not exceed the carrying amount of such investments. For all
other investments, the Company has determined they are not VIEs.
As such, the Company has continued to account for these loans
and investments as a loan or investment in equity affiliate, as
appropriate.
Recently
Issued Accounting Pronouncements
SFAS No. 155 In February
2006 the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments
(SFAS 155), which amends SFAS No. 133
and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, (SFAS 140). SFAS 155
simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 also clarifies
and amends certain other provisions of SFAS 133 and
SFAS 140. SFAS 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event
occurring after January 1, 2007. The adoption did not have
a material impact on the Companys Consolidated Financial
Statements.
FIN 48 In June 2006 the FASB
issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in tax positions.
This Interpretation prescribes a recognition threshold and
measurement in the financial statements of a tax position taken
or expected to be taken in a tax return. The interpretation also
provides guidance as to its application and related transition,
and is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have
a material impact on the Companys Consolidated Financial
Statements.
SFAS No. 157 In September
2006 the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157), which defines
fair value, establishes guidelines for measuring fair value and
expands disclosures
69
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is
permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year.
However, in February 2008, the FASB issued FASB Staff Position
(FSP)
FAS 157-2,
which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The
effective date is delayed by one year to fiscal years beginning
after November 15, 2008 and interim periods within those
fiscal years. The Company is currently evaluating the effect, if
any, the adoption of SFAS 157 may have on the
Companys Consolidated Financial Statements.
SFAS No. 159 In February
2007 the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities (SFAS 159) which permits
entities to voluntarily choose to measure many financial
instruments, and certain other items at fair value and is
effective for fiscal years beginning after November 15,
2007. The Company will not adopt SFAS 159.
FIN 39-1 In April 2007, the
FASB issued FIN No. 39-1, Amendment of FASB Interpretation
No. 39.(FIN 39-1). FIN 39-1 defines
right of setoff and specifies what conditions must
be met for a derivative contract to qualify for this right of
setoff. FIN 39-1 also addresses the applicability of a right of
setoff to derivative instruments and clarifies the circumstances
in which it is appropriate to offset amounts recognized for
those instruments in the balance sheet. In addition, FIN 39-1
permits offsetting of fair value amounts recognized for multiple
derivative instruments executed with the same counterparty under
a master netting arrangement and fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from
the same master netting arrangement as the derivative
instruments. FIN 39-1 is effective for the Company beginning
January 1, 2008. The Company does not expect that the adoption
of FIN 39-1 will have a material impact on its consolidated
financial statements.
FSP
FAS 140-3
In February 2008, the FASB issued FASB Staff Position
No. FAS 140-3
(FSP
FAS 140-3).
Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions.
FSP FAS 140-3
provides guidance on accounting for a transfer of a financial
asset and a repurchase financing. It presumes that an initial
transfer of a financial asset and a repurchase financing are
considered part of the same arrangement (a linked transaction)
unless certain criteria are met. If the criteria are not met,
the linked transaction would be recorded as a net investment,
likely as a derivative, instead of recording the purchased
financial asset on a gross basis along with a repurchasing
financing.
FSP FAS 140-3
applies to reporting periods beginning after November 15,
2008 and is only applied prospectively to transactions that
occur on or after the adoption date. The Company is currently
evaluating the effect the adoption of
FSP FAS 140-3
may have on the Companys Consolidated Financial Statements.
SOP 07-1
In June 2007, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position
(SOP)
07-1
Clarification of the Scope of the Audit and Accounting
Guide Investment Companies and Accounting by Parent Companies
and Equity Method Investors for Investments in Investment
Companies
(SOP 07-1).
SOP 07-1
provides guidance for determining whether an entity is within
the scope of the AICPA Audit and Accounting Guide Investment
Companies. The SOP is effective for fiscal years beginning on or
after December 15, 2007. However, in February 2008 the FASB
issued FSP
SOP 07-1-1
which delays indefinitely the effective date of
SOP 07-1
and prohibits adoption of
SOP 07-1
for an entity that had not adopted
SOP 07-1
before issuance of the final FSP. While the Company maintains an
exemption from the Investment Company Act of 1940, as amended
(Investment Company Act) and is therefore not
regulated as an investment company, it is nonetheless in the
process of assessing whether
SOP 07-1
could be applicable upon becoming effective.
SFAS No. 141 (R) In December
2007, the FASB issued SFAS No. 141 (R), Business
Combinations (SFAS 141 (R)) which
replaces SFAS No. 141, Business
Combinations and requires a company to recognize the
assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquired entity to be measured at
70
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
their fair values as of the acquisition date. SFAS 141 (R)
also requires acquisition costs to be expensed as incurred and
does not permit certain restructuring activities previously
allowed under Emerging Issues Task Force Issue
No. 95-3
to be recorded as a component of purchase accounting.
