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, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number :
001-32136
Arbor Realty Trust,
Inc.
(Exact name of registrant as
specified in its charter)
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Maryland (State or other jurisdiction of incorporation)
333 Earle Ovington Boulevard, Suite 900 Uniondale, NY (Address of principal executive offices)
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20-0057959 (I.R.S. Employer Identification No.)
11553 (Zip Code)
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(516) 506-4200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.01 per share
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The New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common
stock, all of which is voting, held by non-affiliates of the
registrant as of June 30, 2008 (computed based on the
closing price on such date as reported on the NYSE) was
$160.5 million. As of March 9, 2009, the registrant
had 25,142,410 shares of common stock outstanding
(excluding 279,400 shares held in treasury).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the
registrants 2009 Annual Meeting of Stockholders (the
2009 Proxy Statement), to be filed within
120 days after the end of the registrants fiscal year
ended December 31, 2008, are incorporated by reference into
Part III of this Annual Report on Form
10-K.
FORWARD
LOOKING STATEMENTS
This report contains certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
relate to, among other things, the operating performance of our
investments and financing needs. Forward-looking statements are
generally identifiable by use of forward-looking terminology
such as may, will, should,
potential, intend, expect,
endeavor, seek, anticipate,
estimate, overestimate,
underestimate, believe,
could, project, predict,
continue or other similar words or expressions.
Forward-looking statements are based on certain assumptions,
discuss future expectations, describe future plans and
strategies, contain projections of results of operations or of
financial condition or state other forward-looking information.
Our ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Although we believe
that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set
forth in the forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that
may cause our actual results in future periods to differ
materially from forecasted results. Factors that could have a
material adverse effect on our operations and future prospects
include, but are not limited to, changes in economic conditions
generally and the real estate market specifically; adverse
changes in the financing markets we access affecting our ability
to finance our loan and investment portfolio; changes in
interest rates; the quality and size of the investment pipeline
and the rate at which we can invest our cash; impairments in the
value of the collateral underlying our loans and investments;
changes in the markets; legislative/regulatory changes;
completion of pending investments; the availability and cost of
capital for future investments; competition within the finance
and real estate industries; and other risks detailed from time
to time in our SEC reports. Readers are cautioned not to place
undue reliance on any of these forward-looking statements, which
reflect our managements views as of the date of this
report. The factors noted above could cause our actual results
to differ significantly from those contained in any
forward-looking statement. For a discussion of our critical
accounting policies, see Managements Discussion and
Analysis of Financial Condition and Results of Operations of
Arbor Realty Trust, Inc. and Subsidiaries
Significant Accounting Estimates and Critical Accounting
Policies under Item 7 of this report.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
We are under no duty to update any of the forward-looking
statements after the date of this report to conform these
statements to actual results.
i
PART I
Overview
We are a specialized real estate finance company which invests
in a diversified portfolio of structured finance assets in the
multi-family and commercial real estate markets. We invest
primarily in real estate-related bridge and mezzanine loans,
including junior participating interests in first mortgages,
preferred and direct equity, and in limited cases, discounted
mortgage notes and other real estate-related assets, which we
refer to collectively as structured finance investments. We also
invest in mortgage-related securities. Our principal business
objective is to maximize the difference between the yield on our
investments and the cost of financing these investments to
generate cash available for distribution, facilitate capital
appreciation and maximize total return to our stockholders.
In 2008, the global economic and financial deterioration that
began in 2007, continued to worsen resulting in ongoing
disruptions in the credit and capital markets, significant
devaluations of assets, lack of liquidity throughout the
worldwide financial system and a global economic recession. The
failure of several worldwide financial institutions as well as
global deleveraging by most financial institutions has severely
limited the availability of capital for most businesses,
including those involved in the commercial real estate sector.
As a result, most institutions in our space, including ours,
have significantly reduced new investment activity until the
capital markets become more stable and market liquidity
increases. Under normal market conditions, we rely on these
credit and equity markets to generate capital for financing the
growth of our business. However, in this current environment we
are focused on managing our portfolio to preserve capital,
generate and recycle liquidity from existing assets and actively
manage our financing facilities.
We are organized to qualify as a real estate investment trust
(REIT) for federal income tax purposes. A REIT is
generally not subject to federal income tax on that portion of
its REIT taxable income (Taxable Income) which is
distributed to its stockholders, provided that at least 90% of
Taxable Income is distributed and provided that certain other
requirements are met. Certain of our assets that produce
non-qualifying income are held in taxable REIT subsidiaries.
Unlike other subsidiaries of a REIT, the income of a taxable
REIT subsidiary is subject to federal and state income taxes.
We commenced operations in July 2003 and conduct substantially
all of our operations and investing activities through our
operating partnership, Arbor Realty Limited Partnership, and its
wholly-owned subsidiaries. We serve as the general partner of
our operating partnership, and own a 100% partnership interest
in our operating partnership as of December 31, 2008.
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. ACM
provides us with all of the services vital to our operations
other than asset management and securitization, and our
executive officers and other staff are all employed by our
manager, ACM, pursuant to the management agreement. The
management agreement requires ACM to manage our business affairs
in conformity with the policies and investment guidelines that
are approved and monitored by our board of directors. 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 opportunities that demand customized financing
solutions. ACM has granted us a right of first refusal to pursue
all structured finance investment opportunities in the
multi-family or commercial real estate markets that are
identified by ACM or its affiliates. ACM continues to originate
and service multi-family and commercial mortgage loans under
Fannie Mae, Federal Housing Administration and conduit
commercial lending programs. We believe that the customer
relationships established from these lines of business may
generate additional real estate investment opportunities for our
business.
1
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 held approximately
3.8 million operating partnership units, constituting an
approximately 16% limited partnership interest in our operating
partnership. ACM had the ability to 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
were 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. Upon redemption of these operating
partnership units, an equivalent number of shares of our special
voting preferred stock would be redeemed and cancelled.
Concurrently with ACMs contribution of investments to our
operating partnership, we sold approximately 1.6 million of
our units, each consisting of five shares of our common stock
and one warrant to purchase an additional share of common stock
at an initial exercise price of $15.00 per share, for $75.00 per
unit in a private placement and agreed to register the shares of
common stock underlying these units and warrants for resale
under the Securities Act of 1933. In July 2004, we registered
approximately 9.6 million shares of common stock underlying
these units and warrants. At December 31, 2005,
approximately 1.6 million warrants were exercised, of which
0.5 million were exercised cashless, for a
total of 1.3 million common shares issued pursuant to their
exercise.
In April 2004, we closed our initial public offering in which we
issued and sold 6.3 million shares of common stock and a
selling stockholder sold 22,500 shares of common stock,
each at $20.00 per share. Concurrently with the initial public
offering, we sold 0.5 million shares of common stock at the
initial public offering price directly to an entity wholly-owned
by one of our directors. The underwriters of our initial public
offering exercised their overallotment option and, in May 2004,
we issued and sold an additional 0.5 million shares of our
common stock pursuant to such exercise.
In March 2007, we filed a shelf registration statement on
Form S-3
with the SEC under the Securities Act of 1933, as amended (the
1933 Act) with respect to an aggregate of
$500.0 million of debt securities, common stock, preferred
stock, depositary shares and warrants, that may be sold by us
from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the SEC declared this
shelf registration statement effective.
In June 2007, we sold 2,700,000 shares of our common stock
registered on the shelf registration statement in a public
offering at a price of $27.65 per share, for net proceeds of
approximately $73.6 million after deducting the
underwriting discount and the other estimated offering expenses.
We used the proceeds to pay down debt and finance our loan and
investment portfolio. The underwriters did not exercise their
over allotment option for additional shares.
Since January 2005, we completed three non-recourse
collateralized debt obligation (CDO) transactions,
whereby $1.44 billion of real estate related and other
assets were contributed to three newly-formed consolidated
subsidiaries, which issued $1.21 billion of investment
grade-rated floating-rate notes in three separate private
placements. These proceeds were used to repay outstanding debt
and resulted in a decreased cost of funds relating to the CDO
assets.
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Since March 2005, we issued a total of $276.1 million of
junior subordinated notes in nine separate private placements.
The junior subordinated notes are unsecured, have a maturity of
29 to 30 years, pay interest quarterly at a floating rate
of interest based on three-month LIBOR and, absent the
occurrence of special events, are not redeemable during the
first five years.
In June 2008, our external manager exercised its right to redeem
its approximate 3.8 million operating partnership units in
our operating partnership for shares of our common stock on a
one-for-one basis. In addition, the special voting preferred
shares paired with each operating partnership unit, pursuant to
the pairing agreement, were redeemed simultaneously and
cancelled. ACM currently holds approximately 21.4% of the voting
power of our outstanding common stock.
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 Credit Quality. A critical component of
our strategy 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 the credit quality of our portfolio
by using the expertise of our asset management group, which has
a proven track record of structuring and repositioning
structured finance investments to improve credit quality and
yield.
Use Arbor Commercial Mortgages Relationships with
Existing Borrowers. We capitalize on ACMs
reputation in the commercial real estate finance industry. ACM
has relationships with a large borrower base nationwide. Since
ACMs originators offer senior mortgage loans as well as
our structured finance products, we are able to benefit from its
existing customer base and use its senior lending business as a
potential refinance vehicle for our structured finance assets.
Offer Broader Products and Expand Customer
Base. We have the ability to offer a larger
number of financing alternatives than ACM has been able to offer
to its customers in the past. Our potential borrowers are able
to choose from products offering longer maturities and larger
principal amounts than ACM could previously offer.
Leverage the Experience of Executive Officers, Arbor
Commercial Mortgage and Our Employees. Our
executive officers and employees, and those of ACM, have
extensive experience originating and managing structured
commercial real estate investments. Our senior management team
has on average over 20 years of experience in the financial
services industry.
Our
Targeted Investments
We actively pursue lending and investment opportunities with
property owners and developers who need interim financing until
permanent financing can be obtained. We primarily target
transactions under $40 million where we believe we have
competitive advantages, particularly our lower cost structure
and in-house underwriting capabilities. Our structured finance
investments generally have maturities of two to five years,
depending on type,
3
have extension options when appropriate, and generally require a
balloon payment of principal at maturity. Borrowers in the
market for these types of loans include, but are not limited to,
owners or developers seeking either to acquire or refurbish real
estate or to pay down debt and reposition a property for
permanent financing.
Our investment program emphasizes the following general
categories of real estate related activities:
Bridge Financing. We offer bridge financing
products to borrowers who are typically seeking short-term
capital to be used in an acquisition of property. The borrower
has usually identified an undervalued asset that has been under
managed
and/or is
located in a recovering market. From the borrowers
perspective, shorter term bridge financing is advantageous
because it allows time to improve the property value through
repositioning the property without encumbering it with
restrictive long term debt.
The bridge loans we make typically range in size from
$1 million to $75 million and are predominantly
secured by first mortgage liens on the property. The term of
these loans typically is up to five years. Historically,
interest rates have typically ranged from 1.10% to 9.00% over
30-day
LIBOR, with fixed rates ranging from 4.00% to 13.00%. At
December 31, 2008, interest rates typically ranged from
1.10% to 6.50% over
30-day
LIBOR, with fixed rates ranging from 4.00% to 12.20%. 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.
Junior Participation Financing. We offer
junior participation financing in the form of junior
participating interest in the senior debt. Junior participation
financings have the same obligations, collateral and borrower as
the senior debt. The junior participation interest is
subordinated to the senior debt by virtue of a contractual
agreement between the senior debt lender and the junior
participating interest lender.
