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, 2006
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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
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20-0057959
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(State or other jurisdiction
of incorporation)
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(I.R.S. Employer
Identification No.)
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333 Earle Ovington Boulevard,
Suite 900
Uniondale, NY
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11553
Zip Code
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(Address of principal executive
offices)
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(516) 832-8002
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
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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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
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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 or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one)
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants voting
common stock held by non-affiliates of the registrant as of
June 30, 2006 (computed based on the closing price on such
date as reported on the NYSE) was $392.9 million. As of
February 16, 2007, the registrant had
17,230,375 shares of common stock outstanding (excluding
279,400 shares held in the treasury).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the
registrants 2007 Annual Meeting of Stockholders (the
2007 Proxy Statement), to be filed within
120 days after the end of the registrants fiscal year
ended December 31, 2006, are incorporated by reference into
Part III of this Annual Report on
Form 10-K.
FORWARD
LOOKING STATEMENTS
The information contained in this annual report on
Form 10-K
is not a complete description of our business or the risks
associated with an investment in Arbor Realty Trust, Inc. We
urge you to carefully review and consider the various
disclosures made by us in this report.
This report contains certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
relate to, among other things, the operating performance of our
investments and financing needs. 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. 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 82%
partnership interest in our operating partnership as of
December 31, 2006.
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 domestic structured finance
investment opportunities identified by ACM. 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 18% limited partnership interest in our operating
partnership. ACM may redeem each of these operating 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 18% 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.
1
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.
Since January 2005, we completed three non-recourse
collateralized debt obligation (CDO) transactions,
wherby $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.
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 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.
2
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 experience in the financial
services industry including prior experience in managing and
operating a public company, the predecessor of ACM.
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 $60 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 2006,
interest rates have typically ranged from 2.50% to 7.00% over
30-day
LIBOR, with fixed rates ranging from 6.00% to 13.00%. 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.
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. These loans may be in
the form of a junior participating interest in the senior debt.
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 collateral 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 2006,
interest rates have typically ranged from 2.00% to 10.00% over
30-day
LIBOR, with fixed rates ranging from 5.50% to 15.00%. 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
3
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.
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
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.
Mortgage-Related Securities. We invest in
certificates issued by the Government National Mortgage
Association, or GNMA, Federal National Mortgage Association, or
FNMA, or the Federal Home Loan Mortgage Association, or FHLMC
that are collateralized by whole pools of fixed or adjustable
rate residential or commercial mortgage loans. We refer to these
mortgage-related securities as agency-sponsored whole loan pool
certificates. The adjustable rate mortgage-related securities
include adjustable-rate FHLMC ARM and FNMA ARM certificates,
which are generally evidenced by pools of mortgage loans with a
fixed rate of interest for the first three years with annual
interest adjustments thereafter and GNMA ARM certificates, which
have a fixed rate of interest for the first three years with
annual adjustments in relation to the Treasury index thereafter.
Unlike conventional fixed-income securities which provide for
periodic fixed interest payments and principal payments at
maturity and specified call dates, mortgage-related securities
provide for monthly payments of interest and principal that, in
effect, are a pass-through of the monthly payments
made by the borrowers on the residential or commercial mortgage
loans underlying such securities, net of any fees paid to the
issuer or guarantor of such securities. Additional payments on
the securities are made when repayments of principal are made
due to the sale of the underlying property, refinancing or
foreclosure, net of fees or costs that may be incurred. Some
mortgage-related securities (such as securities issued by GNMA)
are described as modified pass-through because they
entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at
scheduled payment dates regardless of whether or not the
mortgagor makes the payment.
The rate of prepayments on the underlying mortgage loans affect
the price and volatility of mortgage-related securities and may
have the effect of shortening or extending the effective
maturity of the security beyond what was anticipated at the time
of our investment in such securities. The yield and maturity
characteristics of mortgage-related securities differ from
conventional fixed-income securities in that the principal
amount of mortgage-related securities may be prepaid at any time
because the underlying mortgage loans may be prepaid at any
time. Therefore, some mortgage-related securities may have less
potential for growth in value than conventional fixed-income
securities with comparable maturities. In addition, the rate of
prepayments tends to increase in periods of falling interest
rates. During such periods, the reinvestment of prepayment
proceeds by us will generally be at lower rates than the rates
that were carried by the obligations that have been prepaid. To
the extent that we purchase mortgage-related securities at a
premium, prepayments (which may be made without penalty) may
result in loss of our principal investment to the extent of the
premium paid.
4
Our
Structured Finance Investments
We own a diversified portfolio of structured finance investments
consisting primarily of real estate-related bridge and mezzanine
loans as well as preferred equity investments and
mortgage-backed securities.
At December 31, 2006, we had 102 loans and investments in
our portfolio, totaling $2.0 billion. These loans and
investments were for 32 multi-family properties, 11 condominium
properties, 26 office properties, 16 hotel properties, nine
commercial properties, five land properties, two retail
properties, and one other property. We have an $8.5 million
loan in our portfolio that is non-performing and income
recognition has been suspended. The principal amount of the loan
is not deemed to be impaired and no loan loss reserve has been
recorded at this time. Income recognition will resume when the
loan becomes contractually current and performance has
recommenced. 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 2006 was 10.50%, excluding
the impact from a first quarter recognition of previously
deferred revenue and a fourth quarter distribution that were
recorded as interest income totaling approximately
$10.4 million, on average assets of $1.5 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 2006 was 7.11% on average borrowings of
$1.3 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 2006 was $213.5 million, resulting in
average leverage (average borrowings divided by average assets)
of 86%. Including average trust preferred securities of
$197.5 million as equity, our average leverage was 73%. The
net interest income earned in 2006 yielded a 35.70% return on
our average net investment during the year. This yield was
computed by dividing the net interest (interest income less
interest expense) earned in 2006 by the 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, 2006, our
overall leverage ratio including the trust preferred securities
as equity was 73%.
5
STRUCTURED
FINANCE INVESTMENT PORTFOLIO
As of December 31, 2006
The following tables set forth information regarding our bridge
and mezzanine loans, preferred equity investments and other real
estate-related assets as of December 31, 2006.
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Weighted
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Unpaid
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Average
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Principal
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Weighted
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Remaining
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(Dollars in
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Average
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Maturity
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Type
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Asset Class
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Number
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thousands)
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Pay Rate
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(Months)
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Bridge Loans
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MultiFamily
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12
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$
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133,075
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8.2
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%
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17.9
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Office
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8
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246,729
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7.8
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%
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31.4
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Hotel
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4
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124,096
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8.1
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%
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17.7
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Condo
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6
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261,328
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9.0
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%
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12.7
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Commercial
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5
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100,267
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8.42
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%
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17.8
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Land
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3
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95,118
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10.41
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%
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34.5
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Retail
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1
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2,802
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9.9
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%
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17.0
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Other
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1
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1,300
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12.0
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%
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3.0
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40
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964,715
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8.5
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%
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21.5
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Mezzanine Loans
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MultiFamily
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13
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183,289
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9.7
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%
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33.2
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Office
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17
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345,765
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9.1
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%
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44.9
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Hotel
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10
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241,367
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8.6
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%
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17.8
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|
Condo
|
|
|
5
|
|
|
|
158,043
|
|
|
|
12.3
|
%
|
|
|
14.4
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
60,000
|
|
|
|
10.0
|
%
|
|
|
15.0
|
|
|
|
Land
|
|
|
2
|
|
|
|
20,958
|
|
|
|
5.4
|
%
|
|
|
38.4
|
|
|
|
Retail
|
|
|
1
|
|
|
|
3,000
|
|
|
|
10.4
|
%
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
1,012,422
|
|
|
|
9.6
|
%
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity
|
|
MultiFamily
|
|
|
7
|
|
|
|
10,437
|
|
|
|
10.0
|
%
|
|
|
111.2
|
|
|
|
Office
|
|
|
1
|
|
|
|
11,000
|
|
|
|
10.9
|
%
|
|
|
21.0
|
|
|
|
Hotel
|
|
|
1
|
|
|
|
2,000
|
|
|
|
9.0
|
%
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
23,437
|
|
|
|
10.3
|
%
|
|
|
59.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Hotel
|
|
|
1
|
|
|
|
1,846
|
|
|
|
7.4
|
%
|
|
|
200.0
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
10,500
|
|
|
|
5.6
|
%
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
12,346
|
|
|
|
5.9
|
%
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
102
|
|
|
$
|
2,012,920
|
|
|
|
9.1
|
%
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
Geographic Location
|
|
(Dollars in thousands)
|
|
|
Percentage(1)
|
|
|
Asset Class
|
|
(Dollars in thousands)
|
|
|
Percentage(1)
|
|
|
New York
|
|
$
|
1,070,342
|
|
|
|
53.2
|
%
|
|
MultiFamily
|
|
$
|
326,801
|
|
|
|
16.2
|
%
|
Florida
|
|
|
210,965
|
|
|
|
10.5
|
%
|
|
Office
|
|
|
603,494
|
|
|
|
30.0
|
%
|
California
|
|
|
109,499
|
|
|
|
5.4
|
%
|
|
Hotel
|
|
|
369,309
|
|
|
|
18.3
|
%
|
Maryland
|
|
|
68,790
|
|
|
|
3.4
|
%
|
|
Condo
|
|
|
419,371
|
|
|
|
20.8
|
%
|
Other(2)
|
|
|
282,571
|
|
|
|
13.5
|
%
|
|
Commercial
|
|
|
170,767
|
|
|
|
8.5
|
%
|
Diversified
|
|
|
270,753
|
|
|
|
14.0
|
%
|
|
Land
|
|
|
116,076
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
5,802
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,300
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,012,920
|
|
|
|
100
|
%
|
|
Total
|
|
$
|
2,012,920
|
|
|
|
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 3% of the total.
|
6
Our
Investments in Mortgage-Related Securities
In 2004, we invested $57.4 million (including
$0.1 million of purchased interest) in agency-sponsored
whole pool certificates. $20.6 million of these securities
were issued by FNMA and $36.7 million were issued by FHLMC.
Pools of FNMA and FHLMC adjustable rate residential mortgage
loans underlie these securities. The underlying mortgage loans
bear interest at a weighted average fixed rate for three years
and adjust annually thereafter and have a weighted average
coupon rate of 3.8%. We receive monthly payments of interest and
principal on these securities based on the monthly interest and
principal payments that are made on the underlying mortgage
loans. At December 31, 2006, these securities were financed
under a $100.0 million repurchase agreement, maturing
July 2007, at a rate of one-month LIBOR plus 0.20%. At
December 31, 2006, the amortized cost of these securities
was $22.2 million and the amount outstanding on the
repurchase agreement related to the financing of these
securities was $20.7 million. These investments had a
weighted average balance of $26.4 million for the year with
an average yield of 2.17%, net of amortization of premiums.
These assets were financed by borrowings with a weighted average
balance of $25.1 million and an average cost of funds of
5.28%.
The table below sets forth information regarding our investments
in mortgage-related securities as of December 31, 2006.
These securities have a fixed interest rate until March 2007,
and adjust annually thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
|
|
Interest
|
|
|
|
Cost
|
|
|
Loss
|
|
|
Value
|
|
|
Maturity
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
FHLMC Security
|
|
$
|
11,792
|
|
|
$
|
(38
|
)
|
|
$
|
11,754
|
|
|
|
3/1/2034
|
|
|
|
3.80
|
%
|
FHLMC Security
|
|
|
4,099
|
|
|
|
(35
|
)
|
|
|
4,064
|
|
|
|
3/1/2034
|
|
|
|
3.76
|
%
|
FNMA Security
|
|
|
6,307
|
|
|
|
(25
|
)
|
|
|
6,282
|
|
|
|
3/1/2034
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,198
|
|
|
$
|
(98
|
)
|
|
$
|
22,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There is an exemption from registration for
entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate. This exemption
generally requires us to maintain at least 55% of our assets
directly in qualifying real estate assets. Assets that qualify
for purposes of this 55% test include, among other things, real
estate, mortgage loans and agency-sponsored whole loan pool
certificates. Our bridge loans secured by first mortgage liens
on the underlying properties, loans secured by second mortgage
liens on the underlying properties and agency-sponsored whole
loan pool certificates generally qualify for purposes of this
55% test. We believe that these assets and certain of our
mezzanine loans are in excess of 55% of our assets as of
December 31, 2006 and qualify for purposes of the 55% test.
The percentage of our assets that we invest in agency-sponsored
whole loan pool certificates may decrease if we determine that
we do not need to purchase such certificates for purposes of
meeting the 55% test. If the Securities and Exchange Commission
(SEC) takes a position or makes an interpretation
more favorable to us, we may have greater flexibility in the
investments we make. Our investments in mortgage-related
securities are limited to agency-sponsored whole loan pool
certificates which qualify for purposes of the 55% test. Our
investment guidelines provide that no more than 15% of our
assets may consist of any type of the mortgage-related
securities 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
7
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
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
nine sales offices located in Bloomfield Hills, Michigan;
Boston, Massachusetts; Charlotte, North Carolina;
Manhattan Beach, California; Dallas, Texas; North Myrtle
Beach, South Carolina; New York, New York; Uniondale, New York;
and Woodland Hills, California. These offices are staffed by
approximately 12 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 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 collateral 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
8
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 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 602 loans with outstanding balances of
$4.6 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 21 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.
9
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 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, 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
10
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.
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. Our board of directors
currently has approved a stock repurchase plan. All share
repurchases pursuant to the plan will only be taken in
conformity with applicable federal and state laws and the
applicable requirements for qualifying as a REIT, for so long as
the board of directors concludes that we should continue to
qualify as a REIT.
Conflicts of Interest Policies. We, our
executive officers and ACM face conflicts of interests because
of our relationships with each other. Mr. Kaufman is our
chief executive officer and the chief executive officer of ACM.