SFAS 141 (R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. The Company is currently evaluating the
effect the adoption of SFAS 141 (R) may have on the
Companys Consolidated Financial Statements.
SFAS No. 160 In December
2007, the FASB issued SFAS No. 160 Accounting
for Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 160 clarifies the classification of noncontrolling
interests in consolidated statements of financial position and
the accounting for and reporting of transactions between the
Company and holders of such noncontrolling interests. Under
SFAS 160, noncontrolling interests are considered equity
and should be reported as an element of consolidated equity. The
current practice of classifying minority interests within a
mezzanine section of the statement of financial position will be
eliminated. Under SFAS 160, net income will encompass the
total income of all consolidated subsidiaries and will require
separate disclosure on the face of the income statement of
income attributable to the controlling and noncontrolling
interests. Increases and decreases in the noncontrolling
ownership interest amount will be accounted for as equity
transactions. When a subsidiary is deconsolidated, any retained,
noncontrolling equity investment in the former subsidiary and
the gain or loss on the deconsolidation of the subsidiary must
be measured at fair value. SFAS 160 is effective for fiscal
years beginning after December 15, 2008 and earlier
application is prohibited. The Company is currently evaluating
the effect the adoption of SFAS 160 may have on the
Companys Consolidated Financial Statements.
|
|
Note 3
|
Loans and
Investments
|
The following table sets forth the composition of the
Companys loan and investment portfolio at
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
December 31,
|
|
|
Percent of
|
|
|
Loan
|
|
|
Wtd. Avg
|
|
|
Months to
|
|
|
|
2007
|
|
|
Total
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Bridge loans
|
|
$
|
1,646,505,888
|
|
|
|
63
|
%
|
|
|
65
|
|
|
|
7.86
|
%
|
|
|
23.7
|
|
Mezzanine loans
|
|
|
384,479,759
|
|
|
|
15
|
%
|
|
|
41
|
|
|
|
9.23
|
%
|
|
|
34.8
|
|
Junior participation loans
|
|
|
340,821,550
|
|
|
|
13
|
%
|
|
|
19
|
|
|
|
7.70
|
%
|
|
|
53.4
|
|
Preferred equity investments
|
|
|
220,387,959
|
|
|
|
9
|
%
|
|
|
20
|
|
|
|
9.42
|
%
|
|
|
74.7
|
|
Other
|
|
|
11,400,272
|
|
|
|
|
|
|
|
2
|
|
|
|
7.99
|
%
|
|
|
76.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,603,595,428
|
|
|
|
100
|
%
|
|
|
147
|
|
|
|
8.18
|
%
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
(9,001,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
2,592,093,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
The following table sets forth the composition of the
Companys loan and investment portfolio at
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
December 31,
|
|
|
Percent
|
|
|
Loan
|
|
|
Wtd. Avg
|
|
|
Months to
|
|
|
|
2006
|
|
|
of Total
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Bridge loans
|
|
$
|
956,963,018
|
|
|
|
48
|
%
|
|
|
39
|
|
|
|
8.54
|
%
|
|
|
21.5
|
|
Mezzanine loans
|
|
|
646,300,830
|
|
|
|
32
|
%
|
|
|
34
|
|
|
|
9.89
|
%
|
|
|
28.5
|
|
Junior participation loans
|
|
|
366,121,180
|
|
|
|
18
|
%
|
|
|
16
|
|
|
|
8.96
|
%
|
|
|
31.5
|
|
Preferred equity investments
|
|
|
23,436,955
|
|
|
|
1
|
%
|
|
|
9
|
|
|
|
10.32
|
%
|
|
|
59.6
|
|
Other
|
|
|
12,345,865
|
|
|
|
1
|
%
|
|
|
3
|
|
|
|
5.89
|
%
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,005,167,848
|
|
|
|
100
|
%
|
|
|
101
|
|
|
|
9.06
|
%
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
(11,642,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
1,993,525,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge loans are loans to borrowers who are typically seeking
short term capital to be used in an acquisition of property and
are predominantly secured by first mortgage liens on the
property.
Mezzanine loans and junior participating interests in senior
debt are loans that are subordinate to a conventional first
mortgage loan and senior to the borrowers equity in a
transaction. Mezzanine financing may take the form of loans
secured by pledges of ownership interests in entities that
directly or indirectly control the real property or subordinated
loans secured by second mortgage liens on the property.