Our junior participation loans typically range in size from
$1 million to $60 million and have terms of up to ten
years. Historically, interest rates have typically ranged from
2.30% to 9.75% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 12.80%. At
December 31, 2008, interest rates typically ranged from
2.30% to 4.00% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 12.80%. As in the
case with our bridge loans, the yield on these investments may
be enhanced by prepaid and deferred interest payments, yield
look-backs and participating interests.
Mezzanine Financing. We offer mezzanine
financing in the form of loans that are subordinate to a
conventional first mortgage loan and senior to the
borrowers equity in a transaction. Mezzanine financing may
take the form of loans secured by pledges of ownership interests
in entities that directly or indirectly control the real
property or subordinated loans secured by second mortgage liens
on the property. We may also require additional security such as
personal guarantees, letters of credit
and/or
additional collateral unrelated to the property.
Our mezzanine loans typically range in size from $1 million
to $50 million and have terms of up to ten years.
Historically, interest rates have typically ranged from 2.00% to
12.00% over
30-day
LIBOR, with fixed rates ranging from 5.00% to 16.00%. At
December 31, 2008, interest rates typically ranged from
2.00% to 10.00% over
30-day
LIBOR, with fixed rates ranging from 6.00% to 16.00%. 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 liens on the
ownership entity, investments structured as preferred equity in
the entity owning the property serve as viable financing
substitutes. With preferred equity investments, we typically
become a special limited partner or member in the ownership
entity.
Our preferred equity investments typically range in size from
$0.3 million to $11.0 million, have terms up to ten
years and interest rates that have typically ranged from 3.75%
to 6.00% over
30-day
LIBOR, with fixed
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rates ranging from 5.00% to 15.00%. At December 31, 2008,
our preferred equity investments ranged in size from
$0.3 million to $113.0 million and interest rates
typically ranged from 3.75% to 6.00% over
30-day
LIBOR, with fixed rates ranging from 6.22% to 10.00%.
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.
Agency Sponsored Whole Loan Pool
Certificates. We have and may, in the future,
invest in certificates issued by the Government National
Mortgage Association, or Ginnie Mae, Federal National Mortgage
Association, or Fannie Mae, or the Federal Home Loan Mortgage
Association, or Freddie Mac, that are collateralized by whole
pools of residential or commercial, fixed or adjustable rate
mortgage loans. These certificates entitle the investor to
monthly payments of interest and principal that, in effect, are
a pass-through of the monthly payments made by the
borrowers on the underlying mortgage loans and the repayment of
the principal of the underlying mortgage loans, whether prepaid
or paid at maturity. Their yield and maturity characteristics
differ from conventional fixed-income securities because their
principal amount may be prepaid at any time without penalty due
to the fact that the underlying mortgage loans may be prepaid at
any time. Therefore, they may have less potential for growth in
value than conventional fixed-income securities with comparable
maturities. To the extent that we purchase agency-sponsored
whole loan pool certificates at a premium, prepayments may
result in loss of our principal investment to the extent of the
premium paid.
Equity Securities. We have and may, in the
future, invest in securities such as the common stock of a
commercial real estate specialty finance company. Investments in
these securities have the risk of stock market fluctuations
which may result in the loss of our principal investment.
Commercial Real Estate Collateralized Debt Obligation
Bonds. We have and may, in the future, invest in
securities such as investment grade commercial real estate
collateralized debt obligation bonds. These certificates are
purchased at a discount to their face value which is accreted
into interest income on an effective yield adjusted for actual
prepayment activity over the average life of the related
security as a yield adjustment. These securities have underlying
credit ratings assigned by the three leading nationally
recognized rating agencies (Moodys Investor Service,
Standard & Poors and Finch Ratings) and are
generally not insured or otherwise guaranteed.
Our
Structured Finance Investments
We own a diversified portfolio of structured finance investments
consisting primarily of real estate-related bridge, junior
participation interests in first mortgages, and mezzanine loans
as well as preferred equity investments and mortgage-related
securities.
At December 31, 2008, we had 136 loans and investments in
our portfolio, totaling $2.3 billion. These loans and
investments were for 73 multi-family properties, 26 office
properties, 13 hotel properties, 12 land properties, seven
commercial properties, three condominium properties, and two
retail properties. We have an allowance for
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loan losses of $130.5 million at December 31, 2008
related to ten loans in our portfolio with an aggregate carrying
value of $312.7 million, net of these reserves. The loan
loss reserves were the result of our regular quarterly risk
rating review process which is based on several factors
including current market conditions, values and the operating
status of these properties. We continue to actively manage all
loans and investments in the portfolio through our strict
underwriting and active asset management with the goal of
maintaining the credit quality of our portfolio and limiting
potential losses.
The overall yield on our portfolio in 2008 was 7.80%, excluding
the impact from the recognition of $0.7 million of interest
income from equity and profits interests in our loans and
investment portfolio for 2008, on average assets of
$2.5 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 2008 was 5.0% on average
borrowings of $2.2 billion. This cost of funds was computed
by dividing the interest expense incurred during the year by the
average borrowings during the year.
Our average net investment (average assets less average
borrowings) in 2008 was $374.4 million, resulting in
average leverage (average borrowings divided by average assets)
of 85.3%. Including average trust preferred securities of
$276.0 million as equity, our average leverage was 74.4%.
The net interest income earned in 2008 yielded a 24.0% return on
our average net investment during the year. This yield was
computed by dividing net interest (interest income less interest
expense) earned in 2008 by average equity (computed as average
assets minus average borrowings) invested during the year.
Our business plan contemplates that our leverage ratio,
including our trust preferred securities as equity, will be
approximately 70% to 80% of our assets in the aggregate.
However, including our trust preferred securities as equity, our
leverage will not exceed 80% of the value of our assets in the
aggregate unless approval to exceed the 80% limit is obtained
from our board of directors. At December 31, 2008, our
overall leverage ratio including the trust preferred securities
as equity was 78.4%.
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The following table set forth information regarding our loan and
investment portfolio as of December 31, 2008:
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Weighted Average
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Unpaid Principal
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Weighted Average
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Remaining
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Type
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Asset Class
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Number
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(Dollars in Thousands)
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Pay Rate
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Maturity (months)
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Bridge Loans
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Multi Family
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25
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$
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514,511
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6.77
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%
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15.9
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Office
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11
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308,074
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5.45
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%
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34.3
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Hotel
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7
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208,643
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6.05
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%
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4.2
|
|
|
|
Condo
|
|
|
2
|
|
|
|
90,175
|
|
|
|
4.29
|
%
|
|
|
8.0
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
55,157
|
|
|
|
6.17
|
%
|
|
|
12.4
|
|
|
|
Land
|
|
|
10
|
|
|
|
261,452
|
|
|
|
6.87
|
%
|
|
|
12.7
|
|
|
|
Retail
|
|
|
1
|
|
|
|
3,834
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
1,441,846
|
|
|
|
6.22
|
%
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Loans
|
|
Multi Family
|
|
|
28
|
|
|
|
153,180
|
|
|
|
10.28
|
%
|
|
|
38.9
|
|
|
|
Office
|
|
|
7
|
|
|
|
106,604
|
|
|
|
7.34
|
%
|
|
|
39.5
|
|
|
|
Hotel
|
|
|
2
|
|
|
|
30,000
|
|
|
|
3.44
|
%
|
|
|
5.0
|
|
|
|
Condo
|
|
|
1
|
|
|
|
15,107
|
|
|
|
|
|
|
|
5.0
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
47,297
|
|
|
|
1.63
|
%
|
|
|
26.0
|
|
|
|
Land
|
|
|
1
|
|
|
|
10,000
|
|
|
|
|
|
|
|
29.0
|
|
|
|
Retail
|
|
|
1
|
|
|
|
2,750
|
|
|
|
10.85
|
%
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
364,938
|
|
|
|
7.03
|
%
|
|
|
32.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Participations
|
|
Multi Family
|
|
|
5
|
|
|
|
93,650
|
|
|
|
6.72
|
%
|
|
|
40.7
|
|
|
|
Office
|
|
|
7
|
|
|
|
162,350
|
|
|
|
6.18
|
%
|
|
|
62.0
|
|
|
|
Hotel
|
|
|
3
|
|
|
|
38,708
|
|
|
|
7.94
|
%
|
|
|
9.5
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
3,571
|
|
|
|
7.89
|
%
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
298,279
|
|
|
|
6.60
|
%
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity
|
|
Multi Family
|
|
|
16
|
|
|
|
80,143
|
|
|
|
8.93
|
%
|
|
|
98.9
|
|
|
|
Office
|
|
|
1
|
|
|
|
12,500
|
|
|
|
9.25
|
%
|
|
|
80.0
|
|
|
|
Hotel
|
|
|
1
|
|
|
|
112,604
|
|
|
|
|
|
|
|
102.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
205,247
|
|
|
|
4.05
|
%
|
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Commercial
|
|
|
2
|
|
|
|
12,418
|
|
|
|
8.73
|
%
|
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
136
|
|
|
$
|
2,322,728
|
|
|
|
6.22
|
%
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth geographic and asset class
information regarding our loan and investment portfolio as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
|
|
Unpaid Principal
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
Location
|
|
(Dollars in Thousands)
|
|
|
Percentage(1)
|
|
|
Asset Class
|
|
(Dollars in Thousands)
|
|
|
Percentage(1)
|
|
|
New York
|
|
$
|
925,300
|
|
|
|
39.8
|
%
|
|
Multi Family
|
|
$
|
841,483
|
|
|
|
36.2
|
%
|
California
|
|
|
281,753
|
|
|
|
12.1
|
%
|
|
Office
|
|
|
589,528
|
|
|
|
25.4
|
%
|
Florida
|
|
|
227,927
|
|
|
|
9.8
|
%
|
|
Hotel
|
|
|
389,955
|
|
|
|
16.8
|
%
|
Maryland
|
|
|
127,740
|
|
|
|
5.5
|
%
|
|
Land
|
|
|
271,452
|
|
|
|
11.7
|
%
|
Texas
|
|
|
98,903
|
|
|
|
4.3
|
%
|
|
Commercial
|
|
|
118,443
|
|
|
|
5.1
|
%
|
Diversified
|
|
|
345,568
|
|
|
|
14.9
|
%
|
|
Condo
|
|
|
105,282
|
|
|
|
4.5
|
%
|
Other(2)
|
|
|
315,537
|
|
|
|
13.6
|
%
|
|
Retail
|
|
|
6,585
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,322,728
|
|
|
|
100.0
|
%
|
|
Total
|
|
$
|
2,322,728
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on a percentage of the total
unpaid principal balance of the underlying loans.
|
|
(2)
|
|
No other individual state makes up
more than 2% of the total.
|
7
Our
Investments in Available-for-Sale Securities
Agency Sponsored Whole Loan Pool
Certificates. We purchased $57.4 million
face amount of agency-sponsored whole loan pool certificates in
2004 and we sold these investments in the first quarter of 2007.
The underlying mortgage loans bore interest at a fixed rate for
the first three years and adjusted annually thereafter,
beginning in March 2007, and had a weighted average coupon rate
of 3.8%. As of December 31, 2006, we financed these
investments pursuant to a $100.0 million repurchase
agreement, maturing in July 2007, at a rate of one-month LIBOR
plus 0.20%. As of December 31, 2006, the amortized cost of
these investments was $22.2 million and the amount
outstanding on the related repurchase agreement was
$20.7 million. These investments had been in an unrealized
loss position for more than twelve months as of
December 31, 2006, but they recovered their fair value
during the first quarter of 2007 in conjunction with a change in
their interest rates. When we sold these securities in 2007, we
recorded a gain of $30,182 on the sale and also repaid the
related repurchase agreement.