Mr. Ivan Kaufman and entities controlled by him own
approximately 90% of the outstanding membership interests of
ACM. In addition, Mr. Elenio, our chief financial officer,
Mr. Weber, our executive vice president of structured
finance, Mr. Kilgore, our executive vice president of
securitization, Mr. Fogel, our senior vice president of
asset management, and two of our directors, Mr. Joseph
Martello and Mr. Walter Horn, have minority ownership
interests in ACM. Mr. Horn also serves as our secretary,
general counsel, and director of compliance. Mr. Martello
serves as the trustee and co-trustee of two separate trusts
through which Mr. Kaufman owns an equity interest in ACM.
We have implemented several policies, through board action and
through the terms of our constituent documents and of our
agreements with ACM, to help address these conflicts of interest:
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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. The 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 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 its ability to compete effectively.
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Employees
We currently have 30 employees, including Mr. Kovarik, our
chief credit officer, Mr. Weber, our executive vice
president of structured finance, Mr. Horn, our secretary,
general counsel, and director of compliance, Mr. Fogel, our
senior vice president of asset management and Mr. Kilgore,
our executive vice president of securitization. In addition,
Mr. Kaufman, our chief executive officer and
Mr. Elenio, our chief financial officer are full time
employees of our manager, who perform the duties required
pursuant to the management agreement with our manager.
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 officers and directors, and employees of our manager. We
emphasize the importance of professional business conduct and
ethics through our corporate governance initiatives.
The audit, nominating/corporate governance, and compensation
committees of our board of directors are composed exclusively of
independent directors.
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 senior financial officers, corporate governance guidelines,
and the charters of the audit committee, nominating/corporate
governance committee and compensation committee of our board of
directors.
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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
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
structured finance and mortgage-related security 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 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.
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 our manager and our employees. In
particular, the mortgage lending experience of Mr. Ivan
Kaufman and Mr. Fred Weber and the extent and nature of the
relationships they have developed with developers 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 Arbor
Commercial Mortgage or us. The loss of services of one or more
members of our managers officers or our officers could
harm our business and our prospects.
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.
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.
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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, 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, 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 paying 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.
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
form 10-K.
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.
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.
We may need to borrow funds to meet the REIT requirement that we
distribute at least 90% of our taxable income each year to our
stockholders if our cash flows from operations are not
sufficient to cover the distribution requirements or because
there are differences in timing between the recognition of
taxable income and the actual receipt of income in cash. Our
warehouse credit facility, bridge loan warehouse facility and
master repurchase
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agreements allow us to borrow up to a maximum amount against
each of our investments financed under these credit facilities.
If we have not borrowed the maximum allowable 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 is generally used to temporarily pay down
borrowings under credit facilities whose primary purpose is to
fund our new loans and investments. When making distributions,
we borrow the required funds by drawing on credit capacity
available under our credit facilities. To date, all
distributions have been funded in this manner. 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.
Failure
to maintain an exemption from 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 of 1940, as
amended, or the Investment Company Act. Under Section 3(c)
(5) (C), the Investment Company Act exempts entities that are
primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in
real estate. 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%
requirement, a real estate interest 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 owners of real property 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 debt instruments 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 or another exemption or exclusion
from registration 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.
We are
substantially controlled by Arbor Commercial Mortgage and its
controlling equity owner, Mr. Kaufman.
Mr. Ivan Kaufman is our chairman and chief executive
officer and the president and chief executive officer of our
manager. Further, Mr. Kaufman and the Kaufman entities
together beneficially own approximately 90% of the outstanding
membership interests of Arbor Commercial Mortgage. Arbor
Commercial Mortgage owns approximately 3.8 million
operating partnership units, representing a 18% limited
partnership interest in our operating partnership and we own the
remaining 82%. 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 Arbor Commercial
Mortgage owns is paired with one share of our special voting
preferred stock, each of which entitle Arbor Commercial Mortgage
to one vote on all matters submitted to a vote of our
stockholders. Arbor Commercial Mortgage is currently entitled to
approximately 3.8 million votes, stock or 18% of the voting
power of our outstanding stock as a result of its ownership of
the special voting preferred stock. In addition, Arbor
Commercial Mortgage owns 578,041 shares of our common
stock, which gives Arbor Commercial Mortgage a total
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of 4,354,110 votes, or 20.7% of the voting power of our
outstanding stock when combined with the special voting
preferred stock. 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
approximately 3.1 million shares of our special voting
preferred stock on July 1, 2003. Because of his position
with us and our manager and his ability to effectively vote a
substantial minority of our outstanding voting stock,
Mr. Kaufman has significant influence over our policies and
strategy.
Our
charter as amended generally does not permit ownership in excess
of 8.3% 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 8.3% (by value or by number of shares,
whichever is more restrictive) of the outstanding shares of our
common stock or 8.3% (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.
Risks
Related to Conflicts of Interest
We are
dependent on our manager with whom we have conflicts of
interest.
We have only 30 employees, including Mr. Fred Weber,
Mr. Mark Fogel, Mr. John C. Kovarik,
Mr. Walter Horn, Mr. Gene Kilgore and are
dependent upon our manager, Arbor Commercial Mortgage, 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. 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
Arbor Commercial Mortgage and Messrs. Elenio, Weber, Fogel,
Martello and Horn, also hold an ownership interest in Arbor
Commercial Mortgage. Mr. Martello also serves as the
trustee of one of the Kaufman entities that holds a majority of
the outstanding membership interests in Arbor Commercial
Mortgage and co-trustee of another Kaufman entity that owns an
equity interest in our manager. Arbor Commercial Mortgage holds
an 18% limited partnership interest in our operating
partnership, which as a result has 18% of the voting power of
our outstanding stock. In addition, Arbor Commercial Mortgage
owns 578,041 shares of our common stock, which gives Arbor
Commercial Mortgage a total of 4,354,110 votes, or 20.7% of the
voting power of our outstanding stock when combined with the
special voting preferred stock.
We may enter into transactions with Arbor Commercial Mortgage
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 and mortgage 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.
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
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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 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.
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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.
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.
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.
Complying
with REIT requirements may force us to borrow to make
distributions to stockholders.
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
19
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. These alternatives
could increase our costs or reduce our equity.
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 8.3% of the aggregate value or
number of shares (whichever is more restrictive) of our
outstanding common stock, or more than 8.3%, 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.
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
20
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.
21
|
|
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 2006.
22
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, low and last 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
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High
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Low
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Last
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Declared
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2005
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First Quarter
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$
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27.00
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$
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23.52
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$
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24.75
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$
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0.55
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Second Quarter
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$
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29.20
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$
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24.25
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$
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28.70
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$
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0.57
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Third Quarter
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$
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31.20
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$
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26.68
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$
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28.10
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$
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0.65
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Fourth Quarter(1)
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$
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29.42
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$
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24.55
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$
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25.92
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$
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0.70
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2006
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First Quarter
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$
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27.76
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$
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24.80
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$
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26.99
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$
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0.72
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Second Quarter
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$
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27.08
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$
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23.26
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$
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25.05
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$
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0.57
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Third Quarter
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$
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26.05
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$
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23.89
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$
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25.56
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$
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0.58
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Fourth Quarter(2)
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$
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30.57
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$
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24.40
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$
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30.09
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$
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0.60
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(1) |
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On January 11, 2006, we declared distributions of
$0.70 per share of common stock, payable with respect to
the three months ended December 31, 2005 to stockholders of
record at the close of business on January 23, 2006. |
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(2) |
|
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. |
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 16, 2007, the closing sale price for our common
stock, as reported on the NYSE, was $34.05. As of
February 16, 2007, there were 8,134 record holders of our
common stock.
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
2007 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, 2006, 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.©
2007.
23
Arbor
Realty Trust, Inc.
Total
Return Performance
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Period Ending
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Index
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04/07/04
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6/30/2004
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12/31/04
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06/30/05
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12/31/05
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06/30/06
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12/31/06
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Arbor Realty Trust, Inc.
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100.00
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97.32
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124.28
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151.42
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142.84
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145.71
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182.82
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Russell 2000
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100.00
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98.56
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109.23
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107.87
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114.21
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123.59
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135.18
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NAREIT All REIT Index
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100.00
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100.07
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124.09
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130.17
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134.37
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151.47
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180.53
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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 February 2006, 1,000 restricted shares were issued to each of
three independent members of the board of directors under the
stock incentive plan. One third of the restricted stock granted
to each of these directors was vested as of the date of grant,
another one third vested in January 2007 and the remaining third
will vest in January 2008. In addition in February 2006,
upon the resignation of a member of the Companys board of
directors, 445 shares of restricted stock were forfeited.
The Company issued 1,445 shares of common stock to this
individual in conjunction with an advisory role taken with the
Company. In April 2006, 1,000 restricted shares were issued to
an independent member of the board of directors under the stock
incentive plan. One third of the restricted stock grant to the
director was vested as of the date of grant, another one third
will vest in April 2007 and the remaining third will vest on
April 2008. In addition in April 2006, the Company issued
89,250 shares of restricted common stock under the stock
incentive plan to certain employees of the Company and of ACM.
One fifth of the restricted stock granted to each of these
employees were vested as of the date of grant, the second
one-fifth will vest in April 2007, the third one-fifth will
vest in April 2008, the fourth one-fifth will vest in April
2009, and the remaining one-fifth will vest in April 2010. The
issuance of these 93,695 shares was not registered under
the Securities Act in reliance on the exemption from
registration provided by Section 4(2) thereof.
In 2006, we issued 243,129 shares of common stock to ACM as
payment of the incentive compensation earned by ACM for the
quarters ending December 31, 2005, March 31, 2006,
June 30, 2006, and September 30, 2006. The issuance of
these 243,129 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.
24
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 may be 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.
Issuer
Purchases of Equity Securities
During the three months ended December 31, 2006, we made
the following purchases of shares of our common stock that are
registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934.
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(c) Total
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Number of
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Shares
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(d) Maximum
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(a) Total
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Purchased as
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Number of
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Number of
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(b) Average
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Part of Publicly
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Shares that May
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Shares
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Price Paid
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Announced Plans
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Yet be Purchased
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Period
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Purchased
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per Share
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or Programs
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Under the Plan(1)
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October 1, 2006 through
October 31, 2006
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29,200
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25.59
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29,200
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720,600
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November 1, 2006 through
November 30, 2006
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720,600
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December 1, 2006 through
December 31, 2006
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720,600
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Total
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29,200
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29,200
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(1)
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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 may be 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. This plan expired on
February 9, 2007.
|
For the year ended December 31, 2006, we made the following
purchases of shares of our common stock that are registered
pursuant to Section 12(b) of the Securities Exchange Act of
1934.
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Total Number
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Average
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of Shares
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Price Paid
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Period
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Purchased
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per Share
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January 1, 2006 through
March 31, 2006
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April 1, 2006 through
June 30, 2006
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July 1, 2006 through
September 30, 2006
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250,200
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25.04
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October 1, 2006 through
December 31, 2006
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29,200
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25.59
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Total
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279,400
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25.10
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25
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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 as of December 31, 2006, 2005, and
2004, and for the years ended December 31, 2006, 2005, 2004
and for the period from June 24, 2003 (inception) to
December 31, 2003. 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.
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Period from
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June 24, 2003
|
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Year Ended
|
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Year Ended
|
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Year Ended
|
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(Inception) to
|
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December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
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December 31,
|
|
|
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2006
|
|
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2005
|
|
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2004
|
|
|
2003
|
|
|
Consolidated Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
|
$
|
57,927,230
|
|
|
$
|
10,012,449
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|
Income from swap derivative
|
|
|
696,960
|
|
|
|
|
|
|
|
|
|
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Other income
|
|
|
170,197
|
|
|
|
498,250
|
|
|
|
42,265
|
|
|
|
156,502
|
|
Total revenue
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
57,969,495
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|
|
|
10,168,951
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|
Management fees related
party
|
|
|
12,831,791
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|
|
|
12,430,546
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|
|
|
3,614,830
|
|
|
|
587,734
|
|
Total expenses
|
|
|
116,966,562
|
|
|
|
68,392,843
|
|
|
|
27,545,997
|
|
|
|
5,452,865
|
|
Income from equity affiliates
|
|
|
4,784,292
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|
|
|
8,453,440
|
|
|
|
525,000
|
|
|
|
|
|
Income allocated to minority
interest
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
|
|
1,308,167
|
|
Net income
|
|
|
50,413,807
|
|
|
|
50,387,023
|
|
|
|
25,072,682
|
|
|
|
3,407,919
|
|
Earnings per share, basic
|
|
|
2.94
|
|
|
|
2.99
|
|
|
|
1.81
|
|
|
|
0.42
|
|
Earnings per share, diluted(1)
|
|
|
2.93
|
|
|
|
2.98
|
|
|
|
1.78
|
|
|
|
0.42
|
|
Dividends declared per common
share(2)(3)
|
|
|
2.57
|
|
|
|
2.24
|
|
|
|
1.16
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
At December 31,
|
|
|
At December 31,
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
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
|
|
|
2,204,345,211
|
|
|
|
1,396,075,357
|
|
|
|
912,295,177
|
|
|
|
338,164,432
|
|
Repurchase agreements
|
|
|
395,847,359
|
|
|
|
413,624,385
|
|
|
|
409,109,372
|
|
|
|
113,897,845
|
|
Collateralized debt obligations
|
|
|
1,091,529,000
|
|
|
|
299,319,000
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes to
subsidiary trust issuing preferred securities
|
|
|
222,962,000
|
|
|
|
155,948,000
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
94,574,240
|
|
|
|
115,400,377
|
|
|
|
165,771,447
|
|
|
|
58,630,626
|
|
Notes payable related
party
|
|
|
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,842,765,882
|
|
|
|
1,044,775,284
|
|
|
|
589,292,273
|
|
|
|
183,416,716
|
|
Minority interest
|
|
|
65,468,252
|
|
|
|
63,691,556
|
|
|
|
60,249,731
|
|
|
|
43,631,602
|
|
Total stockholders equity
|
|
|
296,111,077
|
|
|
|
287,608,517
|
|
|
|
262,753,173
|
|
|
|
111,116,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2003
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations(4)
|
|
$
|
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.
|
|
(2)
|
|
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.
|
|
(3)
|
|
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.
|
|
(4)
|
|
Year ended December 31, 2005
originations are net of a $59.4 million participation in
one of our loans.
|
26
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 on the following page 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 year ended December 31, 2002,
the six months ended June 30, 2003 and under the caption
Consolidated Statement of Assets and Liabilities
Data as of December 31, 2002 have been 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.