A preferred equity investment is another method of financing in
which preferred equity investments in entities that directly or
indirectly own real property are formed. In cases where the
terms of a first mortgage prohibit additional liens on the
ownership entity, investments structured as preferred equity in
the entity owning the property serve as viable financing
substitutes. With preferred equity investments, the Company
typically becomes a special limited partner or member in the
ownership entity.
The following transactions represent loans and investments that
were satisfied during the year ended December 31, 2007 in
which the Company had retained a profits interest in the
borrowing entity.
On the
Avenue
During 2005, the Company originated a $28.0 million
mezzanine loan and a $2.0 million preferred equity
investment secured by an upscale hotel in Manhattan. The Company
also had a 33.33% carried profits interest in the borrowing
entity. In March 2007, the borrowing entity sold the property
and the Company received $16.0 million for its profits
interest as well as full repayment of the $2.0 million
preferred equity investment and $28.0 million outstanding
mezzanine loan.
450 West
33rd
Street
During 2005, the Company originated a $45.0 million
mezzanine loan secured by an office building in Manhattan. The
Company also held an equity and profits interest in the
underlying partnership of approximately 29% and a preferred
equity investment of approximately $2.7 million with a
12.5% return. In May 2007, the Company, as part of an investor
group for the 450 West
33rd Street
partnership, transferred control of the underlying property to
Broadway Partners for a value of approximately
$664.0 million. The investor group, on a pro-rata basis,
retained an approximate 2% ownership interest in the property
and 50% of the propertys air rights which resulted in the
Company retaining an investment in equity affiliates of
approximately $1.1 million related to its 29% interest in
the 2% retained ownership. The Company received approximately
$134.1 million in proceeds upon completion of this
transaction, of which $76.0 million related to the 29%
equity and profits interest, $10.4 million related to yield
72
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
maintenance on the prepayment of the mezzanine debt and the
12.5% return on the preferred equity investment,
$45.0 million for the repayment in full of the mezzanine
debt and $2.7 million as a return of its invested capital.
See Note 5 Investment in Equity
Affiliates for a further description of this transaction.
In July 2007, the Company purchased a $50.0 million
mezzanine loan secured by this property which matures in July
2009 and bears interest at LIBOR plus 4.35%.
The following transactions represent loans and investments
originated by the Company during the year ended
December 31, 2007 in which the Company retained a profits
interest in the borrowing entity.
Nottingham
Village
In March 2007, the Company originated a $6.4 million bridge
loan and a $0.3 million preferred equity investment secured
by a 264 unit apartment complex situated on 25 acres
in Indianapolis, Indiana. The loans accrue interest at a fixed
rate of 7.82%, and matures in March 2012. In addition, the
Company has a 25% equity kicker in the borrowing entity. At
December 31, 2007, the outstanding balance on the bridge
loan was $5.2 million. No income from the equity kicker has
been recognized for the year ended December 31, 2007.
Extended
Stay Hotels
In June 2007, the Company closed on a $210.0 million
preferred equity investment as part of the purchase of Extended
Stay Hotels, Inc. from affiliates of the Blackstone Group by The
Lightstone Group, LLC. The entities acquired 684 mid-price
extended-stay lodging properties in 44 states and Canada,
with an aggregate of approximately 76,000 rooms.
The purchase price was approximately $8.0 billion and was
financed by approximately $7.4 billion of mortgage and
mezzanine debt under a senior secured debt facility from
Wachovia Bank, National Association, and Bear Stearns Commercial
Mortgage, Inc., $210.0 million of senior preferred equity
and approximately $420.0 million of subordinated equity in
two tranches.
The Company initially provided the $210.0 million of senior
preferred equity which has a liquidation preference of
$210.0 million, a 12% preferred dividend rate per annum (of
which 10% will be paid currently and 2% will be permitted to
accumulate) payable monthly, and is entitled to receive a
residual profits interest in the acquiror. The senior preferred
equity (other than the residual profits interest) is redeemable
by the acquiror at any time, subject to certain limitations.
As of December 31, 2007, the Company sold
$95.0 million of the senior preferred equity investment
which reduced its recorded investment to $115.0 million
with a residual profits interest of approximately 16% at
December 31, 2007. The Company also provided a
$10.0 million loan to one of the purchasers that matures in
July 2017 and bears interest at LIBOR plus 3.5%. At
December 31, 2007, the outstanding balance on this loan was
$9.6 million. No income from the equity kicker has been
recognized for the year ended December 31, 2007.