Equity Securities. During 2007, we purchased
2,939,465 shares of common stock of CBRE Realty Finance,
Inc., a commercial real estate specialty finance company, for
$16.7 million which had a fair value of $0.5 million,
at December 31, 2008. We also had a margin loan agreement
with a financial institution related to the purchases of this
security which may not exceed $7.0 million, bears interest
at pricing over LIBOR, and is due upon demand from the lender.
In July 2008, the margin loan was repaid in full.
Our
Investments in Held-to-Maturity Securities
Commercial Real Estate Collateralized Debt Obligation
Bonds. In 2008, we purchased $82.7 million
of investment grade commercial real estate (CRE)
collateralized debt obligation bonds for $58.1 million,
representing a $24.6 million discount to their face value.
This discount will be accreted into interest income on an
effective yield adjusted for actual prepayment activity over the
average life of the related security as a yield adjustment.
These securities bear interest at a weighted average spread of
40 basis points over Libor, have a weighted average stated
maturity of 37.7 years but have an estimated average
remaining life of 5.8 years due to the maturities of the
underlying assets. For the period ended December 31, 2008,
the average yield on these securities based on their face values
was 6.41%, including the accretion of discount. We did not have
any securities held-to-maturity at December 31, 2007.
Regulatory
Aspects of Our Investment Strategy
Real Estate Exemption from Investment Company
Act. We believe that we conduct, and we intend to
conduct, our business at all times in a manner that avoids
registration as an investment company under the Investment
Company Act of 1940, as amended, or the Investment Company Act.
Entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate, are exempt from
registration under the Investment Company Act if they maintain
at least 55% of their assets directly in qualifying real estate
assets and meet certain other requirements. Assets that qualify
for purposes of this 55% test include, among other things,
direct investments in real estate, mortgage loans and
agency-sponsored whole loan pool certificates. Our bridge loans,
which are secured by first mortgage liens on the underlying
properties, and our loans that are secured by second mortgage
liens on the underlying properties generally qualify for
purposes of this 55% test. These two types of loans constituted
more than 55% of our assets as of December 31, 2008.
During the first quarter of 2004, we purchased
$57.4 million face amount of aggregate principal amount of
agency-sponsored whole loan pool certificates and sold them in
March 2007. We may invest in additional agency-sponsored whole
loan pool certificates in the future if we determine that we
need to purchase such certificates for purposes of meeting the
55% test. If the SEC takes a position or makes an interpretation
more favorable to us, we may have greater flexibility in the
investments we may make. Our investment guidelines provide that
no more than 15% of our assets may consist of any type of
mortgage-related securities, such as agency-sponsored whole loan
pool certificates, and that the percentage of our investments in
mortgage-related securities as compared to our structured
finance investments be monitored on a regular basis.
8
Management
Agreement
On July 1, 2003, we and our operating partnership entered
into a management agreement with ACM. On January 19, 2005,
we, our operating partnership, Arbor Realty SR, Inc., one of our
subsidiaries and ACM entered into an amended and restated
management agreement with substantially the same terms as the
original management agreement in order to add Arbor Realty SR,
Inc. as a beneficiary of ACMs services. Pursuant to the
terms of the management agreement, our manager has agreed to
service and manage our investments and to provide us with
multi-family and commercial real estate-related structured
finance investment opportunities, finance and other services
necessary to operate our business. Our manager is required to
provide a dedicated management team to provide these services to
us, the members of which will devote such of their time to our
management as our independent directors reasonably deem
necessary and appropriate, commensurate with our level of
activity from time to time. We rely to a significant extent on
the facilities and resources of our manager to conduct our
operations. For performing services under the management
agreement, ACM receives a base management fee, up to 1% of loan
and investment origination fees 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 Alpharetta, Georgia; Bloomfield
Hills, Michigan; Boston, Massachusetts; Spokane, Washington;
Plano, Texas; Dallas, Texas; Deerfield, Illinois; New York, New
York; and Uniondale, New York. These offices are staffed by
approximately 20 loan originators who solicit property owners,
developers and mortgage loan brokers. In some instances, the
originators accept loan applications meeting our underwriting
criteria from a select group of mortgage loan brokers. While a
large portion of ACMs marketing effort occurs at the
branch level, ACM also markets its products in national industry
publications and targeted direct mailings. ACM markets
structured finance products and our product offerings using the
same methods. Once potential borrowers have been identified, ACM
determines which financing products best meet the
borrowers needs. Loan originators in every branch office
are able to offer borrowers the full array of ACMs and our
structured finance products. After identifying a suitable
product, ACM works with the borrower to prepare a loan
application. Upon completion by the borrower, the application is
forwarded to ACMs underwriters for due diligence.
Underwriting. ACMs loan originators work
in conjunction with its underwriters who perform due diligence
on all proposed transactions prior to loan approval and
commitment. The underwriters analyze each loan application in
accordance with the guidelines set forth below in order to
determine the loans conformity with respect to such
guidelines. In general, ACMs underwriting guidelines
require it to evaluate the following: the historic and current
property revenues and expenses; the potential for near-term
revenue growth and opportunity for expense reduction and
increased operating efficiencies; the propertys location,
its attributes and competitive position within its market; the
proposed ownership structure, financial strength and real estate
experience of the borrower and property management; third party
appraisal, environmental and engineering studies; market
assessment, including property inspection, review of tenant
lease files, surveys of property comparables and an analysis of
area economic and demographic trends; review of an acceptable
mortgagees title policy and an as built
survey; construction quality of the property to determine future
maintenance and capital expenditure requirements; and the
requirements for any reserves, including those for immediate
repairs or rehabilitation, replacement reserves, tenant
improvement and leasing commission costs, real estate taxes and
property casualty and liability insurance. Key factors
considered in credit decisions include, but are not limited to,
debt service coverage, loan to value ratios and property,
financial and operating performance. Consideration is also given
to other factors, such as additional forms
9
of security and identifying likely strategies to effect
repayment. ACM will refine its underwriting criteria based upon
actual loan portfolio experience and as market conditions and
investor requirements evolve.
Investment Approval Process. ACM applies its
established investment approval process to all loans and other
investments proposed for our portfolio before submitting each
proposal to us for final approval. A written report is generated
for every loan or other investment that is submitted to
ACMs credit committee for approval. The report includes a
description of the prospective borrower and any guarantors, the
collateral and the proposed use of investment proceeds, as well
as borrower and property consolidated financial statements and
analysis. In addition, the report includes an analysis of
borrower liquidity, net worth, cash investment, income, credit
history and operating experience. If the transaction is approved
by a majority of ACMs credit committee, it is presented
for approval to our credit committee, which consists of our
chief executive officer, chief credit officer, and executive
vice president of structured finance. All transactions require
the approval of a majority of the members of our credit
committee. Following the approval of any such transaction,
ACMs underwriting and servicing departments, together with
our asset management group, assure that all loan approval terms
have been satisfied and that they conform with lending
requirements established for that particular transaction. If our
credit committee rejects the 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 1,021 loans with outstanding balances of
$6.3 billion through its loan administration department in
Buffalo, New York. ACMs loan servicing operations are
designed to provide prompt customer service and accurate and
timely information for account follow up, financial reporting
and management review. Following the funding of an approved
loan, all pertinent loan data is entered into ACMs data
processing system, which provides monthly billing statements,
tracks payment performance and processes contractual interest
rate adjustments on variable rate loans. Our manager utilizes
the operations of its loan administration department to service
our portfolio with the same efficiency, accuracy, and
promptness. ACM also works closely with our asset management
group to ensure the appropriate level of customer service and
monitoring of these loans.
Our Asset Management Operations. Our asset
management group is comprised of 25 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
10
agreement. In the event the services provided by our asset
management group pursuant to this agreement exceed by more than
15% per quarter the level anticipated by our board of directors,
we will negotiate in good faith with our manager an adjustment
to our managers base management fee under the management
agreement, to reduce the scope of the services, the quantity of
serviced assets or the time required to be devoted to the
services by our asset management group.
Operating
Policies and Strategies
Investment Guidelines. Our board of directors
has adopted general guidelines for our investments and
borrowings to the effect that: (1) no investment will be
made that would cause us to fail to qualify as a REIT;
(2) no investment will be made that would cause us to be
regulated as an investment company under the Investment Company
Act; (3) no more than 25% of our equity (including trust
preferred securities as equity), determined as of the date of
such investment, will be invested in any single asset;
(4) no single mezzanine loan or preferred equity investment
will exceed $75 million; (5) our leverage (including
trust preferred securities as equity) will generally not exceed
80% of the value of our assets, in the aggregate; (6) we
will not co-invest with our manager or any of its affiliates
unless such co-investment is otherwise in accordance with these
guidelines and its terms are at least as favorable to us as to
our manager or the affiliate making such co-investment;
(7) no more than 15% of our gross assets may consist of
mortgage-related securities. Any exceptions to the above general
guidelines require the approval of our board of directors.
Financing Policies. We finance the acquisition
of our structured finance investments primarily by borrowing
against or leveraging our existing portfolio and
using the proceeds to acquire additional mortgage assets. We
expect to incur debt such that we will maintain an equity to
assets ratio no less than 20% (including trust preferred
securities as equity), although the actual ratio may be lower
from time to time depending on market conditions and other
factors deemed relevant by our manager. Our charter and bylaws
do not limit the amount of indebtedness we can incur, and the
board of directors has discretion to deviate from or change our
indebtedness policy at any time. However, we intend to maintain
an adequate capital base to protect against various business
environments in which our financing and hedging costs might
exceed the interest income from our investments.
Our investments are financed primarily by collateralized debt
obligations, our variable rate junior subordinate notes, and
through our floating rate warehouse lines of credit, term and
revolving credit agreements, loan repurchase agreements and
other financing facilities with institutional lenders. Although
we expect that these will be the principal means of leveraging
our investments, we may issue preferred stock or secured or
unsecured notes of any maturity if it appears advantageous to do
so.
Credit Risk Management Policy. We are exposed
to various levels of credit and special hazard risk depending on
the nature of our underlying assets and the nature and level of
credit enhancements supporting our assets. We originate or
purchase mortgage loans that meet our minimum debt service
coverage standards. ACM, as our manager, our chief credit
officer, and our asset management group, reviews and monitors
credit risk and other risks of loss associated with each
investment. In addition, ACM seeks to diversify our portfolio of
assets to avoid undue geographic, issuer, industry and certain
other types of concentrations. Our board of directors monitors
the overall portfolio risk and reviews levels of provision for
loss.
Interest Rate Risk Management Policy. To the
extent consistent with our election to qualify as a REIT, we
follow an interest rate risk management policy intended to
mitigate the negative effects of major interest rate changes. We
minimize our interest rate risk from borrowings by attempting to
structure the key terms of our borrowings to generally
correspond to the interest rate term of our assets.