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, 2002 have been derived from the unaudited interim
consolidated financial statements of Arbor Commercial
Mortgages structured finance business and include all
adjustments, consisting only of normal recurring accruals, which
management considers necessary for a fair presentation of the
historical consolidated financial information for such periods.
The selected consolidated financial information presented under
the caption Consolidated Statement of Revenue and Direct
Operating Expenses Data for the six-month period ended
June 30, 2002 are not necessarily indicative of the results
of any other interim period or the year ended December 31,
2002.
27
Consolidated
Statement of Revenue and Direct Operating Expenses
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
Interest Income
|
|
$
|
7,688,465
|
|
|
$
|
7,482,750
|
|
|
$
|
14,532,504
|
|
Other income
|
|
|
1,552,414
|
|
|
|
553,625
|
|
|
|
1,090,106
|
|
Total revenue
|
|
|
9,240,879
|
|
|
|
8,036,375
|
|
|
|
15,622,610
|
|
Total direct operating expenses
|
|
|
5,737,688
|
|
|
|
8,344,302
|
|
|
|
13,639,755
|
|
Revenue in excess of direct
operating expenses before gain on sale of loans and real estate
and income from equity affiliates
|
|
|
3,503,191
|
|
|
|
(307,927
|
)
|
|
|
1,982,855
|
|
Gain on sale of loans and real
estate
|
|
|
1,024,268
|
|
|
|
7,006,432
|
|
|
|
7,470,999
|
|
Income from equity affiliates
|
|
|
|
|
|
|
601,100
|
|
|
|
632,350
|
|
Revenue, gain on sale of loans and
real estate and income from equity affiliates in excess of
direct operating expenses
|
|
|
4,527,459
|
|
|
|
7,299,605
|
|
|
|
10,086,204
|
|
Consolidated
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
At December 31, 2002
|
|
|
Loans and investments, net
|
|
$
|
172,142,511
|
|
Related party loans, net
|
|
|
15,952,078
|
|
Investment in equity affiliates
|
|
|
2,586,026
|
|
Total assets
|
|
|
200,563,236
|
|
Notes payable and repurchase
agreements
|
|
|
141,836,477
|
|
Total liabilities
|
|
|
144,280,806
|
|
Net assets
|
|
|
56,282,430
|
|
Other
Data (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
2002
|
|
|
Total Originations
|
|
$
|
117,965,000
|
|
|
$
|
30,660,000
|
|
|
$
|
130,043,000
|
|
28
|
|
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 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. 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 of 1986, as amended, or
the 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. The provision for income taxes related to these taxable
subsidiaries has not been material as they have had minimal
activity.
On July 1, 2003, Arbor Commercial Mortgage
(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
29
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.
Changes
in Financial Condition
In 2006, we originated 67 loans and investments totaling
$1.5 billion, of which $1.3 billion was funded as of
December 31, 2006. Of the new loans and investments, 29
were bridge loans totaling $849.2 million, 17 were
mezzanine loans totaling $242.6 million, 13 were junior
participating interests totaling $325.8 million and 8 were
preferred equity loans totaling $40.5 million. We have
received full satisfaction of 38 loans totaling
$694.7 million and partial repayment on 12 loans totaling
$9.8 million.
Since December 31, 2006, we have originated nine loans
totaling approximately $159.8 million. In addition, we have
received $162.8 million for the repayment in full of four
loans of which $94.3 million were loans on properties that
were either sold or refinanced outside of Arbor and
$68.5 million was concurrent with an Arbor refinance.
Lastly, we have received $1.6 million for the partial
repayment of six loans.
Our loan portfolio balance at December 31, 2006 was
$2.0 billion, with a weighted average current interest pay
rate of 9.06%, as compared to $1.3 billion, with a weighted
average current interest pay rate of 9.24%, at December 31,
2005. At December 31, 2006, advances on financing
facilities totaled $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), as compared to
$1.0 billion, with a weighted average funding cost of 6.57%
(6.36% excluding a $59.4 million participation in one of
our loans), at December 31, 2005. Additionally, our joint
venture investment portfolio at December 31, 2006 was
$25.4 million as compared to $18.1 million at
December 31, 2005.
On January 11, 2006, we completed our second non-recourse
collateralized debt obligation (CDO II)
transaction, whereby a portfolio of real estate-related assets
were contributed to a consolidated subsidiary which issued
$356.3 million of investment grade-rated floating-rate
notes in a private placement. The subsidiary retained an equity
interest in the portfolio with a value of approximately
$118.8 million. The notes are secured by a portfolio of
real estate-related assets with a face value of approximately
$412.3 million, consisting primarily of bridge loans,
mezzanine loans and junior participating interests in first
mortgages, and by approximately $62.7 million of cash
available for acquisitions of loans and other permitted
investments. The notes have an initial weighted average spread
of approximately 74 basis points over three-month LIBOR.
The facility has a five-year replenishment period that allows
the principal proceeds from repayments of the collateral assets
to be reinvested in qualifying replacement assets, subject to
certain conditions. We intend to own the portfolio of real
estate-related assets until its maturity and will account for
this transaction on our balance sheet as a financing. These
proceeds were used to repay outstanding debt with higher costs
of funds. In connection with CDO II, we entered into
interest rate swap agreements to hedge its exposure to the risk
of changes in the difference between three-month LIBOR and
one-month LIBOR as well as interest rate swaps on current and
future projected LIBOR-based debt relating to certain fixed rate
loans in our portfolio.
On December 14, 2006, we completed our third non-recourse
collateralized debt obligation (CDO III)
transaction, whereby a portfolio of real estate-related assets
were contributed to a consolidated subsidiary which issued
$547.5 million of investment grade-rated floating-rate
notes, including a $100.0 million revolving note class that
provides a revolving note facility. The notes were sold in a
private placement. The subsidiary retained an equity interest in
the portfolio with a value of approximately $52.5 million.
The notes are secured by a portfolio of real estate-related
assets with a face value of approximately $357.4 million,
consisting primarily of bridge loans, mezzanine loans and junior
participating interests in first mortgages, and by approximately
$142.6 million of cash available for acquisitions of loans
and other permitted investments. The notes have a weighted
average spread of approximately 44 basis points over
three-month LIBOR. In addition, the revolving note facility has
a commitment fee of 0.22% per annum on the undrawn portion
and initially there was no amount outstanding under this
facility. The notes have a five-year replenishment period that
allows the principal proceeds from repayments of the collateral
assets to be reinvested in qualifying replacement assets,
subject to certain conditions. We intend to own the portfolio of
real estate-related assets until its maturity and account for
this transaction on our balance sheet as a financing.
30
These proceeds were used to repay outstanding debt with higher
costs of funds. In connection with CDO III, we entered into
interest rate swap agreements to hedge its exposure to the risk
of changes in the difference between three-month LIBOR and
one-month LIBOR as well as interest rate swaps on current and
future projected LIBOR-based debt relating to certain fixed rate
loans in our portfolio.
Sources
of Operating Revenues
We derive our operating revenues primarily through interest
received from making real estate-related bridge and mezzanine
loans and preferred equity investments. Interest income earned
on these loans and investments represented approximately 93%,
84% and 96% of our total revenues in 2006, 2005, and 2004,
respectively.
Interest income is also derived from profits of equity
participation interests. In 2006, 2005 and 2004 interest income
from participation interests represented approximately
$10.4 million, $17.2 million and $1.2 million, or
6%, 14% and 2% of total revenues, respectively.
We also derive interest income from our investments in mortgage
related securities. In 2006, 2005 and 2004, interest on these
investments represented approximately less than 1%, 1% and 2% of
our total revenues, respectively.
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
2005 and 2004.
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 2006, 2005 and 2004.
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 the equity
method of accounting. We record our 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. In 2006, 2005 and 2004, income from equity
affiliates totaled $4.8 million, $8.5 million and
$0.5 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 to our consolidated
financial statements, which appear in Financial Statements
and Supplementary Data. 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.
31
Loans and
Investments
Statement of Financial Accounting Standards (SFAS)
No. 115 requires that at the time of purchase, we designate
a security as held to maturity, available for sale, or trading
depending on ability and intent. Securities held 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, unless 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.
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 an
evaluation of operating cash flow from the property during the
projected holding period, and estimated sales value 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. An allowance for each loan would be
maintained at a level believed adequate by management to absorb
probable losses. As of December 31, 2006, and 2005, no
impairment has been identified and no valuation allowances have
been established.
At December 31, 2006 we had an $8.5 million loan in
our portfolio that is non-performing and income recognition has
been suspended. The principal amount of the loan is not deemed
to be impaired and no loan loss reserve has been recorded at
this time. Income recognition will resume when the loan becomes
contractually current and performance has recommenced.
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 any 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. There is discussion, based upon a
technical interpretation of SFAS 140, that these
transactions may not qualify as a purchase by us. We believe,
and it is industry practice, that we are accounting for these
transactions in an appropriate manner, however, if these
investments do not qualify as a purchase under SFAS 140, 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. As
of December 31, 2006 we had entered into four such
transactions, with a book value of the associated assets of
$228.8 million financed with repurchase obligations of
$151.0 million. As of December 31, 2005 we had entered
into eight such transactions, with a book value of the
associated assets of $176.7 million financed with
repurchase obligations of $124.6 million. Adoption of the
aforementioned treatment would result in these assets and
liabilities being recorded net on our balance sheets.
Available-For-Sale
Securities
We invest in agency-sponsored whole pool mortgage related
securities. Pools of Federal National Mortgage Association, or
FNMA, and Federal Home Loan Mortgage Corporation, or FHLMC,
adjustable rate residential mortgage loans underlie these
mortgage related securities. We receive payments from the
payments that are made on these underlying mortgage loans, which
have a fixed rate of interest for three years and adjust
annually thereafter. These securities are carried at their
estimated fair value with unrealized gains and losses excluded
from earnings and
32
reported in other comprehensive income pursuant to
SFAS No. 115 Accounting for Certain Investments
in Debt and Equity Securities. Unrealized losses other
than temporary losses are recognized currently in income.
Capitalized
Interest
The Company capitalizes interest in accordance with Statement of
Financial Accounting Standards (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 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. An investee, in one of the Companys
joint ventures accounted for using the equity method, is in the
process of using funds to acquire qualifying assets for its
planned principal operations. During the years ended
December 31, 2006 and 2005 the Company capitalized
$0.9 million and $0.5 million, respectively of
interest relating to this investment. There was no
capitalization of interest during the year ended
December 31, 2004.
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 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 FASB 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.
We have evaluated our loans and investments and investments in
equity affiliates to determine whether they are VIEs. This
evaluation resulted in us determining that our 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, 2006, we have identified 27 loans and
investments which were made to entities determined to be
VIEs. A summary of our identified VIEs is presented
in Note 2 of our consolidated financial statements, which
appear in Financial Statements and Supplementary
Data. However, for
33
the 27 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.
Derivatives
and Hedging Activities
In accordance with Financial Accounting Statement
(FAS) 133, the carrying values of interest rate
swaps and the underlying hedged liabilities are reflected at
their fair value. We rely on quotations from a third party 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 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 the Market Risk
section.
Recently
Issued Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155 (SFAS 155),
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 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. We do not expect adoption to have a
material impact on our Consolidated Financial Statements.
In April 2006, the FASB issued FASB Staff Position (FSP)
FIN 46(R)-6, Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46(R),
that became effective beginning third quarter of 2006. FSP
FIN No. 46(R)-6 clarifies that the variability to be
considered in applying Interpretation 46(R) shall be based on an
analysis of the design of the variable interest entity. We
believe that our current method of accounting for variable
interest entities is consistent with FIN 46(R)-6.
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB 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. We do not expect adoption to have a
material impact on our Consolidated Financial Statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements, which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures 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.
We do not expect adoption to have a material impact on our
Consolidated Financial Statements.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Current Year Misstatements, effective for
fiscal years ending after November 15, 2006. SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement for the
purpose
34
of a materiality assessment. The adoption of SAB 108 did
not have a material impact on our Consolidated Financial
Statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits entities to choose to
measure many financial instruments, and certain other items at
fair value. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the effect, if any; the adoption of SFAS 159 may
have on our Consolidated Financial Statements.
Results
of Operations
The following table sets forth our results of operations for the
years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2006
|
|
|
2005
|
|
|
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
|
|
|
4,648,644
|
|
|
|
4,274,609
|
|
|
|
374,035
|
|
|
|
9
|
%
|
Stock based compensation
|
|
|
2,329,689
|
|
|
|
1,590,898
|
|
|
|
738,791
|
|
|
|
46
|
%
|
Selling and administrative
|
|
|
4,463,019
|
|
|
|
4,351,366
|
|
|
|
111,653
|
|
|
|
3
|
%
|
Management fee related
party
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
401,245
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
116,966,562
|
|
|
|
68,392,843
|
|
|
|
48,573,719
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income
from equity affiliates
|
|
|
56,733,996
|
|
|
|
53,214,564
|
|
|
|
3,519,432
|
|
|
|
7
|
%
|
Income from equity affiliates
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
(3,669,148
|
)
|
|
|
(43
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
61,518,288
|
|
|
|
61,668,004
|
|
|
|
(149,716
|
)
|
|
|
|
|
Income allocated to minority
interest
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
(176,500
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
|
$
|
26,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 123% increase in the average
cash balance directly attributable to the addition of two CDOs
in 2006.