Lake
in the Woods
At December 31, 2006, there was an $8.5 million junior
participation loan in the loan and investment portfolio that was
non-performing and for which income recognition had been
suspended. In March 2007, the Company purchased the senior
position of the first mortgage loan associated with this
property for $34.6 million. The senior loan matures in
January 2008, bears interest based at LIBOR plus 237 basis
points and was also considered non-performing. During the second
quarter, the Company obtained title to the property pursuant to
the execution of a deed in lieu of foreclosure and subsequently
sold the property to a new investor. As part of the purchase,
the new investor committed approximately $2.0 million of
capital and the Company provided a total of $45.0 million
of new financing through a $43.5 million bridge loan and a
$1.5 million preferred equity investment. The loan and
investment mature in June 2012 and bear interest at a fixed rate
of 7.75%. The Company also retained a 50% profits
73
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
interest in the property. No income from the equity kicker has
been recognized for the year ended December 31, 2007. See
Note 19 Subsequent Events for
further information regarding this loan.
St.
Johns Development
In December 2006, the Company originated a $25.0 million
bridge loan with a maturity date in September 2007 with two,
three month extensions that bears interest at a fixed rate of
12%. The loan is secured by 20.5 acres of usable land and
2.3 acres of submerged land located on the banks of the St.
Johns River in downtown Jacksonville, Florida and is
currently zoned for the development of up to 60 dwellings per
acre. In October 2007, the borrower sold the property to an
investor group, in which the Company has a 50% non-controlling
interest, for $25.0 million. The investor group assumed the
$25.0 million mortgage with a new maturity date of October
2009 and a change in the interest rate to LIBOR plus 6.48%.
The managing member of the investor group is an experienced real
estate developer who retains a 50% interest in the partnership
and has funded a $2.9 million interest reserve for the
first year. If the loan is not satisfied during the first year,
the Company will fund a $2.9 million interest reserve for
the second year. The Company also contributed $0.5 million
to cover other operational costs of acquiring and maintaining
the property. The Company retains a non-controlling 50% equity
interest in the property and will account for this investment
under the equity method. No income from the equity kicker has
been recognized for the year ended December 31, 2007.
Concentration
of Credit Risk
Loans and investments can potentially subject the Company to
concentrations of credit risk. The Company is subject to
concentration risk in that the unpaid principal balance related
to 29 loans with five unrelated borrowers represented
approximately 25% of total assets as of December 31, 2007.
At December 31, 2006, the unpaid principal balance related
to 16 loans with five unrelated borrowers represented
approximately 27% of total assets. As of December 31, 2007
and 2006, the Company had 147 and 102 loans and investments,
respectively.
In addition, in 2007 and 2006, no single loan or investment
represented 10% of the Companys total assets. In 2007 and
2006, the Company generated approximately 9% and 17%,
respectively, of revenue from the Chetrit Group L.L.C. In 2005,
the Company generated approximately 12% of revenue from the
Chetrit Group L.L.C. and approximately 19% of revenue from the
Prime Outlet Acquisition Group L.L.C., two of the Companys
borrowers.
Geographic
Concentration Risk
As of December 31, 2007, 45%, 11%, and 9% of the
outstanding balance of the Companys loans and investments
portfolio had underlying properties in New York, Florida and
California, respectively. As of December 31, 2006, 53%,
11%, and 5% of the outstanding balance of the Companys
loans and investments portfolio had underlying properties in New
York, Florida and California, respectively.
Impaired
Loans and Allowance for Loan Losses
The Company considers a loan impaired when, based upon current
information and events, it is probable that it will be unable to
collect all amounts due for both principal and interest
according to the contractual terms of the loan agreement. As a
result of the Companys normal quarterly loan review at
December 31, 2007, it was determined that two multi-family
loans with an aggregate outstanding principal balance of
$58.5 million were impaired. The Company performed an
evaluation of the loans and determined that the fair value of
the underlying collateral securing the impaired loans was less
than the net carrying value of the loans, resulting in the
Company recording a $2.5 million provision for loan losses
at December 31, 2007.
74
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
At December 31, 2006 and 2005, no impairment had been
identified and no valuation allowance had been established.
There were no non-accrual loans at December 31, 2007
compared to an $8.5 million loan at December 31, 2006
that was non-performing and for which income recognition had
been suspended.