We may enter into hedging transactions to protect our investment
portfolio from interest rate fluctuations and other changes in
market conditions. These transactions may include interest rate
swaps, the purchase or sale of interest rate collars, caps or
floors, options, mortgage derivatives and other hedging
instruments. These instruments may be used to hedge as much of
the interest rate risk as ACM determines is in the best interest
of our stockholders, given the cost of such hedges and the need
to maintain our status as a REIT. In general, income from
hedging transactions does not constitute qualifying income for
purposes of the REIT gross income requirements. To the extent,
however, that a hedging contract reduces interest rate risk on
indebtedness incurred to acquire or carry real estate assets,
any income that is derived from the hedging contract, while
comprising non-qualifying income for
11
purposes of the REIT 75% gross income test, would not give rise
to non-qualifying income for purposes of the 95% gross income
test. ACM may elect to have us bear a level of interest rate
risk that could otherwise be hedged when it believes, based on
all relevant facts, that bearing such risk is advisable.
To date, we have entered into various interest rate swaps in
connection with the issuance of floating rate secured notes, the
issuance of variable rate junior subordinate notes, and to hedge
the interest risk on forecasted outstanding LIBOR based debt.
The notional amount of each interest rate swap agreement and the
related terms have been designed to protect our investment
portfolio from interest rate risk and to match the payment and
receipts of interest on the underlying debt instruments, where
applicable.
Disposition Policies. Although there are no
current plans to dispose of properties or other assets within
our portfolio, ACM evaluates our asset portfolio on a regular
basis to determine if it continues to satisfy our investment
criteria. Subject to certain restrictions applicable to REITs,
ACM may cause us to sell our investments opportunistically and
use the proceeds of any such sale for debt reduction, additional
acquisitions, or working capital purposes.
Equity Capital Policies. Subject to applicable
law, our board of directors has the authority, without further
stockholder approval, to issue additional authorized common
stock and preferred stock or otherwise raise capital, including
through the issuance of senior securities, in any manner and on
the terms and for the consideration it deems appropriate,
including in exchange for property. We may in the future issue
common stock in connection with acquisitions. We also may issue
units of partnership interest in our operating partnership in
connection with acquisitions of property. We may, under certain
circumstances, repurchase our common stock in private
transactions with our stockholders, if those purchases are
approved by our board of directors. In August 2006, our board of
directors approved a stock repurchase plan pursuant to which we
purchased an aggregate of 279,400 shares. The plan expired
in February 2007.
Conflicts of Interest Policies. We, our
executive officers, and ACM face conflicts of interests because
of our relationships with each other. ACM currently has an
approximate 21% voting interest in our common stock.
Mr. Kaufman, our chairman and chief executive officer, is
the chief executive officer of ACM and beneficially owns
approximately 92% of the outstanding membership interests of
ACM. Mr. Martello, one of our directors, is the chief
operating officer of Arbor Management, LLC (the managing member
of ACM) and a trustee of two trusts which own minority
membership interests in ACM. Mr. Elenio, our chief
financial officer and treasurer, is the chief financial officer
of ACM. Mr. Horn, our secretary and one of our directors,
is the secretary of ACM. Each of Messrs. Kaufman, Martello,
Elenio and Horn, as well as Mr. Weber, our executive vice
president of structured finance and Mr. Kilgore, our
executive vice president of structured securitization are
members of ACMs executive committee. Each of
Messrs. Kaufman, Martello, Elenio, Horn, Weber, Kilgore,
and Mr. Fogel, our senior vice president of asset
management, own minority membership interests in ACM.
We have implemented several policies, through board action and
through the terms of our charter and our agreements with ACM, to
help address these conflicts of interest, including the
following:
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Our charter requires that a majority of our board of directors
be independent directors and that only our independent directors
make any determination on our behalf with respect to the
relationships or transactions that present a conflict of
interest for our directors or officers.
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Our board of directors has adopted a policy that decisions
concerning our management agreement with ACM, including
termination, renewal and enforcement thereof or our
participation in any transactions with ACM or its affiliates
outside of the management agreement, including our ability to
purchase securities and mortgages or other assets from ACM, or
our ability to sell securities and assets to ACM, must be
reviewed and approved by a majority of our independent directors.
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Our management agreement provides that our determinations to
terminate the management agreement for cause or because the
management fees are unfair to us or because of a change in
control of our manager, will be made by a majority vote of our
independent directors.
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Our independent directors will periodically review the general
investment standards established by ACM under the management
agreement.
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Our management agreement with ACM provides that ACM may not
assign duties under the management agreement, except to certain
affiliates of ACM, without the approval of a majority of our
independent directors.
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Our management agreement provides that decisions to approve or
reject investment opportunities rejected by our credit committee
that ACM or Mr. Kaufman wish to pursue will be made by a
majority of our independent directors.
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Our board of directors has approved the operating policies and
the strategies set forth above. Our board of directors has the
power to modify or waive these policies and strategies, or amend
our agreements with ACM, without the consent of our stockholders
to the extent that the board of directors (including a majority
of our independent directors) determines that such modification
or waiver is in the best interest of our stockholders. Among
other factors, developments in the market that either affect the
policies and strategies mentioned herein or that change our
assessment of the market may cause our board of directors to
revise its policies and strategies. However, if such
modification or waiver involves the relationship of, or any
transaction between, us and our 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
13
impacted. Our competitors may also be willing to accept lower
returns on their investments and may succeed in buying the
assets that we have targeted for acquisition. Although
management believes that we are well positioned to continue to
compete effectively in each facet of our business, there can be
no assurance that we will do so or that we will not encounter
further increased competition in the future that could limit our
ability to compete effectively.
Employees
We have 32 employees, including Messrs. Weber,
Kilgore, Felletter, Fogel and Horn, Mr. Guziewicz, our
chief credit officer, and a 25 person asset management
group. Mr. Kaufman, our chief executive officer and
Mr. Elenio, our chief financial officer are full time
employees of ACM and are not compensated by us (other than
pursuant to our equity incentive plans).
Corporate
Governance and Internet Address
We have adopted corporate governance guidelines and a code of
business conduct and ethics, which delineate our standards for
our directors, officers and employees, and the employees of our
manager who provide services to us. We emphasize the importance
of professional business conduct and ethics through our
corporate governance initiatives.
Our internet address is www.arborrealtytrust.com. We make
available, free of charge through a link on our site, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to such reports, if any, as filed with the SEC as
soon as reasonably practicable after such filing. Our site also
contains our code of business conduct and ethics, code of ethics
for chief executive and senior financial officers, corporate
governance guidelines, stockholder communications with the board
of directors, and the charters of the audit committee,
nominating/corporate governance committee, and compensation
committee of our board of directors. No information contained in
or linked to our website is incorporated by reference in this
report.
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Our business is subject to various risks, including the risks
listed below. If any of these risks actually occur, our
business, financial condition and results of operations could be
materially adversely affected and the value of our common stock
could decline.
Risks
Related to Our Business
Prolonged
disruptions in the financial markets could affect our ability to
obtain financing on reasonable terms and have other adverse
effects on us and the market price of our common
stock.
Global stock and credit markets have recently experienced
significant price volatility, dislocations and liquidity
disruptions, which have caused market prices of many stocks to
fluctuate substantially and the spreads on prospective debt
financings to widen considerably. These circumstances have
materially impacted liquidity in the financial markets, making
terms for certain financings less attractive, and, in certain
cases, have resulted in the unavailability of certain types of
financing. If these conditions persist, lending institutions may
be forced to exit markets such as repurchase lending, become
insolvent or further tighten their lending standards or increase
the amount of equity capital required to obtain financing, and
in such event, could make it more difficult for us to obtain
financing on favorable terms or at all. Our profitability will
be adversely affected if we are unable to obtain cost-effective
financing for our investments. A prolonged downturn in the stock
or credit markets may cause us to seek alternative sources of
potentially less attractive financing, and may require us to
adjust our business plan accordingly. In addition, these factors
may make it more difficult for our borrowers to repay our loans
as they may experience difficulties in selling assets, increased
costs of financing or obtaining financing at all. These events
in the stock and credit markets may also make it more difficult
or unlikely for us to raise capital through the issuance of our
common stock or preferred stock. These disruptions in the
financial markets also may have a material adverse effect on the
market value of our common stock and other adverse effects on us
or the economy generally.
Increases
in loan loss reserves and other impairments are expected if
economic conditions do not improve.
A further decline in economic conditions could negatively impact
the credit quality of our loans and investments portfolio. If we
do not see a stabilization of the financial markets and such
market conditions continue to decline further, we will likely
experience significant increases in loan loss reserves,
potential defaults and other asset impairment charges.
Loan
loss reserves are particularly difficult to estimate in a
turbulent economic environment.
We perform an evaluation of loans on a quarterly basis to
determine whether an impairment is necessary and adequate to
absorb probable losses. The valuation process of our loans and
investments portfolio requires us to make certain estimates and
judgments, which are particularly difficult to determine during
a recession in which the availability of commercial real estate
credit is severely limited and commercial real estate
transactions have dramatically decreased. Our estimates and
judgments are based on a number of factors, including projected
cash flows from the collateral securing our commercial real
estate loans, loan structure, including the availability of
reserves and recourse guarantees, likelihood of repayment in
full at the maturity of a loan, potential for a refinancing
market coming back to commercial real estate in the future and
expected market discount rates for varying property types. If
our estimates and judgments are not correct, our results of
operations and financial condition could be severely impacted.
Loan
repayments are less likely in the current market
environment.
In a market in which liquidity is essential to our business,
loan repayments have been a significant source of liquidity for
us. However, many financial institutions have drastically
curtailed new lending activity and real estate owners are having
difficulty refinancing their assets at maturity. If borrowers
are not able to refinance loans at their maturity, the loans
could go into default and the liquidity that we would receive
from such repayments will not be available. Furthermore, without
a functioning commercial real estate finance market, borrowers
that are performing
15
on their loans will almost certainly extend such loans if they
have that right, which will further delay our ability to access
liquidity through repayments.
We may
not be able to access the debt or equity capital markets on
favorable terms, or at all, for additional liquidity, which
could adversely affect our business, financial condition and
operating results.
In order to obtain additional liquidity, future equity or debt
financing may not be available on terms that are favorable to
us, or at all. Our ability to access additional debt and equity
capital depends on various conditions in these markets, which
are beyond our control. If we are able to complete future equity
offerings, they could be dilutive to our existing shareholders
or could result in the issuance of securities that have rights,
preferences and privileges that are senior to those of our other
securities. Our inability to obtain adequate capital could have
a material adverse effect on our business, financial condition
and operating results.
We may
be unable to invest excess equity capital on acceptable terms or
at all, which would adversely affect our operating
results.
We may not be able to identify investments that meet our
investment criteria and we may not be successful in closing the
investments that we identify. Unless and until we identify
investments consistent with our investment criteria, any excess
equity capital may be used to repay borrowings under our
warehouse credit facility, bridge loan warehouse facility, term
and revolving credit agreements and repurchase agreements, which
would not produce a return on capital. In addition, the
investments that we acquire with our equity capital may not
produce a return on capital. There can be no assurance that we
will be able to identify attractive opportunities to invest our
equity capital which would adversely affect our results of
operations.
Changes
in market conditions could adversely affect the market price of
our common stock.
As with other publicly traded equity securities, the value of
our common stock depends on various market conditions which may
change from time to time. Among the market conditions that may
affect the value of our common stock are the following:
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the general reputation of REITs and the attractiveness of our
equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
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our financial performance; and
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general stock and bond market conditions.
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The market value of our common stock is based primarily upon the
markets perception of our growth potential and our current
and potential future earnings and cash dividends. Consequently,
our common stock may trade at prices that are higher or lower
than our book value per share of common stock. If our future
earnings or cash dividends are less than expected, it is likely
that the market price of our common stock will diminish.