35
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 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 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 directly attributable to
increased loan and investment originations and increased
leverage, combined with a 15% increase in the average cost of
borrowings 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
$0.4 million, or 9%, to $4.7 million in 2006 from
$4.3 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. These expenses
represent salaries, benefits, and incentive compensation for
those employed by us during these periods.
Stock-based compensation expense increased $0.7 million, or
46%, to $2.3 million in 2006 from $1.6 million in
2005. These expenses represent the cost of restricted stock
granted to certain of our employees, directors and executive
officers, and employees of our manager. This increase was
primarily due to an increase in the ratable portion of unvested
restricted stock granted as a result of 94,695 restricted stock
shares granted in 2006, partially offset by a decrease in the
ratable portion of unvested restricted stock from prior grants.
Selling and administrative expense increased $0.1 million,
or 3%, to $4.5 million in 2006 from $4.4 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 and placement fees.
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.
36
The following table sets forth our results of operations for the
years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
Percent
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
121,109,157
|
|
|
$
|
57,927,230
|
|
|
$
|
63,181,927
|
|
|
|
109
|
%
|
Other income
|
|
|
498,250
|
|
|
|
42,265
|
|
|
|
455,985
|
|
|
|
1079
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
121,607,407
|
|
|
|
57,969,495
|
|
|
|
63,637,912
|
|
|
|
110
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
45,745,424
|
|
|
|
19,372,575
|
|
|
|
26,372,849
|
|
|
|
136
|
%
|
Employee compensation and benefits
|
|
|
4,274,609
|
|
|
|
2,325,727
|
|
|
|
1,948,882
|
|
|
|
84
|
%
|
Stock based compensation
|
|
|
1,590,898
|
|
|
|
324,343
|
|
|
|
1,266,555
|
|
|
|
390
|
%
|
Selling and administrative
|
|
|
4,351,366
|
|
|
|
1,908,522
|
|
|
|
2,442,844
|
|
|
|
128
|
%
|
Management fee related
party
|
|
|
12,430,546
|
|
|
|
3,614,830
|
|
|
|
8,815,716
|
|
|
|
244
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
68,392,843
|
|
|
|
27,545,997
|
|
|
|
40,846,846
|
|
|
|
148
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income
from equity affiliates
|
|
|
53,214,564
|
|
|
|
30,423,498
|
|
|
|
22,791,066
|
|
|
|
75
|
%
|
Income from equity affiliates
|
|
|
8,453,440
|
|
|
|
525,000
|
|
|
|
7,928,440
|
|
|
|
1510
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
61,668,004
|
|
|
|
30,948,498
|
|
|
|
30,719,506
|
|
|
|
99
|
%
|
Income allocated to minority
interest
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
|
|
5,405,165
|
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,387,023
|
|
|
$
|
25,072,682
|
|
|
$
|
25,314,341
|
|
|
|
101
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Interest income increased $63.2 million, or 109%, to
$121.1 million in 2005 from $57.9 million in 2004.
This increase was due in part to a distribution of
$17.2 million in 2005 representing a 16.7% carried profits
interest in a $30.1 million mezzanine loan that we have
outstanding. This distribution was a result of excess proceeds
from the refinance of a portfolio of properties securing the
loan. Excluding this transaction, interest income increased
$46.0 million, or 79%, over the same period. This increase
was due to a 50% increase in the average balance of the loan and
investment portfolio from $653.1 million in 2004 to
$978.8 million in 2005 due to increased loan and investment
originations, as well as an 18% increase in the average yield on
the assets from 8.8% in 2004 to 10.4% in 2005 primarily due to
increased market interest rates, partially offset by an
increased average balance of our fixed rate loan portfolio.
Interest income from available for sale securities decreased
$0.3 million, or 25%, to $0.8 million in 2005 from
$1.1 million in 2004. This decrease is due to a lower
average balance in 2005 as a result of prepayments received on
our investment.
Other income totaled $0.5 million in 2005, up from $42,265
in 2004. This is primarily due to increased structuring fees
received for services rendered in arranging loan facilities in
2005.
Expenses
Interest expense increased $26.4 million, or 136%, to
$45.7 million in 2005 from $19.4 million in 2004. This
increase was due to an 87% increase in the average debt
financing on our loan and investment portfolio from
$383.8 million in 2004 to $717.5 million in 2005 due
to increased loan and portfolio originations, a 29% increase in
the average cost of borrowings from 4.8% to 6.2% as a result of
increased market interest rates, as well as the cost of interest
rate swaps on our variable rate debt associated with certain of
our fixed rate loans. In addition, interest expense on debt
financing of our
available-for-sale
securities portfolio increased $0.6 million, or 100%, to
$1.3 million in 2005 from $0.6 million in 2004. This
increase is due to a higher cost of borrowings in 2005 as a
result of increased market interest rates, partially offset by a
lower average balance in 2005 as a result of prepayments
received on our investment.
37
Employee compensation and benefits expense increased
$1.9 million or 84%, to $4.3 million in 2005 from
$2.3 million in 2004. This increase was primarily due to
the expansion of staffing needs associated with the growth of
the business and increased size of our portfolio. These expenses
represent salaries, benefits, and incentive compensation for
those employed by us during these periods.
Stock-based compensation expense totaled $1.6 million in
2005, up from $0.3 million in 2004. These expenses
represent the cost of restricted stock granted to certain of our
employees, directors and executive officers, and employees of
our manager. The increase was primarily due to the initial
one-fifth vesting of 118,500 shares granted in 2005
combined with the initial one-third vesting of 6,000 shares
granted in 2005, partially offset by a decrease in the ratable
portion of the 2003 unvested restricted stock grants in 2005 as
compared to 2004.
Selling and administrative expense increased $2.4 million,
or 128%, to $4.4 million in 2005 from $1.9 million in
2004. This increase is directly attributable to professional
fees, including legal, accounting services, and consulting fees
relating to investor relations and Sarbanes-Oxley compliance,
marketing costs, insurance expense and directors fees.
Management fees totaled $12.4 million in 2005, up from
$3.6 million in 2004. 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
$0.5 million, or 27%, to $2.5 million in 2005 from
$2.0 million in 2004. This increase was primarily due to
increased stockholders equity directly attributable to
increased profits and contributed capital over the same period
in 2004. The incentive management fees totaled $9.9 million
in 2005, up from $1.6 million in 2004. This increase was
primarily due to increased profitability.
Income
From Equity Affiliates
Income from equity affiliates totaled $8.5 million in 2005,
up from $0.5 million in 2004. This increase was primarily
due to excess proceeds received from the refinance of properties
in the portfolio of one of our investments in equity affiliates
in 2005.
Income
Allocated to Minority Interest
Income allocated to minority interest increased
$5.4 million, or 92%, to $11.3 million in 2005 from
$5.9 million in 2004. These amounts represent the portion
of our income allocated to our manager. This increase was due to
a 99% increase in income before minority interest, partially
offset by a decrease in our managers limited partnership
interest in us. Our manager had a weighted average limited
partnership interest of 18.3% and 20.1% in our operating
partnership in 2005 and 2004, respectively.
Liquidity
and Capital Resources
Sources
of Liquidity
Liquidity is a measurement of the ability to meet potential cash
requirements, including ongoing commitments to repay borrowings,
pay dividends, fund loans and investments and other general
business needs. Our primary sources of funds for liquidity
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, the issuance of floating rate notes
resulting from our CDOs (described below) in January 2005,
January 2006 and December 2006, the issuance of junior
subordinated notes to subsidiary trusts issuing preferred
securities (described below) in 2005 and 2006, borrowings under
credit agreements, net cash provided by operating activities
including cash from equity participation interests, repayments
of outstanding loans and investments, funds from junior loan
participation arrangements and the future issuance of common,
convertible
and/or
preferred equity securities.
In 2003, we received gross proceeds from the private placement
totaling $120.2 million, which combined with ACMs
equity contribution of $43.9 million, resulted in total
contributed capital of $164.1 million. These proceeds were
used to pay down borrowings under our existing credit facilities.
38
In 2004, we sold 6,750,000 shares of our common stock in a
public offering on April 13, 2004 for net proceeds of
approximately $125.4 million. In addition, in May 2004 the
underwriters exercised a portion of their over allotment option,
which resulted in the issuance of 524,200 additional shares for
net proceeds of approximately $9.8 million. Additionally,
in 2004, 1.3 million common stock warrants were exercised
which resulted in proceeds of $12.9 million. Also, Arbor
Realty Limited Partnership (ARLP), the operating
partnership of Arbor Realty Trust received proceeds of
$9.4 million from the exercise of ACMs warrants for a
total of 629,345 operating partnership units. These proceeds
were used to pay down borrowings under our existing credit
facilities.
We also maintain liquidity through four master repurchase
agreements, one warehouse credit facility and one bridge loan
warehousing credit agreement with five different financial
institutions. In addition, we have issued three collateralized
debt obligations and seven separate junior subordinated notes.
London interbank offered rate, or LIBOR, refers to one-month
LIBOR unless specifically stated.
We have a $500.0 million master repurchase agreement with
Wachovia Bank National Association, dated as of
December 23, 2003, with an initial term of three years and
bears interest at LIBOR plus pricing of 0.94% to 3.50%, varying
on the type of asset financed. In December 2005, we amended this
facility on a temporary basis which provided for an increase in
the amount of financing available under this facility from
$350 million to $500 million. This increase expired in
January of 2006 in conjunction with the close of CDO II.
Subsequent to December 31, 2005, $269.1 million of
this facility was paid down in connection with the CDO II
closing (see below). In September 2006, we amended this facility
on a temporary basis which provided for an increase in the
amount of financing available under this facility from
$350 million to $550 million in preparation for the
CDO III closing (see below). In October 2006, this
repurchase agreement was amended, increasing the amount of
available financing from $350 million to $500 million
and extended 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. At
December 31, 2006, the outstanding balance under this
facility was $328.5 million with a current weighted average
note rate of 6.99%. In addition, we have a $100 million
repurchase agreement with the same financial institution that we
entered into for the purpose of financing our securities
available for sale. This agreement expires in July 2007 and has
an interest rate of LIBOR plus 0.20%. At December 31, 2006,
the outstanding balance under this facility was
$20.7 million with a current weighted average note rate of
5.55%.
We have a $100.0 million master repurchase agreement with a
second financial institution, effective in December 2005, which
was extended in December 2006 for one year and bears interest at
LIBOR plus pricing of 1.00% to 3.00%, varying on the type of
asset financed. At December 31, 2006, the outstanding
balance under this facility was $46.6 million with a
current weighted average note rate of 7.29%.
We have a $150.0 million master repurchase agreement with a
third financial institution, effective in October 2006, that has
a term expiring in October 2009 and bears interest at LIBOR plus
pricing of 1.00% to 1.80%, varying on the type of asset
financed. At December 31, 2006, there was no outstanding
balance under this facility.
We have a $75.0 million bridge loan warehousing credit
agreement with a fourth financial institution, to provide
financing for bridge loans. This agreement bears a variable rate
of interest, payable monthly, based on Prime plus 0% or 1,2,3 or
6-month
LIBOR plus 1.75%, at the Companys option. In September
2006, this repurchase agreement was amended extending the
maturity date to August 2007, increasing the amount of available
financing from $50 million to $75 million and amending
certain terms of this agreement. At December 31, 2006, the
outstanding balance under this facility was $20.2 million
with a current weighted average note rate of 7.10%.
We have a $50.0 million warehousing credit facility with a
fifth financial institution, effective in December 2005, that
has a term expiring in December 2007 and bears interest at LIBOR
plus pricing of 1.50% to 2.50%, varying on the type of asset
financed. At December 31, 2006, the outstanding balance
under this facility was $11.8 million with a current
weighted average note rate of 7.06%.
We had a $50.0 million master repurchase agreement with a
sixth financial institution, dated as of July 1, 2003,
which expired in July 2006 and bore interest at LIBOR plus
pricing of 1.75% to 3.50%, varying on the type of asset
financed. This facility was not utilized.
We had a $50.0 million warehouse credit facility with a
seventh financial institution, who beneficially owned
approximately 2% of our outstanding common stock as of
December 31, 2005 which was terminated in January
39
2006. This agreement had a term of one year with two six-month
extension periods and bore interest at LIBOR plus 6.00%.
We have a non-recourse collateralized debt obligation
transaction or CDO, which closed on January 19, 2005,
whereby $469 million of real estate related and other
assets were contributed to a newly-formed consolidated
subsidiary which issued $305 million of investment
grade-rated floating-rate notes in a private placement. These
notes are secured by the portfolio of assets and pay interest
quarterly at a weighted average rate of approximately
77 basis points over a floating rate of interest based on
three-month LIBOR. The CDO may be replenished with substitute
collateral for loans that are repaid during the first four
years. Thereafter, the outstanding debt balance will be reduced
as loans are repaid. The Company incurred approximately
$7.2 million of issuance costs which is being amortized on
a level yield basis over the average estimated life of the CDO.
Proceeds from the CDO were used to repay outstanding debt under
our existing facilities totaling $267 million. By
contributing these real estate assets to the CDO, this
transaction resulted in a decreased cost of funds relating to
the CDO assets and created capacity in our existing credit
facilities. At December 31, 2006, the outstanding balance
under this facility was $291.3 million with a weighted
average current note rate of 6.10%. Proceeds from the repayment
of assets which serve as collateral for our CDO must be retained
in the CDO structure until such collateral can be replaced or
used to paydown the secured notes 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. For accounting purposes, the CDO is consolidated in our
financial statements.