|
|
Note 4
|
Available-For-Sale
Securities
|
The following is a summary of the Companys
available-for-sale securities at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
Unrealized Loss
|
|
Value
|
|
Common equity securities
|
|
$
|
16,715,584
|
|
|
$
|
(1,018,841
|
)
|
|
$
|
15,696,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
16,715,584
|
|
|
$
|
(1,018,841
|
)
|
|
$
|
15,696,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys
available-for-sale securities at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Amortized Cost
|
|
|
Unrealized Loss
|
|
|
Value
|
|
|
Federal Home Loan Mortgage Corporation, variable rate security,
fixed rate of interest for three years at 3.783% and adjustable
rate interest thereafter, due March 2034 (including unamortized
premium of $37,680)
|
|
$
|
11,792,374
|
|
|
$
|
(37,679
|
)
|
|
$
|
11,754,695
|
|
Federal Home Loan Mortgage Corporation, variable rate security,
fixed rate of interest for three years at 3.778% and adjustable
rate interest thereafter, due March 2034 (including unamortized
premium of $15,238)
|
|
|
4,099,238
|
|
|
|
(35,658
|
)
|
|
|
4,063,580
|
|
Federal National Mortgage Association, variable rate security,
fixed rate of interest for three years at 3.804% and adjustable
rate interest thereafter, due March 2034 (including unamortized
premium of $25,039)
|
|
|
6,306,940
|
|
|
|
(25,039
|
)
|
|
|
6,281,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
22,198,552
|
|
|
$
|
(98,376
|
)
|
|
$
|
22,100,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007, the Company
sold all of its mortgage related securities. The balance of
these securities was $22.1 million at December 31,
2006 and consisted of securities that were purchased in March
2004 with fixed rates of interest for three years until March
2007 then reset to adjustable rates of interest thereafter. As
of December 31, 2006, these securities had been in an
unrealized loss position for more than twelve months. These
mortgage related securities recovered their fair value in
conjunction with a change in interest rates at which time the
Company sold the securities and recorded a gain of $30,182.
These securities were pledged as collateral for borrowings under
a repurchase agreement and such repurchase agreement was also
repaid during the quarter ended March 31, 2007
(See Note 6 Debt Obligations).
During 2007, the Company purchased 2,939,465 shares of
common stock of CBRE Realty Finance, Inc., a commercial real
estate specialty finance company, which had a fair value of
$15.7 million, at December 31, 2007. As of
December 31, 2007, these securities have been in an
unrealized loss position for less than twelve months and the
Company has the ability and intent to hold these investments
until a recovery of fair value. The Company does not consider
these investments to be other-than-temporarily impaired at
December 31, 2007. The Company has a margin loan agreement
with a financial institution related to the purchases of this
security. The margin loan may not exceed $7.0 million,
bears interest at pricing over LIBOR, and is due upon demand
from the lender. The balance of the margin loan agreement was
approximately $7.0 million at December 31, 2007.
As of December 31, 2007 and 2006, all available-for-sale
securities were carried at their estimated fair market value
based on current market quotes received from financial sources
that trade such securities. The estimated fair value of the
securities held at December 31, 2006 fluctuated primarily
due to changes in interest rates and other
75
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
factors; however, given that these securities were guaranteed as
to principal
and/or
interest by an agency of the U.S. Government, such
fluctuations were generally not based on the creditworthiness of
the mortgages securing these securities.
During the years ended December 31, 2007 and 2006, the
Company received prepayments of $3.4 million and
$8.0 million on the mortgage related securities. The
Company amortized $0.1 million, $0.4 million and
$0.6 million of the premium paid for the mortgage related
securities against interest income for the year ended
December 31, 2007, 2006, and 2005, respectively.
The cumulative amount of other comprehensive loss related to
unrealized losses on securities as of December 31, 2007 and
December 31, 2006 was $1.0 million and $98,376,
respectively.
|
|
Note 5
|
Investment
in Equity Affiliates
|
As of December 31, 2007 and 2006, the Company had
approximately $29.6 million and $25.4 million of
investments in equity affiliates, respectively, which are
described below.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Equity Affiliates
|
|
2007
|
|
|
2006
|
|
|
930 Flushing & 80 Evergreen
|
|
$
|
700,724
|
|
|
$
|
325,724
|
|
450 West
33rd
Street
|
|
|
1,136,960
|
|
|
|
2,710,938
|
|
200 Fifth Avenue/1107 Broadway
|
|
|
5,720,000
|
|
|
|
15,620,594
|
|
1133 York Ave
|
|
|
7,693
|
|
|
|
7,693
|
|
Alpine Meadows
|
|
|
13,219,813
|
|
|
|
|
|
St. Johns Development
|
|
|
500,000
|
|
|
|
|
|
Prime Outlets
|
|
|
|
|
|
|
|
|
Issuance of Junior Subordinated Notes
|
|
|
8,305,000
|
|
|
|
6,712,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,590,190
|
|
|
$
|
25,376,949
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for the 450 West
33rd Street
investment under the cost method of accounting and the remaining
investments under the equity method.