Our
stock could be at risk of being delisted by the New York Stock
Exchange and could have a materially adverse effects on our
business
The price of our common stock has declined significantly and
rapidly since September 2008. In the event we record additional
losses, it is possible that the value of our common stock could
decline further. This reduction in stock price could have
materially adverse effects on our business, including reducing
our ability to use our common stock as compensation or to
otherwise provide incentives to employees and by reducing our
ability to generate capital through stock sales or otherwise use
our stock as currency with third parties.
In the event that the average closing price of our common stock
is less than $1.00 or our market capitalization is less than
$25 million over a consecutive 30
trading-day
period, our stock could be delisted from the NYSE. However, due
to the continued turbulence of the market, the NYSE has
temporarily reduced its minimum market capitalization rule to
$15 million, and has also suspended its minimum stock price
rule until June 30, 2009. The threat of delisting
and/or a
delisting of our common stock could have adverse effects by,
among other things:
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Reducing the liquidity and market price of our common stock;
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Reducing the number of investors willing to hold or acquire our
common stock, thereby further restricting our ability to obtain
equity financing;
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Reducing our ability to retain, attract and motivate our
directors, officers and employees.
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A
prolonged economic slowdown, a lengthy or severe recession, or
declining real estate values could harm our
operations.
We believe the risks associated with our business is more severe
during periods of economic slowdown or recession if these
periods are accompanied by declining real estate values.
Declining real estate values will likely reduce our level of new
mortgage loan originations, since borrowers often use increases
in the value of their existing properties to support the
purchase or investment in additional properties. Borrowers may
also be less able to pay principal and interest on our loans if
the real estate economy weakens. Declining real estate values
also significantly increase the likelihood that we will incur
losses on our loans in the event of default because the value of
our collateral may be insufficient to cover our cost on the
loan. Any sustained period of increased payment delinquencies,
foreclosures or losses could adversely affect both our net
interest income from loans in our portfolio as well as our
ability to originate, sell and securitize loans, which would
significantly harm our revenues, results of operations,
financial condition, business prospects and our ability to make
distributions to the stockholders.
A
declining portfolio and reductions in short-term debt could
adversely affect the returns on our investments.
Continued dislocations in the market will likely lead to a
reduction in our loans and investments portfolio. Additionally,
the majority of the proceeds received from repayments of loans
are expected to be used to repay short-term borrowings. This
deleveraging will likely result in reduced returns on our
investments.
Our
investments in commercial mortgage-related securities are
subject to risks relating to the particular REIT issuer of the
securities, which may result in losses to us.
Our investments in commercial mortgage-related securities
involve special risks relating to the particular issuer of the
securities, including the financial condition and business
outlook of the issuer. The issuers of these securities are
experiencing many of the same risks resulting from the continued
disruptions in the financial markets and deteriorating economic
conditions. In addition, our investments are also subject to the
risks described above with respect to commercial real estate
loans and mortgage-backed securities and similar risks,
including risks of delinquency and foreclosure, the dependence
upon the successful operation of, and net income from, real
property, risks generally related to interests in real property,
and risks that may be presented by the type and use of a
particular commercial property. REITs have been severely
impacted by the current economic environment and have had very
little access to the capital markets or the debt markets in
order to meet their existing obligations or to refinance
maturing debt.
We
depend on key personnel with long standing business
relationships, the loss of whom could threaten our ability to
operate our business successfully.
Our future success depends, to a significant extent, upon the
continued services of ACM as our manager and our and ACMs
officers and employees. In particular, the mortgage lending
experience of Mr. Kaufman and Mr. Weber and the extent
and nature of the relationships they have developed with
developers and owners of multi-family and commercial properties
and other financial institutions are critical to the success of
our business. We cannot assure you of their continued employment
with ACM or service as our officers. The loss of services of one
or more members of our or ACMs management team could harm
our business and our prospects.
The
real estate investment business is highly competitive. Our
success depends on our ability to compete with other providers
of capital for real estate investments.
Our business is highly competitive. Competition may cause us to
accept economic or structural features in our investments that
we would not have otherwise accepted and it may cause us to
search for investments in markets outside of our traditional
product expertise. We compete for attractive investments with
traditional lending sources,
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such as insurance companies and banks, as well as other REITs,
specialty finance companies and private equity vehicles with
similar investment objectives, which may make it more difficult
for us to consummate our target investments. Many of our
competitors have greater financial resources and lower costs of
capital than we do, which provides them with greater operating
flexibility and a competitive advantage relative to us.
We may
not achieve our targeted rate of return on our
investments.
We originate or acquire investments based on our estimates or
projections of overall rates of return on such investments,
which in turn are based upon, among other considerations,
assumptions regarding the performance of assets, the amount and
terms of available financing to obtain desired leverage and the
manner and timing of dispositions, including possible asset
recovery and remediation strategies, all of which are subject to
significant uncertainty. In addition, events or conditions that
we have not anticipated may occur and may have a significant
effect on the actual rate of return received on an investment.
As we acquire or originate investments for our balance sheet
portfolio, whether as new additions or as replacements for
maturing investments, there can be no assurance that we will be
able to originate or acquire investments that produce rates of
return comparable to returns on our existing investments.
Our
due diligence may not reveal all of a borrowers
liabilities and may not reveal other weaknesses in its
business.
Before investing in a company or making a loan to a borrower, we
will assess the strength and skills of such entitys
management and other factors that we believe are material to the
performance of the investment. In making the assessment and
otherwise conducting customary due diligence, we will rely on
the resources available to us and, in some cases, an
investigation by third parties. This process is particularly
important and subjective with respect to newly organized
entities because there may be little or no information publicly
available about the entities. There can be no assurance that our
due diligence processes will uncover all relevant facts or that
any investment will be successful.
We
invest in junior participation notes which may be subject to
additional risks relating to the privately negotiated structure
and terms of the transaction, which may result in losses to
us.
We invest in junior participation loans which is a mortgage loan
typically (i) secured by a first mortgage on a single
commercial property or group of related properties and
(ii) subordinated to a senior note secured by the same
first mortgage on the same collateral. As a result, if a
borrower defaults, there may not be sufficient funds remaining
for the junior participation loan after payment is made to the
senior note holder. Since each transaction is privately
negotiated, junior participation loans can vary in their
structural characteristics and risks. For example, the rights of
holders of junior participation loans to control the process
following a borrower default may be limited in certain
investments. We cannot predict the terms of each junior
participation investment. A junior participation may not be
liquid and, consequently, we may be unable to dispose of
underperforming or non-performing investments. The higher risks
associated with a subordinate position in any investments we
make could subject us to increased risk of losses.
We
invest in mezzanine loans which are subject to a greater risk of
loss than loans with a first priority lien on the underlying
real estate.
We invest in mezzanine loans that take the form of subordinated
loans secured by second mortgages on the underlying property or
loans secured by a pledge of the ownership interests of either
the entity owning the property or a pledge of the ownership
interests of the entity that owns the interest in the entity
owning the property. These types of investments involve a higher
degree of risk than long-term senior mortgage lending secured by
income producing real property because the investment may become
unsecured as a result of foreclosure by the senior lender. In
the event of a bankruptcy of the entity providing the pledge of
its ownership interests as security, we may not have full
recourse to the assets of such entity, or the assets of the
entity may not be sufficient to satisfy our mezzanine loan. If a
borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine
loan will be satisfied only after the senior debt. As a result,
we may not recover some or
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all of our investment. In addition, mezzanine loans may have
higher loan to value ratios than conventional mortgage loans,
resulting in less equity in the property and increasing the risk
of loss of principal.
Preferred
equity investments involve a greater risk of loss than
traditional debt financing.
We invest in preferred equity investments, which involve a
higher degree of risk than traditional debt financing due to a
variety of factors, including that such investments are
subordinate to other loans and are not secured by property
underlying the investment. Furthermore, should the issuer
default on our investment, we would only be able to proceed
against the partnership in which we have an interest, and not
the property underlying our investment. As a result, we may not
recover some or all of our investment.
We
invest in multi-family and commercial real estate loans, which
may involve a greater risk of loss than single family real
estate loans.
Our investments include multi-family and commercial real estate
loans that are considered to involve a higher degree of risk
than single family residential lending because of a variety of
factors, including generally larger loan balances, dependency
for repayment on successful operation of the mortgaged property
and tenant businesses operating therein, and loan terms that
include amortization schedules longer than the stated maturity
and provide for balloon payments at stated maturity rather than
periodic principal payments. In addition, the value of
commercial real estate can be affected significantly by the
supply and demand in the market for that type of property.
Volatility
of values of multi-family and commercial properties may
adversely affect our loans and investments.
Multi-family and commercial property values and net operating
income derived from such properties are subject to volatility
and may be affected adversely by a number of factors, including,
but not limited to, events such as natural disasters, including
hurricanes and earthquakes, acts of war
and/or
terrorism and others that may cause unanticipated and uninsured
performance declines
and/or
losses to us or the owners and operators of the real estate
securing our investment; national, regional and local economic
conditions, such as what we have experienced over the past year
(which may be adversely affected by industry slowdowns and other
factors); local real estate conditions (such as an oversupply of
housing, retail, industrial, office or other commercial space);
changes or continued weakness in specific industry segments;
construction quality, construction cost, age and design;
demographic factors; retroactive changes to building or similar
codes; and increases in operating expenses (such as energy
costs). In the event a propertys net operating income
decreases, a borrower may have difficulty repaying our loan,
which could result in losses to us. In addition, decreases in
property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay our loans,
which could also cause us to suffer losses.
Many
of our commercial real estate loans are funded with interest
reserves and our borrowers may be unable to replenish those
interest reserves once they run out.
Given the transitional nature of many of our commercial real
estate loans, we required borrowers to post reserves to cover
interest and operating expenses until the property cash flows
were projected to increase sufficiently to cover debt service
costs. We also generally required the borrower to replenish
reserves if they become depleted due to underperformance or if
the borrower wanted to exercise extension options under the
loan. Despite low interest rates, revenues on the properties
underlying any commercial real estate loan investments will
likely decrease in the current economic environment, making it
more difficult for borrowers to meet their payment obligations
to us. We expect that in the future some of our borrowers may
have difficulty servicing our debt and will not have sufficient
capital to replenish reserves, which could have a significant
impact on our operating results and cash flow.
We may
not have control over certain of our loans and
investments.
Our ability to manage our portfolio of loans and investments may
be limited by the form in which they are made. In certain
situations, we may acquire investments subject to rights of
senior classes and servicers under inter-
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creditor or servicing agreements; acquire only a participation
in an underlying investment; co-invest with third parties
through partnerships, joint ventures or other entities, thereby
acquiring non-controlling interests; or rely on independent
third party management or strategic partners with respect to the
management of an asset.
Therefore, we may not be able to exercise control over the loan
or investment. Such financial assets may involve risks not
present in investments where senior creditors, servicers or
third party controlling investors are not involved. Our rights
to control the process following a borrower default may be
subject to the rights of senior creditors or servicers whose
interests may not be aligned with ours. A third party partner or
co-venturer may have financial difficulties resulting in a
negative impact on such asset, may have economic or business
interests or goals which are inconsistent with ours. In
addition, we may, in certain circumstances, be liable for the
actions of our third party partners or co-venturers.
The
impact of any future terrorist attacks and the availability of
terrorism insurance expose us to certain risks.