On January 11, 2006, we completed our second non-recourse
collateralized debt obligation transaction, or CDO II,
whereby $475 million of real estate related and other
assets were contributed to a newly-formed consolidated
subsidiary which issued $356 million of investment
grade-rated floating-rate notes in a private placement. These
notes are secured by the portfolio of assets and pay interest
quarterly at a weighted average rate of approximately
74 basis points over a floating rate of interest based on
three-month LIBOR. CDO II may be replenished with
substitute collateral for loans that are repaid during the first
five years. Thereafter, the outstanding debt balance will be
reduced as loans are repaid. Proceeds from CDO II were used
to repay outstanding debt under our existing facilities totaling
$301.0 million. The Company incurred approximately
$6.2 million of issuance costs which is being amortized on
a level yield basis over the average estimated life of
CDO II. By contributing these real estate assets to
CDO II, this transaction resulted in a decreased cost of
funds relating to CDO IIs assets and created capacity
in our existing credit facilities. Proceeds from the repayment
of assets which serve as collateral for CDO II must be
retained in its structure 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. For accounting
purposes, CDO II is consolidated in our financial
statements. At December 31, 2006, the outstanding balance
under this facility was $352.7 million with a weighted
average current note rate of 6.11%.
On December 14, 2006, we completed our third non-recourse
collateralized debt obligation transaction, or CDO III,
whereby $500.0 million of real estate related and other
assets were contributed to a newly-formed consolidated
subsidiary which issued $547.5 million of investment
grade-rated floating-rate notes, including a $100.0 million
revolving note class that provides a revolving note facility in
a private placement. These notes are secured by the portfolio of
assets and pay interest quarterly at a weighted average rate of
approximately 44 basis points over a floating rate of
interest based on three-month LIBOR. In addition, the revolving
note facility has a commitment fee of 0.22% per annum on
the undrawn portion. CDO III may be replenished with
substitute collateral for loans that are repaid during the first
five years. Thereafter, the outstanding debt balance will be
reduced as loans are repaid. The Company incurred approximately
$9.7 million of issuance costs which is being amortized on
a level yield basis over the average estimated life of the
CDO III. Proceeds from CDO III were used to repay
outstanding debt under our existing facilities totaling
$317.1 million. By contributing these real estate assets to
CDO III, this transaction resulted in a decreased cost of
funds relating to CDO IIIs assets and created
capacity in our existing credit facilities. Proceeds from the
repayment of assets which serve as collateral for CDO III
must be retained in its structure 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. For accounting
purposes, CDO III is consolidated in our financial
statements. At December 31, 2006, the outstanding balance
under this facility was $447.5 million with a weighted
average current note rate of 5.82%.
40
In 2005, we, through newly-formed wholly-owned subsidiaries of
our operating partnership, issued a total of $155.9 million
of junior subordinated notes in five separate private
placements. In 2006, we, through wholly-owned subsidiaries of
our operating partnership, issued a total of $67.0 million
of junior subordinated notes in two separate private placements.
These junior subordinated notes are described in Note 6
Debt Obligations of our consolidated financial
statements, which appears in Financial Statements and
Supplementary Data. These securities 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. At December 31, 2006, the outstanding
balance under these facilities was $222.9 million with a
current weighted average note rate of 8.36%.
The warehouse credit agreement, bridge loan warehousing credit
agreement, and the master repurchase agreements require that we
pay interest monthly, based on pricing over LIBOR. The amount of
our pricing over LIBOR varies depending upon the structure of
the loan or investment financed pursuant to the specific
agreement.
The warehouse credit agreement, 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.
As of December 31, 2006, these facilities had an aggregate
capacity of $2.5 billion and borrowings were approximately
$1.8 billion.
Each of the credit facilities contains various financials
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, 2006,
we are in compliance with all covenants and restrictions under
these credit facilities.
We have three junior loan participations with a total
outstanding balance at December 31, 2006 of
$62.5 million. These participation borrowings have maturity
dates equal to the corresponding mortgage loans and are secured
by the participants interests in the mortgage loans.
Interest expense is based on a portion of the interest received
from the loans.
We believe our existing sources of funds will be adequate for
purposes of meeting our short-term liquidity (within one year)
and long-term liquidity needs. Our short-term and long-term
liquidity needs include ongoing commitments to repay borrowings,
fund future investments, fund operating costs and fund
distributions to our stockholders. 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.
41
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.
In order to maximize the return on our funds, cash generated
from operations is generally used to temporarily pay down
borrowings under credit facilities whose primary purpose is to
fund our new loans and investments. When making distributions,
we borrow 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.
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 may
be 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,
2006, 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 $25.10 per share).
This plan expired on February 9, 2007.
Contractual
Commitments
As of December 31, 2006, we had the following material
contractual obligations (payments in thousands):
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|
|
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|
|
|
|
|
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Payments Due by Period(1)
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Contractual Obligations
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|
2007
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|
|
2008
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|
2009
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|
|
2010
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|
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2011
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Thereafter
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Total
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|
|
|
|
|
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|
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Notes payable
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$
|
21,315
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|
|
$
|
2,522
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|
|
$
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|
|
|
$
|
|
|
|
$
|
1,733
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|
|
$
|
6,479
|
|
|
$
|
32,049
|
|
Collateralized debt obligations(2)
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|
|
12,720
|
|
|
|
12,720
|
|
|
|
96,493
|
|
|
|
96,493
|
|
|
|
295,778
|
|
|
|
577,325
|
|
|
|
1,091,529
|
|
Repurchase agreements
|
|
|
118,095
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|
|
|
140,492
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|
|
|
60,000
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|
|
|
4,000
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|
|
|
36,060
|
|
|
|
37,200
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|
|
|
395,847
|
|
Trust preferred securities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,962
|
|
|
|
222,962
|
|
Loan participations
|
|
|
125
|
|
|
|
62,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,525
|
|
Outstanding unfunded commitments(3)
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|
|
40,815
|
|
|
|
7,669
|
|
|
|
7,511
|
|
|
|
920
|
|
|
|
18,190
|
|
|
|
|
|
|
|
75,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
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|
$
|
193,070
|
|
|
$
|
225,803
|
|
|
$
|
164,004
|
|
|
$
|
101,413
|
|
|
$
|
351,761
|
|
|
$
|
843,966
|
|
|
$
|
1,880,017
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
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|
Represents amounts due based on
contractual maturities.
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|
(2)
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|
Comprised of $291.3 million of
CDO I debt, $352.7 million of CDO II debt and
$447.5 million of CDO III debt with a weighted average
remaining maturity of 3.40, 4.88 and 5.48 years,
respectively, as of December 31, 2006.
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(3)
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|
In accordance with certain of our
loans and investments, we have outstanding unfunded commitments
of $75.1 million as of December 31, 2006, 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.
|
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.
42
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
$2.6 million and $2.5 million in base management fees
for services rendered in 2006 and 2005, 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
(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 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. In 2005, our manager earned
a total of $9.9 million of incentive compensation and
elected to receive it partially in cash totaling
$4.4 million and partially in 205,069 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
43
termination fee equal to two times the base management fee and
incentive compensation paid for the
12-month
period preceding the termination.
Inflation
In our two most recent fiscal years, inflation and changing
prices have not had 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. Additionally, we
also 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 effected. See Item 7A
Quantitative and Qualitative Disclosures about Market
Risk.
Related
Party Transactions
Related
Party Loans
As of December 31, 2006 and 2005, we had a
$7.75 million first mortgage loan receivable 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. This
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 borrower
and the private academic institution. Interest income recorded
from this loan for the year ended December 31, 2006 and
2005, was approximately $0.7 million and $0.6 million,
respectively.
ACM had a 50% non-controlling interest in a joint venture, which
was formed to acquire, develop
and/or sell
real estate assets. In 2005, ACM received all of the invested
capital and retained its interest in the joint venture. All
loans outstanding to this joint venture were repaid in full in
2004. In 2003, we had a $16.0 million bridge loan
outstanding to the joint venture, which was collateralized by a
first lien position on a commercial real estate property. This
loan was funded by ACM in June 2003 and was purchased by us in
July 2003. The loan required monthly interest payments based on
one month LIBOR and was repaid in full in 2004. We had agreed to
provide the borrower with additional mezzanine financing in the
amount of up to $8.0 million. The mezzanine financing
required interest payments based on one month LIBOR and was
repaid in full in 2004.
Our $16.0 million bridge loan to the joint venture was
contributed by ACM as one of the structured finance assets
contributed to us on July 1, 2003 at book value, which
approximates fair value. At the time of contribution, ACM also
agreed to provide a limited guarantee of the loans
principal amount based on any profits realized on its retained
50% interest in the joint venture with the borrower and
ACMs participating interests in borrowers under three
other contributed structured finance assets.
At the time of ACMs origination of three of the structured
finance assets that it contributed to us on July 1, 2003 at
book value, which approximates fair value, each of the property
owners related to these contributed assets granted ACM
participating interests that share in a percentage of the cash
flows of the underlying properties. Upon contribution of the
structured finance assets, ACM retained these participating
interests and its 50% non-controlling interest in the joint
venture to which it had made the $16.0 million bridge loan.
ACM agreed that if any portion of the outstanding amount of any
of these four contributed assets is not paid at its maturity or
repurchase date, ACM will pay to us, subject to the limitation
described below, the portion of the unpaid amount of the
contributed asset up to the total amount then received by ACM
due to the realization of any profits on its retained interests
associated with any of the four contributed assets (which had an
aggregate balance of $22.3 million and $48.3 million
as of December 31, 2004 and 2003, respectively). However,
ACM will no longer be obligated to make such payments to us when
the remaining accumulated principal amount of the four
contributed assets, collectively, falls below $5 million
and none of the four contributed assets were in default. In 2004
and 2005, these four investments matured, the borrowers paid the
amounts due in full and ACMs guarantee on these
investments has been satisfied.
44
ACM has a 50% non-controlling interest in an entity, that owns
15% of a real estate holding company that owns and operates a
factory outlet center. At December 31, 2006, ACMs
investment in this joint venture was approximately
$0.2 million. The Company had a $28.3 million
preferred equity investment in 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
matures 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 lieu of waving our right of
first refusal and potential prepayment fee under the original
terms of the bridge loan.
As of December 31, 2006 and 2005, $0.1 million and
$0.2 million, respectively of escrows received at loan
closings were due to ACM and included in due to related party.
These payments were remitted in January 2007 and January 2006,
respectively. In addition, as of December 31, 2005,
approximately $0.1 million of net expenses due from ACM
were included in due to related party. These payments were
remitted in January 2006.
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 an 18% limited partnership
interest in our operating partnership and the remaining 82%
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.
45
Under the terms of the management agreement, ACM is also
required to provide us with a right of first refusal with
respect to all structured finance transactions identified by ACM
or its affiliates. We have agreed not to pursue, and to allow
ACM to pursue, any real estate opportunities other than
structured finance transactions.
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, except as approved
by our board of directors.
We are dependent upon our manager, ACM, to provide services to
us that are vital to our operations with whom we have conflicts
of interest. 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 an 18% 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.
46
|
|
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, interest rate
risk, market value risk and prepayment risk.
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,
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, 2006,
and assuming the balances of these loans and liabilities remain
unchanged for the subsequent twelve months, a 1% increase in
LIBOR would increase our annual net income and cash flows 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. Based on the loans and liabilities as of
December 31, 2006, and assuming the balances of these loans
and liabilities remain unchanged for the subsequent twelve
months, a 1% decrease in LIBOR would decrease our annual net
income and cash flows 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).
As of December 31, 2005, 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, 2005, a 1%
decrease in LIBOR would have decreased our annual net income and
cash flows in the subsequent twelve months by approximately
$1.1 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).
47
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.
We invest in securities, which are designated as
available-for-sale.
These securities are adjustable rate securities that have a
fixed component for three years and, thereafter, generally reset
annually. These securities are financed with a repurchase
agreement that bears interest at a rate of one month LIBOR plus
.20%. Since the repricing of the debt obligations occurs more
quickly than the repricing of the securities, on average, our
cost of borrowings will rise more quickly in response to an
increase in market interest rates than the earnings rate on the
securities. This will result in a reduction to our net interest
income and cash flows related to these securities. Based on the
securities and borrowings as of December 31, 2006, and
assuming the balances of these securities and borrowings remain
unchanged for the subsequent twelve months, a 1% increase in
LIBOR would reduce our annual net income and cash flows by
approximately $0.2 million. A 1% decrease in LIBOR would
increase our annual net income and cash flows by approximately
$0.2 million. As of December 31, 2005, assuming the
balances of these securities and borrowings remained unchanged
for the subsequent twelve months, a 1% increase in LIBOR would
have reduced our annual net income and cash flows by
approximately $0.3 million. A 1% decrease in LIBOR would
have increased our annual net income and cash flows by
approximately $0.3 million.
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, 2006 we had ten of these interest rate
swap agreements outstanding that have a combined notional value
of $1.2 billion. As of December 31, 2005 we had five
of these interest rate swap agreements outstanding with a
combined notional value of $757.3 million. 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, 2006, and December 31, 2005, if there
were a 50 basis point increase in forward interest rates,
the value of these interest rate swaps would have decreased by
approximately $0.7 million and $0.1 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 $0.7 million and
$0.1 million, respectively.
In connection with the issuance of variable rate junior
subordinate notes during 2006 and 2005, we entered into various
interest rate swap agreements. These swaps have total notional
values of $140.0 million and $50.0 million,
respectively, as of December 31, 2006 and December 31,
2005. 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, 2006 and
December 31, 2005, 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
$2.5 million and $0.9 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 $2.4 million and
$0.9 million, respectively.
As of December 31, 2006, we had eighteen interest rate swap
agreements outstanding that have a combined notional value of
$330.4 million. As of December 31, 2005 we had two
interest rate swap agreements outstanding with combined notional
values of $140.0 million to hedge current and outstanding
LIBOR 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, 2006, and
December 31, 2005, 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
$8.9 million and $4.7 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 $9.2 million and
$4.7 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
48
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.
Market
Value Risk
Our
available-for-sale
securities are reflected at their estimated fair value with
unrealized gains and losses excluded from earnings and reported
in other comprehensive income pursuant to SFAS No. 115
Accounting for Certain Investments in Debt and Equity
Securities. The estimated fair value of these securities
fluctuate primarily due to changes in interest rates and other
factors; however, given that these 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. Generally, in a rising
interest rate environment, the estimated fair value of these
securities would be expected to decrease; conversely, in a
decreasing interest rate environment, the estimated fair value
of these securities would be expected to increase.