930
Flushing & 80 Evergreen
In June 2003, ACM invested approximately $0.8 million in
exchange for a 12.5% preferred interest in a joint venture,
which owns and operates two commercial properties. The Company
purchased this investment from ACM in August 2003. The Company
subsequently contributed an additional $0.3 million,
$0.4 million and $0.1 million in 2004, 2005 and 2006,
respectively. During 2007, the Company contributed an additional
$0.4 million to the joint venture increasing its equity
investment to approximately $0.7 million at
December 31, 2007.
The Company had a $4.8 million bridge loan and a
$3.5 million mezzanine loan outstanding to affiliated
entities of the joint venture. The loans required monthly
interest payments based on one month LIBOR and matured in
November 2006 and June 2006, respectively. In August 2005, the
joint venture refinanced one of these properties with a
$25 million amortizing bridge loan that the Company
provided which matures in August 2010 with a fixed rate of 6.45%
and has an outstanding principal balance of $24.9 million
at December 31, 2007. Proceeds from this loan were used to
pay off senior debt as well as the Companys
$3.5 million mezzanine loan. Excess proceeds were
distributed to each of the members in accordance with the
operating agreement of which the Company received
$1.3 million. The Company recorded this amount as a return
of its equity investment in 2005. The bridge loan was extended
for one year periods in both 2006 and 2007 and has a current
maturity date of October 2008 and an outstanding principal
balance of $4.7 million at December 31, 2007.
76
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
450 West
33rd
Street
As of December 31, 2006, the Company had a mezzanine loan
outstanding totaling $45 million to 450 Partners
Mezz III LLC, a wholly-owned subsidiary of
450 Westside Partners, LLC and the owner of 100% of the
outstanding membership interests in 450 Partners Mezz II
LLC, who used the proceeds to refinance an office building. The
mezzanine loan was scheduled to mature in March 2015 and had a
fixed interest rate of 8.17%. The Company also held an equity
and profits interest in the underlying partnership of
approximately 29% and had a preferred equity investment of
approximately $2.7 million with a 12.5% return.
In May 2007, the Company, as part of an investor group for the
450 West 33rd Street partnership, transferred control
of the underlying property to Broadway Partners for a value of
approximately $664.0 million. The investor group, on a
pro-rata basis, retained an approximate 2% ownership interest in
the property and 50% of the propertys air rights. In
accordance with this transaction, the joint venture members
agreed to guarantee $258.1 million of the
$517.0 million of new debt outstanding on the property. The
guarantee expires at the earlier of maturity or prepayment of
the debt and was allocated to the members in accordance with
their ownership percentages. The guarantee is callable, on a
pro-rata basis, if the market value of the property declines
below the $258.1 million of debt guaranteed. The
Companys portion of the guarantee is $76.3 million.
The transaction was structured to provide for a tax deferral for
an estimated period of seven years.
The Company received approximately $134.1 million in
proceeds upon completion of this transaction of which
$76.0 million related to the 29% equity and profits
interest, $10.4 million related to yield maintenance on the
prepayment of the mezzanine debt and the 12.5% return on the
preferred equity investment, $45.0 million for the
repayment in full of the mezzanine debt and $2.7 million as
a return of the preferred equity investment. The Company paid an
incentive management fee to its manager of approximately
$21.6 million.
The Company recorded deferred revenue of approximately
$77.1 million as a result of the guarantee on a portion of
the new debt, prepaid expenses related to the incentive
management fee on the deferred revenue of approximately
$19.0 million, an investment in equity affiliates of
approximately $1.1 million related to its 29% interest in
the 2% retained ownership, interest income of approximately
$10.4 million and incentive management fee expense of
approximately $2.6 million for year ended December 31,
2007.
In July 2007, the Company purchased a $50.0 million
mezzanine loan secured by this property which matures in July
2009 and bears interest at LIBOR plus 4.35%. The outstanding
balance on this loan was $50.0 million at December 31,
2007.
200 Fifth
Avenue/1107 Broadway
In 2005, the Company invested $10.0 million in exchange for
a 20% ownership interest in 200 Fifth LLC, which owned two
properties in New York City. It was intended that the
properties, with over one million square feet of space, would be
converted into residential condominium units. The Company also
provided loans to three partners in the investor group totaling
$13 million, all of which were repaid by December 31,
2007. In 2005, the Company purchased three mezzanine loans
totaling $137.0 million from the primary lender. These
loans were secured by the properties, required monthly interest
payments based on one month LIBOR and had a maturity date of
April 2008. The Company sold a participating interest in one of
the loans for $59.4 million which was recorded as a
financing and was included in notes payable. The Company repaid
the notes payable in May 2007 in conjunction with the
satisfaction of the $137.0 million mezzanine loan, upon the
sale (described below) of one of the underlying properties.