The terrorist attacks on September 11, 2001 disrupted the
U.S. financial markets, including the real estate capital
markets, and negatively impacted the U.S. economy in
general. Any future terrorist attacks, the anticipation of any
such attacks, and the consequences of any military or other
response by the United States and its allies may have a further
adverse impact on the U.S. financial markets and the
economy generally. We cannot predict the severity of the effect
that any such future events would have on the
U.S. financial markets, the economy or our business. Any
future terrorist attacks could adversely affect the credit
quality of some of our loans and investments. Some of our loans
and investments will be more susceptible to such adverse effects
than others. We may suffer losses as a result of the adverse
impact of any future terrorist attacks and these losses may
adversely impact our results of operations.
In addition, the enactment of the Terrorism Risk Insurance Act
of 2002, or the TRIA, and the subsequent enactment of the
Terrorism Risk Insurance Program Reauthorization Act of 2007,
which extended TRIA through the end of 2014, requires insurers
to make terrorism insurance available under their property and
casualty insurance policies in order to receive federal
compensation under TRIA for insured losses. However, this
legislation does not regulate the pricing of such insurance. The
absence of affordable insurance coverage may adversely affect
the general real estate lending market, lending volume and the
markets overall liquidity and may reduce the number of
suitable investment opportunities available to us and the pace
at which we are able to make investments. If the properties that
we invest in are unable to obtain affordable insurance coverage,
the value of those investments could decline and in the event of
an uninsured loss, we could lose all or a portion of our
investment.
We are
required to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and furnish a report on our internal control over
financial reporting.
We are required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires us to
assess and attest to the effectiveness of our internal control
over financial reporting and requires our independent registered
public accounting firm to opine as to the adequacy of our
assessment and effectiveness of our internal control over
financial reporting. We may not receive an unqualified opinion
from our independent registered public accounting firm with
regard to our internal control over financial reporting.
Failure
to maintain an exemption from regulation as an investment
company under the Investment Company Act would adversely affect
our results of operations.
We believe that we conduct, and we intend to conduct our
business in a manner that allows us to avoid being regulated as
an investment company under the Investment Company Act. Pursuant
to Section 3(c) (5) (C) of the Investment Company Act,
entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate are exempted from
regulation thereunder. The staff of the SEC has provided
guidance on the availability of this exemption. Specifically,
the staffs position generally requires us to maintain at
least 55% of our assets directly in qualifying real estate
interests. To constitute a qualifying real estate interest
under this 55% test, an interest in real estate must meet
various criteria. Loans that are secured by equity interests in
entities that directly or indirectly own the underlying real
property, rather than a mortgage on the
20
underlying property itself, and ownership of equity interests in
real property owners may not qualify for purposes of the 55%
test depending on the type of entity. Mortgage-related
securities that do not represent all of the certificates issued
with respect to an underlying pool of mortgages may also not
qualify for purposes of the 55% test. Therefore, our ownership
of these types of loans and equity interests may be limited by
the provisions of the Investment Company Act. To the extent that
we do not comply with the SEC staffs 55% test, another
exemption or exclusion from registration as an investment
company under the Investment Company Act or other
interpretations under the Investment Company Act, we may be
deemed to be an investment company. If we fail to maintain an
exemption or other exclusion from registration as an investment
company we could, among other things, be required either
(a) to substantially change the manner in which we conduct
our operations to avoid being required to register as an
investment company or (b) to register as an investment
company, either of which could have an adverse effect on us and
the market price of our common stock. If we were required to
register as an investment company under the Investment Company
Act, we would become subject to substantial regulation with
respect to our capital structure (including our ability to use
leverage), management, operations, transactions with affiliated
persons (as defined in the Investment Company Act), portfolio
composition, including restrictions with respect to
diversification and industry concentration and other matters.
Risks
Related to Our Financing and Hedging Activities
We may
not be able to access financing sources on favorable terms, or
at all, which could adversely affect our ability to execute our
business plan.
We finance our assets over the short and long-term through a
variety of means, including repurchase agreements, term
facilities, credit facilities, CDOs and other structured
financings. We have also financed our investments through the
issuance of $276.1 million of trust preferred securities.
Our ability to execute this strategy depends on various
conditions in the markets for financing in this manner which are
beyond our control, including lack of liquidity and wider credit
spreads, which we have seen over the past year. If these
conditions continue to worsen, we cannot assure you that these
sources are feasible for financing of our assets, as there can
be no assurance that these agreements will be renewed or
extended at expiration. If our strategy is not viable, we will
have to find alternative forms of long-term financing for our
assets, as secured revolving credit facilities and repurchase
facilities may not accommodate long-term financing. This could
subject us to more recourse indebtedness and the risk that debt
service on less efficient forms of financing would require a
larger portion of our cash flows, thereby reducing cash
available for distribution to our stockholders, funds available
for operations as well as for future business opportunities.
Our
credit facilities contain restrictive covenants relating to our
operations.
Each of our credit facilities contains various financial
covenants and restrictions, including minimum net worth, minimum
liquidity, debt-to-equity ratios and fixed and senior fixed
charge coverage ratios. Other restrictive covenants contained in
our credit facility agreements include covenants that prohibit
us from effecting a change in control, disposing of or
encumbering assets being financed and restricting us from making
any material amendment to our underwriting guidelines without
approval of the lender. At December 31, 2008, we were in
compliance with all financial covenants and restrictions with
the exception of a minimum liquidity requirement with three
financial institutions. We are required to have a minimum
unrestricted cash and cash equivalents total balance ranging
from $5.0 million to $15.0 million, depending on the
financial institution. We have obtained waivers of these
covenants for December 31, 2008 from all three financial
institutions. However, if economic conditions continue to weaken
and capital for commercial real estate remains scarce, we expect
credit quality in our assets and across the commercial real
estate sector to decline as well. While we remain focused on
actively managing our loans and investments portfolio, a
continued weak environment will make maintaining compliance with
the credit facilities covenants more difficult. If we are
not in compliance with any of our covenants, there can be no
assurance that our lenders would waive or amend such
non-compliance in the future and any such non-compliance could
have a material adverse effect on us.
Investor
demand for commercial real estate CDOs has been substantially
curtailed.
The recent turmoil in the structured finance markets, in
particular the sub-prime residential loan market, has negatively
impacted the credit markets generally. As a result, investor
demand for commercial real estate CDOs has
21
been substantially curtailed. In recent years, we have relied to
a substantial extent on CDO financings to obtain match-funded
financing for our investments. Until and unless the market for
commercial real estate CDOs recovers, we may be unable to
utilize CDOs to finance our investments and we may need to
utilize less favorable sources of financing to finance our
investments on a long-term basis. There can be no assurance as
to when or if the demand for commercial real estate CDOs will
return or the terms of such securities investors will demand or
whether we will be able to issue CDOs to finance our investments
on terms beneficial to us.
We may
not be able to obtain the level of leverage necessary to
optimize our return on investment.
Our return on investment depends, in part, upon our ability to
grow our balance sheet portfolio of invested assets through the
use of leverage at a cost of debt that is lower than the yield
earned on our investments. We generally obtain leverage through
the issuance of collateralized debt obligations, or CDOs, term
and revolving credit agreements, repurchase agreements and other
borrowings. Our ability to obtain the necessary leverage on
beneficial terms ultimately depends upon the quality of the
portfolio assets that collateralize our indebtedness. Our
failure to obtain
and/or
maintain leverage at desired levels, or to obtain leverage on
attractive terms, would have a material adverse effect on our
performance. Moreover, we are dependent upon a few lenders to
provide financing under credit agreements and repurchase
agreements for our origination or acquisition of loans and
investments and there can be no assurance that these agreements
will be renewed or extended at expiration. Our ability to obtain
financing through CDOs is subject to conditions in the debt
capital markets which are impacted by factors beyond our control
that may at times be adverse and reduce the level of investor
demand for such securities.
The
repurchase agreements and credit facilities that we use to
finance our investments may require us to provide additional
collateral.
We use credit facilities and repurchase agreements to finance
some of our investments. If the market value of the loans
pledged or sold by us to a funding source decline in value, we
may be required by the lending institution to provide additional
collateral or pay down a portion of the funds advanced. We may
not have the funds available to pay down our debt, which could
result in defaults. Posting additional collateral to support our
repurchase and credit facilities would reduce our liquidity and
limit our ability to leverage our assets. In the event we do not
have sufficient liquidity to meet such requirements, lending
institutions can accelerate our indebtedness, increase interest
rates and terminate our ability to borrow. Such a situation
would likely result in a rapid deterioration of our financial
condition and possibly necessitate a filing for protection under
the United States Bankruptcy Code. Further, facility providers
may require us to maintain a certain amount of cash uninvested
or set aside unlevered assets sufficient to maintain a specified
liquidity position which would allow us to satisfy our
collateral obligations. As a result, we may not be able to
leverage our assets as fully as we would choose, which could
reduce our return on assets. In the event that we are unable to
meet these collateral obligations, our financial condition could
deteriorate rapidly.
Our
use of leverage may create a mismatch with the duration and
index of the investments that we are financing.
We attempt to structure our leverage such that we minimize the
difference between the term of our investments and the leverage
we use to finance such an investment. In the event that our
leverage is shorter term than the financed investment, we may
not be able to extend or find appropriate replacement leverage
and that would have an adverse impact on our liquidity and our
returns. In the event that our leverage is longer term than the
financed investment, we may not be able to repay such leverage
or replace the financed investment with an optimal substitute or
at all, which will negatively impact our desired leveraged
returns.
We attempt to structure our leverage such that we minimize the
difference between the index of our investments and the index of
our leverage financing floating rate investments
with floating rate leverage and fixed rate investments with
fixed rate leverage. If such a product is not available to us
from our lenders on reasonable terms, we may use hedging
instruments to effectively create such a match. For example, in
the case of fixed rate investments, we may finance such an
investment with floating rate leverage, but effectively convert
all or a portion of the attendant leverage to fixed rate using
hedging strategies.
22
Our attempts to mitigate such risk are subject to factors
outside of our control, such as the availability to us of
favorable financing and hedging options, which is subject to a
variety of factors, of which duration and term matching are only
two such factors.
We
utilize a significant amount of debt to finance our portfolio,
which may subject us to an increased risk of loss, adversely
affecting the return on our investments and reducing cash
available for distribution.
We utilize a significant amount of debt to finance our
operations, which can compound losses and reduce the cash
available for distributions to our stockholders. We generally
leverage our portfolio through the use of bank credit
facilities, repurchase agreements, securitizations, including
the issuance of CDOs and other borrowings. The leverage we
employ varies depending on our ability to obtain credit
facilities, the loan-to-value and debt service coverage ratios
of our assets, the yield on our assets, the targeted leveraged
return we expect from our portfolio and our ability to meet
ongoing covenants related to our asset mix and financial
performance. Substantially all of our assets are pledged as
collateral for our borrowings. Our return on our investments and
cash available for distribution to our stockholders may be
reduced to the extent that changes in market conditions cause
the cost of our financing to increase relative to the income
that we can derive from the assets we acquire.
Our debt service payments, including payments in connection with
any CDOs, reduce the net income available for distributions.
Moreover, we may not be able to meet our debt service
obligations and, to the extent that we cannot, we risk the loss
of some or all of our assets to foreclosure or sale to satisfy
our debt obligations. Currently, neither our charter nor our
bylaws impose any limitations on the extent to which we may
leverage our assets.
We may
guarantee some of our leverage and contingent
obligations.
We guarantee the performance of some of our obligations,
including but not limited to some of our repurchase agreements,
derivative agreements, and unsecured indebtedness.