Prepayment
Risk
As we receive repayments of principal on these securities,
premiums paid on such securities are amortized against interest
income using the effective yield method through the expected
maturity dates of the securities. In general, an increase in
prepayment rates will accelerate the amortization of purchase
premiums, thereby reducing the interest income earned on the
securities.
49
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
THE CONSOLIDATED FINANCIAL STATEMENTS OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
|
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|
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|
Page
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
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52
|
|
|
|
|
53
|
|
|
|
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54
|
|
|
|
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55
|
|
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|
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93
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
50
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 (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2006, 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
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal
Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 28, 2007
expressed an unqualified opinion thereon.
New York, New York
February 28, 2007
51
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
7,756,857
|
|
|
$
|
19,427,309
|
|
Restricted cash
|
|
|
84,772,062
|
|
|
|
35,496,276
|
|
Loans and investments, net
|
|
|
1,993,525,064
|
|
|
|
1,246,825,906
|
|
Related party loans, net
|
|
|
7,752,038
|
|
|
|
7,749,538
|
|
Available-for-sale
securities, at fair value
|
|
|
22,100,176
|
|
|
|
29,615,420
|
|
Investment in equity affiliates
|
|
|
25,376,949
|
|
|
|
18,094,242
|
|
Other assets
|
|
|
63,062,065
|
|
|
|
38,866,666
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,204,345,211
|
|
|
$
|
1,396,075,357
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY:
|
Repurchase agreements
|
|
$
|
395,847,359
|
|
|
$
|
413,624,385
|
|
Collateralized debt obligations
|
|
|
1,091,529,000
|
|
|
|
299,319,000
|
|
Junior subordinated notes to
subsidiary trust issuing preferred securities
|
|
|
222,962,000
|
|
|
|
155,948,000
|
|
Notes payable
|
|
|
94,574,240
|
|
|
|
115,400,377
|
|
Notes payable related
party
|
|
|
|
|
|
|
30,000,000
|
|
Due to related party
|
|
|
3,983,647
|
|
|
|
1,777,412
|
|
Due to borrowers
|
|
|
16,067,295
|
|
|
|
10,691,355
|
|
Other liabilities
|
|
|
17,802,341
|
|
|
|
18,014,755
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,842,765,882
|
|
|
|
1,044,775,284
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
65,468,252
|
|
|
|
63,691,556
|
|
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; 17,388,770 shares
issued, 17,109,370 shares outstanding at December 31,
2006 and 17,051,391 shares issued and outstanding at
December 31, 2005
|
|
|
173,888
|
|
|
|
170,514
|
|
Additional paid-in capital
|
|
|
273,037,744
|
|
|
|
264,691,931
|
|
Treasury stock, at
cost 279,400 shares
|
|
|
(7,023,361
|
)
|
|
|
|
|
Retained earnings
|
|
|
27,732,489
|
|
|
|
21,452,789
|
|
Accumulated other comprehensive
income
|
|
|
2,152,556
|
|
|
|
1,255,522
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
296,111,077
|
|
|
|
287,608,517
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,204,345,211
|
|
|
$
|
1,396,075,357
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
52
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
|
$
|
57,927,230
|
|
Income from swap derivative
|
|
|
696,960
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
170,197
|
|
|
|
498,250
|
|
|
|
42,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
57,969,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
92,693,419
|
|
|
|
45,745,424
|
|
|
|
19,372,575
|
|
Employee compensation and benefits
|
|
|
4,648,644
|
|
|
|
4,274,609
|
|
|
|
2,325,727
|
|
Stock based compensation
|
|
|
2,329,689
|
|
|
|
1,590,898
|
|
|
|
324,343
|
|
Selling and administrative
|
|
|
4,463,019
|
|
|
|
4,351,366
|
|
|
|
1,908,522
|
|
Management fee related
party
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
3,614,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
116,966,562
|
|
|
|
68,392,843
|
|
|
|
27,545,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income from equity affiliates
|
|
|
56,733,996
|
|
|
|
53,214,564
|
|
|
|
30,423,498
|
|
Income from equity affiliates
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
61,518,288
|
|
|
|
61,668,004
|
|
|
|
30,948,498
|
|
Income allocated to minority
interest
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
|
$
|
25,072,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
2.94
|
|
|
$
|
2.99
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
2.93
|
|
|
$
|
2.98
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
2.57
|
|
|
$
|
2.24
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,161,346
|
|
|
|
16,867,466
|
|
|
|
13,814,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
21,001,804
|
|
|
|
20,672,502
|
|
|
|
17,366,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
53
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
FOR THE
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2004
|
|
|
|
|
|
|
3,146,724
|
|
|
$
|
31,467
|
|
|
|
8,199,567
|
|
|
$
|
81,996
|
|
|
$
|
111,694,516
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(691,865
|
)
|
|
$
|
|
|
|
$
|
111,116,114
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
629,345
|
|
|
|
6,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,294
|
|
Issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,274,200
|
|
|
|
72,742
|
|
|
|
134,115,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,188,141
|
|
Issuance of common stock from
exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
973,354
|
|
|
|
9,733
|
|
|
|
12,862,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,872,670
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,498
|
|
|
|
225
|
|
|
|
499,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,459
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,343
|
|
Distributions common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,567,679
|
)
|
|
|
|
|
|
|
(15,567,679
|
)
|
Forfeited unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,401
|
)
|
|
|
(24
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to minority interest
from increased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,229,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,229,251
|
)
|
Net income
|
|
$
|
25,072,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,072,682
|
|
|
|
|
|
|
|
25,072,682
|
|
Net unrealized loss on securities
available for sale
|
|
|
(529,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529,600
|
)
|
|
|
(529,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2004
|
|
$
|
24,543,082
|
|
|
|
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
|
|
$
|
51,310,842
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
54
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,413,807
|
|
|
$
|
50,387,023
|
|
|
$
|
25,072,682
|
|
Adjustments to reconcile net income
to cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
2,329,689
|
|
|
|
1,590,898
|
|
|
|
324,343
|
|
Minority interest
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
Amortization and accretion of
interest
|
|
|
(219,820
|
)
|
|
|
(165,906
|
)
|
|
|
(1,431,146
|
)
|
Non-cash incentive compensation to
manager
|
|
|
8,453,489
|
|
|
|
5,545,506
|
|
|
|
1,623,106
|
|
Income from equity affiliates
|
|
|
|
|
|
|
|
|
|
|
(525,000
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Others assets
|
|
|
(6,336,004
|
)
|
|
|
(7,771,987
|
)
|
|
|
(6,192,238
|
)
|
Other liabilities
|
|
|
(212,413
|
)
|
|
|
12,207,088
|
|
|
|
838,159
|
|
Deferred origination fees
|
|
|
(471,814
|
)
|
|
|
(130,560
|
)
|
|
|
1,163,039
|
|
Due to related party
|
|
|
32,956
|
|
|
|
292,927
|
|
|
|
1,324,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
65,094,371
|
|
|
$
|
73,235,970
|
|
|
$
|
28,073,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments originated
and purchased, net
|
|
|
(1,449,405,924
|
)
|
|
|
(989,797,797
|
)
|
|
|
(733,136,131
|
)
|
Payoffs and paydowns of loans and
investments
|
|
|
704,467,014
|
|
|
|
574,393,425
|
|
|
|
221,425,780
|
|
Due to borrowers
|
|
|
5,375,940
|
|
|
|
2,104,285
|
|
|
|
177,125
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
(57,228,552
|
)
|
Prepayments on securities available
for sale
|
|
|
7,897,845
|
|
|
|
15,999,968
|
|
|
|
9,722,630
|
|
Change in restricted cash
|
|
|
(49,275,786
|
)
|
|
|
(35,496,276
|
)
|
|
|
|
|
Contributions to equity affiliates
|
|
|
(7,282,707
|
)
|
|
|
(18,280,824
|
)
|
|
|
(9,562,190
|
)
|
Distributions from equity affiliates
|
|
|
|
|
|
|
5,441,315
|
|
|
|
3,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
$
|
(788,223,618
|
)
|
|
$
|
(445,635,904
|
)
|
|
$
|
(565,076,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable and
repurchase agreements
|
|
|
702,024,038
|
|
|
|
759,168,998
|
|
|
|
605,600,178
|
|
Payoffs and paydowns of notes
payable and repurchase agreements
|
|
|
(770,627,202
|
)
|
|
|
(775,025,055
|
)
|
|
|
(203,247,830
|
)
|
Proceeds from issuance of
collateralized debt obligation
|
|
|
803,750,000
|
|
|
|
305,319,000
|
|
|
|
|
|
Payoffs and paydowns of
collateralized debt obligation
|
|
|
(11,540,000
|
)
|
|
|
(6,000,000
|
)
|
|
|
|
|
Proceeds from issuance of junior
subordinated notes
|
|
|
67,014,000
|
|
|
|
155,948,000
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
5,381,172
|
|
|
|
158,356,670
|
|
Purchases of treasury stock
|
|
|
(7,023,361
|
)
|
|
|
|
|
|
|
|
|
Issuance of ARSR preferred stock
|
|
|
116,000
|
|
|
|
|
|
|
|
|
|
Exercise of warrants from minority
interest
|
|
|
|
|
|
|
|
|
|
|
9,440,175
|
|
Distributions paid to minority
interest
|
|
|
(9,704,497
|
)
|
|
|
(8,458,394
|
)
|
|
|
(3,920,819
|
)
|
Offering expenses paid
|
|
|
|
|
|
|
|
|
|
|
(11,236,483
|
)
|
Distributions paid on common stock
|
|
|
(44,134,107
|
)
|
|
|
(37,747,372
|
)
|
|
|
(15,567,679
|
)
|
Payment of deferred financing costs
|
|
|
(18,416,076
|
)
|
|
|
(13,160,807
|
)
|
|
|
(2,135,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
$
|
711,458,795
|
|
|
$
|
385,425,542
|
|
|
$
|
537,288,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash
|
|
$
|
(11,670,452
|
)
|
|
$
|
13,025,608
|
|
|
$
|
286,176
|
|
Cash at beginning of period
|
|
|
19,427,309
|
|
|
|
6,401,701
|
|
|
|
6,115,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,756,857
|
|
|
$
|
19,427,309
|
|
|
$
|
6,401,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay interest, net of
capitalized interest
|
|
$
|
85,650,217
|
|
|
$
|
41,376,179
|
|
|
$
|
18,547,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued offering expenses
|
|
|
|
|
|
|
|
|
|
|
59,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of investment in equity
affiliates to loan
|
|
|
|
|
|
|
|
|
|
|
6,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
55
Note 1
Description of Business and Basis of Presentation
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 backed 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.
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 units, each consisting of five shares of common
stock and one warrant to purchase one share of common stock.
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). As of
December 31, 2006, the Company had 17,109,370 shares
of common stock outstanding.
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 (see
Note 2 Summary of Significant Accounting
Policies), which the Company is not the primary
beneficiary, are accounted for under the equity method. All
significant intercompany transactions and balances have been
eliminated.
Note 2
Summary of Significant Accounting Policies
Use of
Estimates
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.
56
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
Reclassifications
Certain prior year amounts have been reclassified to conform to
current period presentation.
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, 2006 and 2005, the Company had restricted
cash of $84.8 million and $35.5 million, respectively,
on deposit with the trustees for the Companys
collateralized debt obligations (CDOs), see
Note 6 Debt Obligations, primarily representing
ramp-up
proceeds received from the Companys third collateralized
debt obligation (CDO III) which will be used to
purchase underlying assets, 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.
Loans
and Investments
SFAS No. 115 requires that at the time of purchase, we
designate a security as held to maturity, 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 a trading security 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, unless 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.
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 an
evaluation of operating cash flow from the property during the
projected holding period, and estimated sales value 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. An
allowance for each loan would be maintained at a level believed
adequate by management to absorb probable losses. As of
December 31, 2006 and 2005, no impairment has been
identified and no valuation allowances have been established.
At December 31, 2006, there was an $8.5 million loan
in the loan and investment portfolio that is non-performing and
income recognition has been suspended. The principal amount of
the loan is not deemed to be impaired and no loan loss reserve
has been recorded at this time. Income recognition will resume
when the loan becomes contractually current and performance has
recommenced.
57
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
Capitalized
Interest
The Company capitalizes interest in accordance with Statement of
Financial Accounting Standards (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 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
accounted for using the equity method, is in the process of
using funds to acquire qualifying assets for its planned
principal operations. During the year ended December 31,
2006 and 2005 the Company capitalized $0.9 million and
$0.5 million, respectively of interest relating to this
investment.
Available-For-Sale
Securities
The Company invests in agency-sponsored whole pool mortgage
related securities. Pools of Federal National Mortgage
Association, or FNMA, and Federal Home Loan Mortgage
Corporation, or FHLMC, 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 have a fixed rate of interest
for three years and adjust annually thereafter. These securities
are carried at their estimated fair value with unrealized gains
and losses excluded from earnings and reported in other
comprehensive income pursuant to SFAS No. 115
Accounting for Certain Investments in Debt and Equity
Securities. Unrealized losses other than temporary losses
are recognized currently in income. The estimated fair value of
these securities fluctuate primarily due to changes in interest
rates and other factors; however, given that these 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.
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, 2006 and 2005, the Company recorded
$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.
58
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
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 us, and are not consolidated in our financial
statements. These investments are recorded under the equity
method of accounting. 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.
Other
Comprehensive Income (Loss)
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, net unrealized gains or
losses are reported as a component of accumulated other
comprehensive income, see Derivatives and Hedging
Activities below.
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 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. During the year
ended December 31, 2006 and 2005 the Company recorded a
$0.2 million and a $0.1 million provision for income
taxes related to these assets that are held in taxable REIT
subsidiaries. This provision is included in selling and
administrative expense on the income statement.