For the years ended December 31, 2007, 2006 and 2005 the
Company capitalized $0.3 million, $0.9 million and
$0.5 million, respectively, of interest on its equity
investment. The Company also contributed an additional
$3.6 million and $4.2 million to the joint venture for
the years ended December 31, 2007 and 2006, respectively.
77
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
In May 2007, the Company, as part of an investor group in the
200 Fifth LLC holding partnership, sold the 200 Fifth
Avenue property for net proceeds of approximately
$450.0 million and the investor group, on a pro-rata basis,
retained an adjacent building located at 1107 Broadway. The
partnership used the net proceeds from the sale to repay the
$402.5 million outstanding debt on both the 200 Fifth
Avenue and the 1107 Broadway properties, and used the remaining
proceeds as a return of invested capital to the partners. As a
result of the transaction, the Company received
$9.5 million in proceeds as a return on its invested
capital and was repaid in full on its $137.0 million
mezzanine debt, including all applicable interest. The Company
recorded approximately $11.4 million net, in income before
minority interest related to its 20% equity interest, which
consisted of $24.2 million gain recorded as income from
equity affiliates and expenses of a $9.0 million provision
for income taxes and a $3.8 million incentive management
fee paid to the Companys manager. The partnership retained
the 1107 Broadway property. In December 2007, the Company
received a $0.6 million distribution from escrow funds
related to its interest in the 200 Fifth Avenue property,
which was recorded as income from equity affiliates.
In October 2007, the partnership sold 50% of its economic
interest in the 1107 Broadway property. The partnership was
recapitalized with financing of approximately $343 million,
of which approximately $203 million was funded with the
unfunded portion to be used to develop the property. The Company
received net proceeds of approximately $39.0 million from
this transaction as a return of invested capital. The investor
group, on a pro-rata basis, retains a 50% economic interest in
the property, representing approximately $29 million of
capital. The Company recorded approximately $2.3 million
net, in income before minority interest related to its 20%
equity interest, which consisted of $4.8 million as income
from equity affiliates and expenses of a $1.8 million
provision for income taxes and a $0.7 million incentive
management fee paid to the Companys manager. The Company
also recorded a $5.7 million investment in equity affiliate
and a net deferred gain of $3.5 million related to its 10%
retained interest in the 1107 Broadway property. The partnership
intends to develop this property into a mix of residential and
retail uses.
Summarized consolidated financial information of 1107 Broadway
LLC for 2007 and 200 Fifth LLC (includes 1107 Broadway
property) for 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
201
|
|
|
$
|
6,123
|
|
Real estate assets
|
|
|
238,684
|
|
|
|
362,294
|
|
Other assets
|
|
|
2,727
|
|
|
|
121,509
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
241,612
|
|
|
$
|
489,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
203,012
|
|
|
$
|
415,614
|
|
Other liabilities
|
|
|
|
|
|
|
3,078
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
203,012
|
|
|
|
418,692
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity Arbor
|
|
|
5,720
|
|
|
|
14,247
|
|
Shareholders equity
|
|
|
32,880
|
|
|
|
56,987
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
38,600
|
|
|
|
71,234
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
241,612
|
|
|
$
|
489,926
|
|
|
|
|
|
|
|
|
|
|
78
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
The Company did not include summarized income statement
information for 200 Fifth LLC because the project was under
development and any income statement activity was deemed to be
incidental operations as defined by SFAS No. 67
Accounting for Costs and Initial Rental Operations of Real
Estate Projects. The income generated by the incidental
operations has been recorded as a reduction to the development
cost of the project.
1133
York Avenue
In October 2004, the Company invested $0.5 million in
exchange for an 8.7% non-managing preferred interest in LBREP
York Avenue Holdings, LLC, a joint venture that was formed to
operate as a real estate business, to acquire, own, manage,
develop, and sell real estate assets. In December 2005, the
joint venture issued new debt on an existing property. The
proceeds were distributed to each of the partners in accordance
with the operating agreement of which the Company received
$0.5 million which was recorded as a return of the
Companys equity investment.
Alpine
Meadows
In July 2007, the Company invested $13.2 million in
exchange for a 39% profits interest with an 18% preferred return
in the Alpine Meadows ski resort, which consists of
approximately 2,163 total acres in northwestern Lake Tahoe,
California. The Companys invested capital represents 65%
of the total equity of the transaction and will be allocated 65%
of any losses. The Company also provided a $30.5 million
first mortgage loan that matures in August 2009 and bears
interest at pricing over one month LIBOR. The outstanding
balance on this loan was $29.4 million at December 31,
2007.
St.
Johns Development
In December 2006, the Company originated a $25.0 million
bridge loan with a maturity date in September 2007 with two,
three month extensions that bears interest at a fixed rate of
12%. The loan is secured by 20.5 acres of usable land and
2.3 acres of submerged land located on the banks of the St.