Non-performance on such obligations may cause losses to us in
excess of the capital we initially may have invested/committed
under such obligations and there is no assurance that we will
have sufficient capital to cover any such losses.
We may
not be able to acquire suitable investments for a CDO issuance,
or we may not be able to issue CDOs on attractive terms, or at
all, which may require us to utilize more costly financing for
our investments.
We have financed, and, if the opportunities exist in the future,
we may continue to finance certain of our investments through
the issuance of CDOs. During the period that we are acquiring
investments for eventual long-term financing through CDOs, we
intend to finance these investments through repurchase and
credit agreements. We use these agreements to finance our
acquisition of investments until we have accumulated a
sufficient quantity of investments, at which time we may
refinance them through a securitization, such as a CDO issuance.
As a result, we are subject to the risk that we will not be able
to acquire a sufficient amount of eligible investments to
maximize the efficiency of a CDO issuance. In addition,
conditions in the debt capital markets may make the issuance of
CDOs less attractive to us even when we do have a sufficient
pool of collateral, or we may not be able to execute a CDO
transaction due to substantial curtailment in demand for
commercial real estate CDOs, such as currently exists. If we are
unable to issue a CDO to finance these investments, we may be
required to utilize other forms of potentially less attractive
financing.
We may
not be able to find suitable replacement investments for CDOs
with reinvestment periods.
Some of our CDOs have periods where principal proceeds received
from assets securing the CDO can be reinvested for a defined
period of time, commonly referred to as a reinvestment period.
Our ability to find suitable investments during the reinvestment
period that meet the criteria set forth in the CDO documentation
and by rating agencies may determine the success of our CDO
investments. Our potential inability to find suitable
investments may cause, among other things, lower returns,
interest deficiencies,
hyper-amortization
of the senior CDO liabilities and may cause us to reduce the
life of our CDOs and accelerate the amortization of certain fees
and expenses.
23
The
use of CDO financings with over-collateralization and interest
coverage requirements may have a negative impact on our cash
flow.
The terms of CDOs will generally provide that the principal
amount of investments must exceed the principal balance of the
related bonds by a certain amount and that interest income
exceeds interest expense by a certain amount. Generally, CDO
terms provide that, if certain delinquencies
and/or
losses or other factors cause a decline in collateral or cash
flow levels, the cash flow otherwise payable on subordinated
classes may be redirected to repay senior classes of CDOs until
the issuer or the collateral is in compliance with the terms of
the governing documents. Other tests (based on delinquency
levels or other criteria) may restrict our ability to receive
net income from assets pledged to secure CDOs. We cannot assure
you that the performance tests will be satisfied. If our
investments fail to perform as anticipated, our
over-collateralization, interest coverage or other credit
enhancement expense associated with our CDO financings will
increase. With respect to future CDOs we may issue, we cannot
assure you, in advance of completing negotiations with the
rating agencies or other key transaction parties as to the
actual terms of the delinquency tests, over-collateralization
and interest coverage terms, cash flow release mechanisms or
other significant factors upon which net income to us will be
calculated. Failure to obtain favorable terms with regard to
these matters may adversely affect the availability of net
income to us.
We may
be required to repurchase loans that we have sold or to
indemnify holders of our CDOs.
If any of the loans we originate or acquire and sell or
securitize through CDOs do not comply with representations and
warranties that we make about certain characteristics of the
loans, the borrowers and the underlying properties, we may be
required to repurchase those loans or replace them with
substitute loans. In addition, in the case of loans that we have
sold instead of retained, we may be required to indemnify
persons for losses or expenses incurred as a result of a breach
of a representation or warranty. Repurchased loans typically
require a significant allocation of working capital to carry on
our books, and our ability to borrow against such assets is
limited. Any significant repurchases or indemnification payments
could adversely affect our financial condition and operating
results.
Our
loans and investments may be subject to fluctuations in interest
rates which may not be adequately protected, or protected at
all, by our hedging strategies.
Our current balance sheet investment program emphasizes loans
with both floating interest rates and fixed interest
rates. Floating rate investments earn interest at rates that
adjust from time to time (typically monthly) based upon an index
(typically LIBOR), allowing this portion of our portfolio to be
insulated from changes in value due specifically to changes in
rates. Fixed interest rate investments, however, do not have
adjusting interest rates and, as prevailing interest rates
change, the relative value of the fixed cash flows from these
investments will cause potentially significant changes in value.
Depending on market conditions, fixed rate assets may become a
greater portion of our new loan originations. We may employ
various hedging strategies to limit the effects of changes in
interest rates (and in some cases credit spreads), including
engaging in interest rate swaps, caps, floors and other interest
rate derivative products. No strategy can completely insulate us
from the risks associated with interest rate changes and there
is a risk that they may provide no protection at all and
potentially compound the impact of changes in interest rates.
Hedging transactions involve certain additional risks such as
counterparty risk, the legal enforceability of hedging
contracts, the early repayment of hedged transactions and the
risk that unanticipated and significant changes in interest
rates may cause a significant loss of basis in the contract and
a change in current period expense. We cannot make assurances
that we will be able to enter into hedging transactions or that
such hedging transactions will adequately protect us against the
foregoing risks. In addition, cash flow hedges which are not
perfectly correlated (and appropriately designated and
documented as such) with a variable rate financing will impact
our reported income as gains, and losses on the ineffective
portion of such hedges will be recorded.
Hedging
instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by
any U.S. or foreign governmental authorities and involve risks
and costs.
The cost of using hedging instruments increases as the period
covered by the instrument lengthens and during periods of rising
and volatile interest rates. We may increase our hedging
activity and thus increase our hedging costs during periods when
interest rates are volatile or rising and hedging costs have
increases.
24
In addition, hedging instruments involve risk since they often
are not traded on regulated exchanges, guaranteed by an exchange
or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial
responsibility or segregation of customer funds and positions.
Furthermore, the enforceability of agreements underlying
derivative transactions may depend on compliance with applicable
statutory and commodity and other regulatory requirements and,
depending on the identity of the counterparty, applicable
international requirements. The business failure of a hedging
counterparty with whom we enter into a hedging transaction will
most likely result in a default. Default by a party with whom we
enter into a hedging transaction may result in the loss of
unrealized profits and force us to cover our resale commitments,
if any, at the then current market price. Although generally we
will seek to reserve the right to terminate our hedging
positions, it may not always be possible to dispose of or close
out a hedging position without the consent of the hedging
counterparty, and we may not be able to enter into an offsetting
contract to cover our risk. We cannot assure you that a liquid
secondary market will exist for hedging instruments purchased or
sold, and we may be required to maintain a position until
exercise or expiration, which could result in losses.
We may
enter into derivative contracts that could expose us to
contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our
investment strategy involves entering into derivative contracts
that could require us to fund cash payments in the future under
certain circumstances (e.g., the early termination of the
derivative agreement caused by an event of default or other
early termination event, or the decision by a counterparty to
request margin securities it is contractually owed under the
terms of the derivative contract). The amount due would be equal
to the unrealized loss of the open swap positions with the
respective counterparty and could also include other fees and
charges. These economic losses will be reflected in our
financial results of operations, and our ability to fund these
obligations will depend on the liquidity of our assets and
access to capital at the time, and the need to fund these
obligations could adversely impact our financial condition.
Changes
in values of our derivative contracts could adversely affect our
liquidity and financial condition.
Certain of our derivative contracts, which are designed to hedge
interest rate risk associated with a portion of our loans and
investments, could require the funding of additional cash
collateral for changes in the market value of these contracts.
Due to the recent volatility in the financial markets, the value
of these contracts have declined substantially.
As a result, as of December 31, 2008, we funded
approximately $46.5 million in cash related to these
contracts. If we continue to experience significant changes in
the outlook of interest rates, these contracts could continue to
decline in value, which would require additional cash to be
funded. However, at maturity the value of these contracts return
to par and all cash will be recovered. We may not have available
cash to meet these requirements, which could result in the early
termination of these derivatives, leaving us exposed to interest
rate risk associated with these loans and investments, which
could adversely impact our financial condition.
We are
subject to certain counterparty risks related to our derivative
contracts.
We periodically hedge a portion of our interest rate risk by
entering into derivative financial instrument contracts. As a
result of the global credit crises, there is a risk that
counterparties could fail, shut down, file for bankruptcy or be
unable to pay out contracts. The failure of a counterparty that
holds collateral that we post in connection with certain
interest rate swap agreements could result in the loss of such
collateral.
Risks
Related to Our Corporate and Ownership Structure
We are
substantially controlled by ACM and
Mr. Kaufman.
Mr. Ivan Kaufman, our chairman, chief executive officer and
president and the chief executive officer of ACM, beneficially
owns approximately 92% of the outstanding membership interests
of ACM. At December 2007, ACM owned approximately
3.8 million operating partnership units, representing a 16%
limited partnership interest in our operating partnership. The
operating partnership units were redeemable for cash or, at our
election, for shares of our common stock generally on a
one-for-one basis. Each of the operating partnership units ACM
owned was paired with one share of our special voting preferred
stock, each of which entitled ACM to one vote on all matters
25
submitted to a vote of our stockholders. In June 2008, ACM
exercised its right to redeem its approximate 3.8 million
operating partnership units in our operating partnership for
shares of our common stock on a one-for-one basis. In addition,
the special voting preferred shares paired with each operating
partnership unit, pursuant to a pairing agreement, were redeemed
simultaneously and cancelled. As a result of this conversion and
its ownership of an additional 1,607,254 shares of our
common stock, ACM currently has 21.4% of the voting power of our
outstanding stock. As a result of Mr. Kaufmans
beneficial ownership of stock held by ACM as well as his
beneficial ownership of an additional 124,549 shares of our
common stock, Mr. Kaufman currently has 21.9% of the voting
power of our outstanding stock. Because of his position with us
and our manager and his ability to effectively vote a
substantial minority of our outstanding stock, Mr. Kaufman
has significant influence over our policies and strategy.
Our
charter as amended generally does not permit ownership in excess
of 7.0% of our capital stock, and attempts to acquire our
capital stock in excess of this limit are ineffective without
prior approval from our board of directors.
For the purpose of preserving our REIT qualification, our
charter generally prohibits direct or constructive ownership by
any person of more than 7.0% (by value or by number of shares,
whichever is more restrictive) of the outstanding shares of our
common stock or 7.0% (by value) of our outstanding shares of
capital stock. For purposes of this calculation, warrants held
by such person will be deemed to have been exercised if such
exercise would result in a violation. Our charters
constructive ownership rules are complex and may cause the
outstanding stock owned by a group of related individuals or
entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than
these percentages of the outstanding stock by an individual or
entity could cause that individual or entity to own
constructively in excess of these percentages of the outstanding
stock and thus be subject to our charters ownership limit.
Any attempt to own or transfer shares of our common or preferred
stock in excess of the ownership limit without the consent of
the board of directors will result in the shares being
automatically transferred to a charitable trust or otherwise be
void.
We granted ACM and Mr. Kaufman, as its controlling equity
owner, an exemption from the ownership limitation contained in
our charter in order to acquire the approximately
3.8 million shares of special voting preferred stock that
ACM subsequently converted into common stock in June 2008. In
2007, we granted Mr. C. Michael Kojaian, one of our
directors, an exemption from this ownership limitation so that
he may own up to 8.3% of the number of shares of our common
stock that may be outstanding at any time.
Our
staggered board and other provisions of our charter and bylaws
may prevent a change in our control.