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 Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), as amended
by Statement of Financial Accounting Standards 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 shareholders equity in other comprehensive
income 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.
59
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
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 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.
The following is a summary of derivative financial instruments
held by the Company as of December 31, 2006 and 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Value
|
|
|
Notional Value
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Designation/
|
|
December 31,
|
|
|
December 31,
|
|
Date Executed
|
|
2006
|
|
|
2005
|
|
|
Expiration Date
|
|
Cash Flow
|
|
2006
|
|
|
2005
|
|
|
December 21, 2004
|
|
$
|
386,321
|
|
|
$
|
338,095
|
|
|
January 2012
|
|
Non-Qualifying
|
|
$
|
326
|
|
|
$
|
52
|
|
December 21, 2004
|
|
|
82,706
|
|
|
|
130,931
|
|
|
December 2009
|
|
Non-Qualifying
|
|
|
162
|
|
|
|
183
|
|
June 22, 2005
|
|
|
25,000
|
|
|
|
25,000
|
|
|
March 2010
|
|
Non-Qualifying
|
|
|
682
|
|
|
|
653
|
|
December 23, 2005
|
|
|
119,171
|
|
|
|
119,171
|
|
|
July 2015
|
|
Non-Qualifying
|
|
|
205
|
|
|
|
(30
|
)
|
December 23, 2005
|
|
|
111,000
|
|
|
|
111,000
|
|
|
July 2013
|
|
Non-Qualifying
|
|
|
113
|
|
|
|
(24
|
)
|
December 23, 2005
|
|
|
58,085
|
|
|
|
58,085
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
47
|
|
|
|
(13
|
)
|
December 13, 2006
|
|
|
112,425
|
|
|
|
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
(4
|
)
|
|
|
|
|
December 13, 2006
|
|
|
25,000
|
|
|
|
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
(1
|
)
|
|
|
|
|
December 13, 2006
|
|
|
221,900
|
|
|
|
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
(7
|
)
|
|
|
|
|
December 13, 2006
|
|
|
31,170
|
|
|
|
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
(5
|
)
|
|
|
|
|
December 13, 2006
|
|
|
31,170
|
|
|
|
|
|
|
January 2013
|
|
Non-Qualifying
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Qualifying
|
|
$
|
1,203,948
|
|
|
$
|
782,282
|
|
|
|
|
|
|
$
|
1,514
|
|
|
$
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 16, 2005
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
April 2010
|
|
Qualifying
|
|
$
|
612
|
|
|
$
|
554
|
|
December 23, 2005
|
|
|
134,050
|
|
|
|
134,050
|
|
|
October 2015
|
|
Qualifying
|
|
|
1,037
|
|
|
|
(844
|
)
|
December 23, 2005
|
|
|
|
|
|
|
5,922
|
|
|
November 2010
|
|
Qualifying
|
|
|
|
|
|
|
(15
|
)
|
February 28, 2006
|
|
|
5,000
|
|
|
|
|
|
|
September 2010
|
|
Qualifying
|
|
|
(11
|
)
|
|
|
|
|
March 2, 2006
|
|
|
20,000
|
|
|
|
|
|
|
November 2012
|
|
Qualifying
|
|
|
(133
|
)
|
|
|
|
|
March 10, 2006
|
|
|
10,000
|
|
|
|
|
|
|
March 2016
|
|
Qualifying
|
|
|
(132
|
)
|
|
|
|
|
March 14, 2006
|
|
|
7,200
|
|
|
|
|
|
|
April 2011
|
|
Qualifying
|
|
|
(37
|
)
|
|
|
|
|
March 15, 2006
|
|
|
9,000
|
|
|
|
|
|
|
November 2010
|
|
Qualifying
|
|
|
(39
|
)
|
|
|
|
|
March 15, 2006
|
|
|
3,709
|
|
|
|
|
|
|
November 2010
|
|
Qualifying
|
|
|
(16
|
)
|
|
|
|
|
May 17, 2006
|
|
|
9,000
|
|
|
|
|
|
|
June 2007
|
|
Qualifying
|
|
|
0
|
|
|
|
|
|
June 1, 2006
|
|
|
1,889
|
|
|
|
|
|
|
June 2016
|
|
Qualifying
|
|
|
(71
|
)
|
|
|
|
|
June 2, 2006
|
|
|
15,000
|
|
|
|
|
|
|
June 2011
|
|
Qualifying
|
|
|
(217
|
)
|
|
|
|
|
July 21, 2006
|
|
|
7,215
|
|
|
|
|
|
|
July 2011
|
|
Qualifying
|
|
|
(120
|
)
|
|
|
|
|
July 28, 2006
|
|
|
25,000
|
|
|
|
|
|
|
July 2011
|
|
Qualifying
|
|
|
(398
|
)
|
|
|
|
|
August 4, 2006
|
|
|
5,165
|
|
|
|
|
|
|
August 2011
|
|
Qualifying
|
|
|
(55
|
)
|
|
|
|
|
August 15, 2006
|
|
|
25,000
|
|
|
|
|
|
|
July 2011
|
|
Qualifying
|
|
|
(322
|
)
|
|
|
|
|
September 21, 2006
|
|
|
25,000
|
|
|
|
|
|
|
January 2011
|
|
Qualifying
|
|
|
(44
|
)
|
|
|
|
|
September 27, 2006
|
|
|
7,000
|
|
|
|
|
|
|
June 2016
|
|
Qualifying
|
|
|
16
|
|
|
|
|
|
September 27, 2006
|
|
|
6,500
|
|
|
|
|
|
|
May 2016
|
|
Qualifying
|
|
|
16
|
|
|
|
|
|
November 29, 2006
|
|
|
7,950
|
|
|
|
|
|
|
February 2017
|
|
Qualifying
|
|
|
64
|
|
|
|
|
|
December 1, 2006
|
|
|
2,800
|
|
|
|
|
|
|
July 2011
|
|
Qualifying
|
|
|
32
|
|
|
|
|
|
December 13, 2006
|
|
|
39,285
|
|
|
|
|
|
|
July 2011
|
|
Qualifying
|
|
|
218
|
|
|
|
|
|
December 20, 2006
|
|
|
11,796
|
|
|
|
|
|
|
June 2011
|
|
Qualifying
|
|
|
28
|
|
|
|
|
|
December 22, 2006
|
|
|
42,807
|
|
|
|
|
|
|
December 2016
|
|
Qualifying
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Qualifying
|
|
$
|
445,366
|
|
|
$
|
164,972
|
|
|
|
|
|
|
$
|
658
|
|
|
$
|
(305
|
)
|
60
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
The fair value of Non-Qualifying Hedges as of December 31,
2006 and December 31, 2005 was $1.5 million and
$0.8 million, respectively, and is recorded in other assets
and other liabilities on the Balance Sheet. For the year ended
December 31, 2006 and 2005 the change in unrealized fair
value of the Non-Qualifying Swaps was $0.7 million and
$0.1 million respectively, and is recorded as a reduction
to interest expense on the Consolidated Income Statement.
The fair value of Qualifying Cash Flow Hedges as of
December 31, 2006 and December 31, 2005 was
$0.7 million and $(0.3) million, respectively and is
recorded in Other Comprehensive Income and other assets and
other liabilities on the Balance Sheet, respectively. As of
December 31, 2006 the Company expects to reclassify
approximately $0.7 million of Other Comprehensive Income
from Qualifying Cash Flow Hedges to earnings over the next
twelve months assuming interest rates on that date are held
constant.
In June 2005, the Company entered into an interest rate swap
agreement on one of its junior subordinated notes relating to
one of its series of Trust Preferred securities
(Trust Preferred swap) that was accounted for
as a cash flow hedge under SFAS No. 133. The Company
elected an abbreviated method (the short-cut method)
of documenting the effectiveness of the Trust Preferred
swap as a hedge, which allowed the Company to assume no
ineffectiveness in this transaction as long as critical terms
did not change. The Company recently concluded that the
Trust Preferred swap did not qualify for this method in
prior periods. The presence of an interest deferral feature in
the Trust Preferred security, in retrospect, violated
short-cut method criteria. Hedge accounting under
SFAS No. 133 is not allowed retrospectively because
the hedge documentation required for the long-haul
method was not in place at the inception of the hedge.
Eliminating the application of cash flow hedge accounting
reverses the fair value adjustments that were made to the hedged
item and results in the reclassification of approximately
$0.7 million of the cumulative fair value of the
Trust Preferred swap on the balance sheet to income from
swap derivative on the income statement. This is a result of a
change in accounting treatment according to a new technical
clarification of accounting for interest rate swaps on
Trust Preferred securities. As of December 31, 2006,
the Company re-evaluated the overall effectiveness of this swap,
as required under SFAS 133, and determined it does not
qualify as a cash flow hedge. During the fourth quarter of 2006,
the Company has recorded a $14,575 decrease in the market value
of this swap in the income statement and subsequent to year end
this swap was terminated.
The cumulative amount of Other Comprehensive Income related to
net unrealized gains on derivatives designated as Cash Flow
Hedges as of December 31, 2006 and December 31, 2005
of $2.3 million and $2.2 million, respectively, is a
combination of the fair value of qualifying cash flow hedges of
$0.7 million and $0.4 million, respectively, and
deferred gain on termination of interest swaps of
$1.6 million and $1.8 million, respectively. The
remaining portion included in Other Comprehensive Income is
related to the Companys Available for Sale Securities as
discussed in Note 4 Available For Sale
Securities of these Consolidated Financial Statements.
The following interest rate swap agreements designated as
hedging the Companys exposure to interest rate risk on
current and future forecasted outstanding LIBOR based debt were
entered into at various times during 2006 and 2005, two of these
swap agreements were terminated in 2006 and six were terminated
in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
Notional Value
|
|
|
|
|
|
Date Terminated
|
|
Date Executed
|
|
Maturity Date
|
|
(Thousands)
|
|
|
Hedge Type
|
|
Designation
|
|
December 13, 2006
|
|
December 23, 2005
|
|
November 1, 2010
|
|
$
|
5,921
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 13, 2006
|
|
December 1, 2006
|
|
May 31, 2011
|
|
|
20,000
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
May 2, 2005
|
|
April 2015
|
|
|
9,860
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
May 27, 2005
|
|
March 2015
|
|
|
37,537
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
June 24, 2005
|
|
August 2010
|
|
|
23,500
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
August 9, 2005
|
|
November 2009
|
|
|
6,382
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
August 9, 2005
|
|
November 2009
|
|
|
7,973
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
December 22, 2005
|
|
August 9, 2005
|
|
July 2015
|
|
|
7,032
|
|
|
Interest Rate Swap
|
|
Qualifying Cash Flow Hedge
|
61
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
The Company had accounted for these derivatives as cash flow
hedges. As a result of terminating these derivatives at market
value, unrealized deferred hedging gains of $0.1 million
and $1.8 million have been recorded to other comprehensive
income for the years ended December 31, 2006 and 2005,
respectively. As of December 31, 2006, and 2005,
respectively $1.6 million and $1.8 million of such
gains are deferred through other comprehensive income. These
deferred gains are being accreted to income over the remaining
life of the related swap agreement. For the years ended
December 31, 2006 and 2005, respectively, the Company
accreted approximately $0.3 million and less than
$0.1 million to earnings. The Company expects to accrete
approximately $0.3 million of these deferred gains to
earnings over the next twelve months.
Variable
Interest Entities
Financial Accounting Standards Board (FASB) issued
FASB 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, 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, 2006, the Company has identified
27 loans and investments which were made to entities determined
to be VIEs.
62
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
The following is a summary of the identified VIEs as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Carrying Amount
|
|
|
Property
|
|
|
Location
|
|
|
Loan and investment
|
|
$
|
63,962,648
|
|
|
|
Commercial
|
|
|
|
California
|
|
Loan and investment
|
|
|
47,710,938
|
|
|
|
Office
|
|
|
|
New York
|
|
Loan
|
|
|
30,653,000
|
|
|
|
Hotel
|
|
|
|
Various
|
|
Loan and investment
|
|
|
97,418,115
|
|
|
|
Condo
|
|
|
|
New York
|
|
Loan
|
|
|
17,050,000
|
|
|
|
Office
|
|
|
|
New York
|
|
Loan
|
|
|
7,752,038
|
|
|
|
Multifamily
|
|
|
|
Indiana
|
|
Loan
|
|
|
1,900,000
|
|
|
|
Multifamily
|
|
|
|
New York
|
|
Loan
|
|
|
10,000,000
|
|
|
|
Office
|
|
|
|
Pennsylvania
|
|
Loan
|
|
|
7,063,275
|
|
|
|
Multifamily
|
|
|
|
South Carolina
|
|
Loan
|
|
|
4,464,285
|
|
|
|
Multifamily
|
|
|
|
Indiana
|
|
Loan
|
|
|
7,000,000
|
|
|
|
Office
|
|
|
|
Texas
|
|
Loan
|
|
|
2,800,000
|
|
|
|
Office
|
|
|
|
Rhode Island
|
|
Loan
|
|
|
28,000,000
|
|
|
|
Office
|
|
|
|
New York
|
|
Loan
|
|
|
4,000,000
|
|
|
|
Multifamily
|
|
|
|
Virginia
|
|
Loan
|
|
|
1,600,000
|
|
|
|
Multifamily
|
|
|
|
South Carolina
|
|
Loan
|
|
|
2,400,000
|
|
|
|
Multifamily
|
|
|
|
North Carolina
|
|
Loan
|
|
|
30,000,000
|
|
|
|
Commercial
|
|
|
|
New York
|
|
Loan
|
|
|
14,500,000
|
|
|
|
Multifamily
|
|
|
|
Florida
|
|
Loan
|
|
|
112,600,000
|
|
|
|
Multifamily
|
|
|
|
Various
|
|
Loan
|
|
|
33,100,000
|
|
|
|
Multifamily
|
|
|
|
Maryland
|
|
Investment
|
|
|
1,550,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
1,550,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
820,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
780,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
774,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
774,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
Investment
|
|
|
464,000
|
|
|
|
Junior subordinated notes
|
(1)
|
|
|
N/A
|
|
|
|
|
(1)
|
|
These entities that issued the
junior subordinated notes are VIEs, it is not appropriate
to consolidate these entities under the provisions of
FIN 46 as equity interests are variable interests only to
the extent that the investment is considered to be at risk.