Johns River in downtown Jacksonville, Florida and is
currently zoned for the development of up to 60 dwellings per
acre. In October 2007, the borrower sold the property to an
investor group, in which the Company has a 50% non-controlling
interest, for $25.0 million. The investor group assumed the
$25.0 million mortgage with a new maturity date of October
2009 and a change in the interest rate to LIBOR plus 6.48%.
The managing member of the investor group is an experienced real
estate developer who retains a 50% interest in the partnership
and has funded a $2.9 million interest reserve for the
first year. If the loan is not satisfied during the first year
the Company will fund a $2.9 million interest reserve for
the second year. The Company also contributed $0.5 million
to cover other operational costs of acquiring and maintaining
the property. The Company retains a non-controlling 50% equity
interest in the property.
Prime
Outlets
In December 2003, the Company invested approximately
$2.1 million in exchange for a 50% non-controlling interest
in Prime Outlets Member, LLC (POM,) which owns 15%
of a real estate holding company that owns and operates a
portfolio of factory outlet shopping centers. The Company
accounts for this investment under the equity method.
Additionally, the Company has a 16.7% carried profits interest
in the borrowing entity.
As of December 31, 2005, the Company had a mezzanine loan
outstanding to an affiliate entity of the joint venture for
$30.1 million. In addition, the Company had a
$10.0 million junior loan participation interest
outstanding to an affiliate entity of the joint venture as of
December 31, 2005. The loans required monthly interest
payments based on one month LIBOR and matured in January 2006.
In June 2005, POM refinanced the debt on a portion of the assets
in its portfolio, receiving proceeds in excess of the amount of
the previously existing debt. The excess proceeds were
distributed to each of the partners in accordance with
POMs operating agreement of
79
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007
which the Company received $36.5 million. In accordance
with this transaction, the joint venture members of POM agreed
to guarantee $38.0 million of the new debt. The guarantee
expires at the earlier of maturity or prepayment of the debt and
would require performance by the members if not repaid in full.
This guarantee was allocated to the members in accordance with
their ownership percentages. Of the distribution received by the
Company during 2005, $17.2 million was recorded as interest
income, representing the portion attributable to the 16.7%
carried profits interest, $2.1 million was recorded as a
return of the Companys equity investment,
$8.0 million was recorded as income from equity affiliates,
representing the portion attributable to the 7.5% equity
interest, and $9.2 million was recorded as deferred
revenue, representing the Companys portion of the
$38.0 million guarantee.
In January 2006, POM refinanced the debt on a portion of the
assets in its portfolio and repaid in full the debt that was
added in June 2005 and the $30.1 million mezzanine loan and
the $10.0 million junior loan participating interest that
the Company had outstanding as of December 31, 2005. As a
result, the $38.0 million guarantee was removed and the
Company recorded the $9.2 million of deferred revenue,
$6.3 million as interest income and $2.9 million as
income from equity affiliates. In 2006, POM refinanced the debt
on a portion of the assets in its portfolio, receiving proceeds
in excess of the amount of the previously existing debt. The
excess proceeds were distributed to each of the partners in
accordance with POMs operating agreement. In December
2006, the Company received a $6.0 million distribution from
POM and recorded $4.1 million as interest income,
representing the portion attributable to the 16.7% carried
profits interest and $1.9 million as income from equity
affiliates, representing the portion attributable to the 7.5%
equity interest.
In 2007, the Company received distributions from POM of
$16.2 million as a result of excess proceeds from
refinancing and sales activities on certain assets in the POM
portfolio. The excess proceeds were distributed to each of the
partners in accordance with POMs operating agreement. The
Company recorded $11.2 million as interest income
representing the portion attributable to the 16.7% carried
profits interest and $5.0 million as income from equity
affiliates representing the portion attributable to the 7.5%
equity interest.
Summarized consolidated financial information of POM (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,904
|
|
|
$
|
58,338
|
|
Real estate assets
|
|
|
726,397
|
|
|
|
661,349
|
|
Other assets
|
|
|
142,921
|
|
|
|
132,611
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
906,222
|
|
|
$
|
852,298
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
1,200,700
|
|
|
$
|
958,678
|
|
Other liabilities
|
|
|
46,877
|
|
|
|
12,547
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,247,577
|
|
|
|
971,225
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity Arbor
|
|
|
|
|
|
|
|
|
Shareholders deficit
|
|
|
(341,355
|
)
|
|
|
(118,927
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(341,355
|
)
|
|
|
(118,927
|
)
|
|
|
|
|
|
|
|
|
|
|