Since the Companys investments were funded by the entities
that issued the junior subordinated notes, it is not considered
to be at risk.
|
For the 27 VIEs identified, the Company has determined
that they are 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
In December 2004, the FASB published SFAS 123(R) entitled
Share-Based Payment. It requires all public
companies to report share-based compensation expense at the
grant date fair value of the related share-based awards. We are
required to adopt the provisions of the standard effective for
periods beginning after June 15, 2005.
63
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
The Company believes that our current method of accounting for
share-based payments is consistent with SFAS 123(R).
Deferred compensation of $1.7 million for the period ending
December 31, 2005, relating to unvested restricted stock
was reclassified to additional paid-in capital in accordance
with SFAS 123(R). As of December 31, 2006, the Company
has deferred unearned compensation related to its unvested
restricted stock of approximately $1.9 million.
In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155 (SFAS 155),
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 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 Company does not expect adoption
to have a material impact on the Companys Consolidated
Financial Statements.
In April 2006, the FASB issued FASB Staff Position
(FSP) FIN 46(R)-6, Determining the
Variability to Be Considered in Applying FASB Interpretation
No. 46(R), that became effective beginning third
quarter of 2006. FSP FIN No. 46(R)-6 clarifies that
the variability to be considered in applying Interpretation
46(R) shall be based on an analysis of the design of the
variable interest entity. The Company believes that its current
method of accounting for variable interest entities is
consistent with FIN 46(R)-6.
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB 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 Company does not expect adoption to
have a material impact on the Companys Consolidated
Financial Statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements, which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures 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.
The Company does not expect adoption to have a material impact
on the Companys Consolidated Financial Statements.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Current Year Misstatements, effective for
fiscal years ending after November 15, 2006. SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement for the
purpose of a materiality assessment. The adoption of
SAB 108 did not have a material impact on the
Companys Consolidated Financial Statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits entities to choose to
measure many financial instruments, and certain other items at
fair value. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the effect, if any; the adoption of SFAS 159 may
have on the Companys Consolidated Financial Statements.
64
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
Note 3
Loans and Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
At December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Loan
|
|
|
Wtd. Avg.
|
|
|
Months to
|
|
|
Loan
|
|
|
Wtd. Avg.
|
|
|
Months to
|
|
|
|
2006
|
|
|
2005
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Bridge loans
|
|
$
|
956,963,018
|
|
|
$
|
405,702,234
|
|
|
|
39
|
|
|
|
8.54
|
%
|
|
|
21.5
|
|
|
|
21
|
|
|
|
8.21
|
%
|
|
|
17.7
|
|
Mezzanine loans
|
|
|
1,012,422,010
|
|
|
|
821,454,043
|
|
|
|
50
|
|
|
|
9.56
|
%
|
|
|
29.6
|
|
|
|
42
|
|
|
|
9.81
|
%
|
|
|
27.5
|
|
Preferred equity investments
|
|
|
23,436,955
|
|
|
|
18,855,388
|
|
|
|
9
|
|
|
|
10.32
|
%
|
|
|
59.6
|
|
|
|
4
|
|
|
|
9.64
|
%
|
|
|
26.1
|
|
Other
|
|
|
12,345,865
|
|
|
|
13,891,005
|
|
|
|
3
|
|
|
|
5.89
|
%
|
|
|
42.7
|
|
|
|
4
|
|
|
|
5.63
|
%
|
|
|
53.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,005,167,848
|
|
|
|
1,259,902,670
|
|
|
|
101
|
|
|
|
9.06
|
%
|
|
|
26.2
|
|
|
|
71
|
|
|
|
9.25
|
%
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
(11,642,784
|
)
|
|
|
(13,076,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
1,993,525,064
|
|
|
$
|
1,246,825,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 are loans that are subordinate to a conventional
first mortgage loan and senior to the borrowers equity in
a transaction. These loans may be in the form of a junior
participating interest in the senior debt. 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 form 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.
In June 2006, the Company originated a $60.0 million bridge
loan secured by approximately 769 acres of land, partially
improved by an operating ski resort in Lake Tahoe, California.
In October 2006, we provided additional financing of
$3.9 million which is secured by an adjacent parcel of land
partially improved by an inn and cross collateralized with the
original bridge loan. The additional financing carries the same
terms and conditions of the original bridge loan. The loan
accrues interest on a monthly basis at a rate of 12.74%,
requires a monthly fixed interest payment at 10.37% and matures
in June 2011. In addition, the Company has a 25.6% equity kicker
in the borrowing entity. At December 31, 2006 the
outstanding balance on this loan was $63.9 million. No
income from the equity kicker has been recognized for the year
ended December 31, 2006.
In July and August 2006, the Company originated two bridge and
preferred equity loans totaling $13.0 million. The loans
accrue interest based on LIBOR on a monthly basis and mature in
2011. In addition, the Company has a 25% equity kicker in the
borrowing entities. At December 31, 2006 the outstanding
balance on these loans was $11.5 million. No income from
the equity kickers has been recognized for the year ended
December 31, 2006.
At December 31, 2006, there was an $8.5 million loan
in the loan and investment portfolio that is non-performing and
income recognition has been suspended. The principal amount of
the loan is not deemed to be impaired and no loan loss reserve
has been recorded at this time. Income recognition will resume
when the loan becomes contractually current and performance has
recommenced.
65
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
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, as of December 31, 2006, the
unpaid principal balance related to 16 loans with five unrelated
borrowers represented approximately 27% of total assets, and as
of December 31, 2005, the unpaid principal balance related
to 32 loans with five unrelated borrowers represented
approximately 31% of total assets. As of December 31, 2006
and 2005, the Company had 102 and 72 loans and investments,
respectively.
In addition, in 2006 and 2005, no single loan or investment
represented at least 10% of the Companys total assets. In
2006, the Company generated approximately 17% of revenue from
the Chetrit Group L.L.C. In 2005, the Company generated
approximately 12% and 19% of revenue from the Chetrit Group
L.L.C. and Prime Outlet Acquisition Group L.L.C. two of the
Companys borrowers, respectively.
Geographic
Concentration Risk
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. As of December 31, 2005, 57%, 8%,
and 8% of the outstanding balance of the Companys loans
and investments portfolio had underlying properties in New York,
Florida and California, respectively.
Note 4
Available-For-Sale
Securities
The following is a summary of the Companys
available-for-sale
securities at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Face Value
|
|
|
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)
|
|
$
|
11,754,694
|
|
|
$
|
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)
|
|
|
4,084,000
|
|
|
|
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)
|
|
|
6,281,900
|
|
|
|
6,306,940
|
|
|
|
(25,039
|
)
|
|
|
6,281,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,120,594
|
|
|
$
|
22,198,552
|
|
|
$
|
(98,376
|
)
|
|
$
|
22,100,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
The following is a summary of the Companys
available-for-sale
securities at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Face Value
|
|
|
Amortized Cost
|
|
|
Unrealized Loss
|
|
|
Value
|
|
|
Federal Home Loan Mortgage
Corporation, variable rate security, fixed rate of interest for
three years at 3.797% and adjustable rate interest thereafter,
due March 2034 (including unamortized premium of $226,895)
|
|
$
|
15,228,360
|
|
|
$
|
15,455,255
|
|
|
$
|
(441,044
|
)
|
|
$
|
15,014,211
|
|
Federal Home Loan Mortgage
Corporation, variable rate security, fixed rate of interest for
three years at 3.758% and adjustable rate interest thereafter,
due March 2034 (including unamortized premium of $83,967)
|
|
|
4,763,621
|
|
|
|
4,847,588
|
|
|
|
(156,909
|
)
|
|
|
4,690,679
|
|
Federal National Mortgage
Association, variable rate security, fixed rate of interest for
three years at 3.800% and adjustable rate interest thereafter,
due March 2034 (including unamortized premium of $181,415)
|
|
|
10,026,460
|
|
|
|
10,207,875
|
|
|
|
(297,345
|
)
|
|
|
9,910,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,018,441
|
|
|
$
|
30,510,718
|
|
|
$
|
(895,298
|
)
|
|
$
|
29,615,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and 2005, 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 these
securities fluctuate primarily due to changes in interest rates
and other factors; however, given that these 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. The Company has the
ability and intent to hold these investments until a recovery of
fair value, which may be maturity; the Company does not consider
these investments to be
other-than-temporarily
impaired at December 31, 2006.
During the years ended December 31, 2006 and 2005, the
Company received prepayments of $8.0 million and
$16.0 million on these securities and amortized
$0.4 million and $0.6 million, respectively, of the
premium paid for these securities against interest income.
These securities are pledged as collateral for borrowings under
a repurchase agreement (See Note 6 Debt
Obligations).
The cumulative amount of Other Comprehensive Income related to
unrealized gains or (losses) on these securities as of
December 31, 2006 and December 31, 2005 was ($98,376)
and ($895,298), respectively.
Note 5
Investment in Equity Affiliates
As of December 31, 2006 and 2005, the Company had
approximately $25.4 million and $18.1 million of
investments in equity affiliates, respectively, which are
described below.
In 2006, the Company invested $2.0 million for 100% of the
common shares of two affiliate entities of the Company which
were formed to facilitate the issuance of $67.0 million of
junior subordinate notes. In 2005, the Company invested
$4.7 million for 100% of the common shares of five
affiliate entities of the Company which were formed to
facilitate the issuance of $155.9 million of junior
subordinate notes. These entities pay dividends on both the
common shares and preferred securities on a quarterly basis at a
variable rate based on LIBOR. The financing
67
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
terms of these junior subordinate notes are presented in the
notes payable table of Note 6. The impact of these entities
in accordance with FIN 46R Consolidation of Variable
Interest Entities is discussed in Note 2.
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. 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. Additionally, the Company has a 16.7% carried
profits interest in the borrowing entity. The Company received
$1.2 million of distributions from this investment in 2004
as a result of the 16.7% carried profits interest which was
recorded in interest income. In addition, The Company received
$0.5 million from its 50% non-controlling interest in this
joint venture, which was recorded as income from equity
affiliates. 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 which the Company received
$36.5 million. In accordance with this transaction, the
joint venture members of POM agreed to guarantee
$38 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,
$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 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 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.
68
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
Summarized consolidated financial information of POM (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,338
|
|
|
$
|
14,658
|
|
Real estate assets
|
|
|
661,349
|
|
|
|
638,712
|
|
Other assets
|
|
|
132,611
|
|
|
|
116,001
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
852,298
|
|
|
$
|
769,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
958,678
|
|
|
$
|
855,902
|
|
Other liabilities
|
|
|
12,547
|
|
|
|
17,503
|
|
Total liabilities
|
|
|
971,225
|
|
|
|
873,405
|
|
Shareholders equity Arbor
|
|
|
|
|
|
|
|
|
Shareholders (deficit)/equity
|
|
|
(118,927
|
)
|
|
|
(104,034
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders
(deficit)/equity
|
|
|
(118,927
|
)
|
|
|
(104,034
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
|
852,298
|
|
|
$
|
769,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
93,624
|
|
|
$
|
82,759
|
|
|
$
|
68,447
|
|
Reimbursement income
|
|
|
45,578
|
|
|
|
42,978
|
|
|
|
37,305
|
|
Other income
|
|
|
51,970
|
|
|
|
11,353
|
|
|
|
18,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
191,172
|
|
|
|
137,090
|
|
|
|
124,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
82,707
|
|
|
|
73,198
|
|
|
|
40,665
|
|
Interest expense
|
|
|
61,796
|
|
|
|
35,725
|
|
|
|
30,332
|
|
Depreciation and amortization
|
|
|
29,209
|
|
|
|
31,211
|
|
|
|
24,207
|
|
Other expenses
|
|
|
|
|
|
|
2,691
|
|
|
|
17,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
173,712
|
|
|
|
142,825
|
|
|
|
112,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
17,460
|
|
|
$
|
(5,735
|
)
|
|
$
|
11,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company invested $6.1 million in a joint
venture, which as part of an investor group, used these proceeds
to make a deposit on the potential purchase of a property in New
York City. In April 2005, this joint venture closed on the
purchase of the property and the Company invested additional
capital that, combined with its deposit, represented a
$10 million equity investment, in exchange for a 20%
ownership interest in a limited liability corporation of this
joint venture (200 Fifth LLC). It is intended that the property,
with over one million square feet of space, will be converted
from an office property into condominium units. In addition, the
Company provided
69
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006
loans to three partners in the investor group totaling
$13 million, of which $10.5 million is outstanding as
of December 31, 2006. The loans are secured by their
ownership interest in the joint venture and mature in April
2008. In 2005, the Company purchased three mezzanine loans
totaling $137 million from the primary lender. These loans
are secured by the property, require monthly interest payments
based on one month LIBOR and mature in April 2008. The Company
sold a participating interest in one of the loans for
$59 million which was recorded as a financing and is
included in notes payable. For the years ended December 31,
2006 and 2005 the Company capitalized $0.9 million and
$0.5 million, respectively, of interest on its equity
investment. During 2006, the Company contributed an additional
$4.2 million to the joint venture increasing its equity
investment to approximately $15.6 million. In January 2007,
the Company contributed an additional $0.5 million to the
joint venture increasing its equity investment to approximately
$16.1 million.
Summarized consolidated financial information of 200 Fifth LLC
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,123
|
|
|
$
|
61,122
|
|
Real estate assets
|
|
|
362,294
|
|
|
|
355,177
|
|
Other assets
|
|
|
121,509
|
|
|
|
50,672
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
489,926
|
|
|
$
|
466,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|