Our board of directors is divided into three classes of
directors. The current terms of the Class I, Class II
and Class III directors will expire in 2010, 2011 and 2009,
respectively. Directors of each class are chosen for three year
terms upon the expiration of their current terms, and each year
one class of directors is elected by the stockholders. The
staggered terms of our directors may reduce the possibility of a
tender offer or an attempt at a change in control, even though a
tender offer or change in control might be in the best interest
of our stockholders. In addition, our charter and bylaws also
contain other provisions that may delay or prevent a transaction
or a change in control that might involve a premium price for
our common stock or otherwise be in the best interest of our
stockholders.
Risks
Related to Conflicts of Interest with Our Manager
We are
dependent on our manager with whom we have conflicts of
interest.
We have only 32 employees, including Messrs. Weber,
Fogel, Felletter, Horn, Guziewicz, and are dependent upon our
manager to provide services to us that are vital to our
operations. ACM, our manager currently has approximately 21.4%
of the voting power of the outstanding shares of our capital
stock and Mr. Kaufman, our chairman and chief executive
officer and the chief executive officer of ACM, beneficially
owns these shares. Mr. Martello, one of our directors, is
the chief operating officer of Arbor Management, LLC (the
managing member of ACM) and a trustee of two trusts which own
minority membership interests in ACM. Mr. Elenio, our chief
financial officer and treasurer, is the chief financial officer
of ACM. Each of Messrs. Kaufman, Martello, Elenio,
26
Horn, Weber, Kilgore are members of ACMs executive
committee and own minority membership interests in ACM.
Mr. Fogel also owns a minority membership interest in ACM.
We may enter into transactions with ACM outside the terms of the
management agreement with the approval of a majority vote of the
independent members of our board of directors. Transactions
required to be approved by a majority of our independent
directors include, but are not limited to, our ability to
purchase securities, mortgages and other assets from ACM or to
sell securities and assets to ACM. ACM 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 ACM may also make loans to the same borrower or to
borrowers that are under common control. Additionally, our
policies and those of ACM may require us to enter into
intercreditor agreements in situations where loans are made by
us and ACM 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 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 ACMs 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.
27
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.
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.
|
Even
if we remain qualified as a REIT, we may face other tax
liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be
subject to certain federal, state and local taxes on our income
and assets, including taxes on any undistributed income, tax on
income from some activities conducted as a result of a
foreclosure, and state or local income, property and transfer
taxes, such as mortgage recording taxes. Any of these taxes
would decrease cash available for distribution to our
stockholders. In addition, in order to meet the REIT
qualification requirements, or to avert the imposition of a 100%
tax that applies to certain gains derived by a REIT from dealer
property or inventory, we may hold some of our assets through
taxable subsidiary corporations.
The
taxable mortgage pool rules may increase the taxes
that we or our stockholders may incur, and may limit the manner
in which we effect future securitizations.
Certain of our securitizations have resulted in the creation of
taxable mortgage pools for federal income tax purposes. So long
as 100% of the equity interests in a taxable mortgage pool are
owned by an entity that qualifies as a REIT, including our
subsidiary Arbor Realty SR, Inc., we would generally not be
adversely affected by the characterization of the securitization
as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or
other benefits, stockholders with net operating losses, and
certain tax-exempt stockholders that are subject to unrelated
business income tax, could be subject to increased taxes on a
portion of their dividend income from us that is attributable to
the taxable mortgage pool. In addition, to the extent that our
stock is owned by tax-exempt disqualified
organizations, such as certain government-related entities
that are not subject to tax on unrelated business income, under
recently issued IRS guidance, we could incur a corporate level
tax on a portion of our income from the taxable mortgage pool.
In that case, we may reduce the amount of our distributions to
any disqualified organization whose stock ownership gave rise to
the tax. Moreover, we could be
28
precluded from selling equity interests in these securitizations
to outside investors, or selling any debt securities issued in
connection with these securitizations that might be considered
to be equity interests for tax purposes. These limitations may
prevent us from using certain techniques to maximize our returns
from securitization transactions.
Complying
with REIT requirements may cause us to forego otherwise
attractive opportunities.
To qualify as a REIT for federal income tax purposes we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. We may be required to make distributions
to stockholders at disadvantageous times or when we do not have
funds readily available for distribution. Thus, compliance with
the REIT requirements may hinder our ability to operate solely
on the basis of maximizing profits.
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 25% of the value of our total assets may be
represented by securities of one or more taxable REIT
subsidiaries. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct such failure
within 30 days after the end of the calendar quarter to
avoid losing our REIT status and suffering adverse tax
consequences. As a result, we may be required to liquidate
otherwise attractive investments.
Liquidation
of collateral may jeopardize our REIT status.
To continue to qualify as a REIT, we must comply with
requirements regarding our assets and our sources of income. If
we are compelled to liquidate investments to satisfy our
obligations to our lenders, we may be unable to comply with
these requirements, ultimately jeopardizing our status as a REIT.
We may
be unable to generate sufficient revenue from operations to pay
our operating expenses and to pay dividends to our
stockholders.
As a REIT, we are generally required to distribute at least 90%
of our taxable income each year to our stockholders. In order to
qualify for the tax benefits accorded to REITs, we intend to pay
quarterly dividends and to make distributions to our
stockholders in amounts such that we distribute all or
substantially all of our taxable income each year, subject to
certain adjustments. However, our ability to make distributions
may be adversely affected by the risk factors described in this
report. In the event of a downturn in our operating results and
financial performance or unanticipated declines in the value of
our asset portfolio, we may be unable to declare or pay
quarterly dividends or make distributions to our stockholders.
The timing and amount of dividends are in the sole discretion of
our board of directors, which considers, among other factors,
our earnings, financial condition, debt service obligations and
applicable debt covenants, REIT qualification requirements and
other tax considerations and capital expenditure requirements as
our board may deem relevant from time to time.
Among the factors that could adversely affect our results of
operations and impair our ability to make distributions to our
stockholders are:
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our ability to make profitable structured finance investments;
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|
defaults in our asset portfolio or decreases in the value of our
portfolio;
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|
the fact that anticipated operating expense levels may not prove
accurate, as actual results may vary from estimates; and
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|
increased debt service requirements, including those resulting
from higher interest rates on variable rate indebtedness.
|
29
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.
In order to qualify as a REIT, we must generally, among other
requirements, distribute at least 90% of our taxable income,
subject to certain adjustments, to our stockholders each year.
To the extent that we satisfy the distribution requirement, but
distribute less than 100% of our taxable income, we will be
subject to federal corporate income tax on our undistributed
taxable income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount that we pay out to
our stockholders in a calendar year is less than a minimum
amount specified under federal tax laws.
From time to time, we may generate taxable income greater than
our net income for financial reporting purposes, or our taxable
income may be greater than our cash flow available for
distribution to stockholders (for example, where a borrower
defaults and an asset is deem impaired resulting in the
recording of a loan loss provision). If we do not have other
funds available in these situations we could be required to
borrow funds, sell investments and our equity securities 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.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our common stock.
At any time, the federal income tax laws governing REITs or the
administrative interpretations of those laws may change. Any
such changes may have retroactive effect, and could adversely
affect us or our stockholders. Legislation enacted in 2003 and
extended in 2006 generally reduced the federal income tax rate
on most dividends paid by corporations to individual investors
to a maximum of 15% (through 2010). REIT dividends, with limited
exceptions, will not benefit from the rate reduction, because a
REITs income generally is not subject to corporate level
tax. As such, this legislation could cause shares in non-REIT
corporations to be a more attractive investment to individual
investors than shares in REITs, and could have an adverse effect
on the value of our common stock.
Restrictions
on share accumulation in REITs could discourage a change of
control of us.
In order for us to qualify as a REIT, not more than 50% of the
value of our outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals during the
last half of a taxable year.
In order to prevent five or fewer individuals from acquiring
more than 50% of our outstanding shares and a resulting failure
to qualify as a REIT, our charter provides that, subject to
certain exceptions, no person, including entities, may own, or
be deemed to own by virtue of the attribution provisions of the
Internal Revenue Code, more than 7.0% of the aggregate value or
number of shares (whichever is more restrictive) of our
outstanding common stock, or more than 7.0%, by value, of our
outstanding shares of capital stock of all classes, in the
aggregate. For purposes of the ownership limitations, warrants
held by a person will be deemed to have been exercised.
Shares of our stock that would otherwise be directly or
indirectly acquired or held by a person in violation of the
ownership limitations are, in general, automatically transferred
to a trust for the benefit of a charitable beneficiary, and the
purported owners interest in such shares is void. In
addition, any person who acquires shares in excess of these
limits is obliged to immediately give written notice to us and
provide us with any information we
30
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. At
December 2007, Arbor Commercial Mortgage owned
3,776,069 shares of our special voting preferred stock
which it subsequently converted to common stock in June 2008.
During 2007 we granted Mr. C. Michael Kojaian, one of our
directors, an exemption from the ownership limitation contained
in our charter. The exemption granted to Mr. Kojaian sets
his ownership limitation at 8.3%.
While these restrictions are designed to prevent any five
individuals from owning more than 50% of our shares, they could
also discourage a change in control of our company. These
restrictions may also deter tender offers that may be attractive
to stockholders or limit the opportunity for stockholders to
receive a premium for their shares if an investor makes
purchases of shares to acquire a block of shares.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Internal Revenue Code may limit our
ability to hedge our operations. Under current law, any income
that we generate from derivatives or other transactions intended
to hedge indebtedness incurred to acquire and carry qualifying
real estate assets or to manage the risk of currency
fluctuations with respect to other qualifying income will not be
taken into account in applying the REIT income tests, provided
certain identification requirements are met. Other income
generated from derivatives or other hedging transactions would
generally constitute non-qualifying income for purposes of the
REIT income tests. 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.
31
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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.
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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 2008.
32
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock has been listed on the New York Stock Exchange
under the symbol ABR since our initial public
offering in April 2004. The following table sets forth for the
indicated periods the high and low sales prices for our common
stock, as reported on the New York Stock Exchange, and the
dividends declared and paid with respect to such periods.
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Dividends
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High
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Low
|
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Declared
|
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|
2007
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|
|
|
|
|
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|
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First Quarter
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|
$
|
34.45
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|
|
$
|
28.01
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|
|
|
$0.62
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|
Second Quarter
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|
$
|
32.13
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|
|
$
|
25.41
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|
|
|
$0.62
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|
Third Quarter
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|
$
|
26.48
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|
$
|
13.91
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|
|
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$0.62
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Fourth Quarter(1)
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|
$
|
21.26
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|
$
|
16.00
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|
|
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$0.62
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2008
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First Quarter
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|
$
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18.80
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|
$
|
13.46
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$0.62
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Second Quarter
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|
$
|
18.18
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|
|
$
|
8.71
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|
|
|
$0.62
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Third Quarter
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|
$
|
12.49
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|
$
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7.50
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$0.62
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Fourth Quarter(2)
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|
$
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10.25
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$
|
1.77
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|
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|
$0.24
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(1) |
|
On January 25, 2008, we declared distributions of $0.62 per
share of common stock, payable with respect to the three months
ended December 31, 2007 to stockholders of record at the
close of business on February 15, 2008. |
|
(2) |
|
In January 2009, we elected not to pay a common stock
distribution with respect to the quarter ended December 31,
2008 and we believe the dividends paid fully satisfy our 2008
REIT distribution requirements. |
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. 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 March 6, 2009, the closing sale price for our common
stock, as reported on the NYSE, was $0.65. As of March 6,
2009, there were 12,076 record holders of our common stock,
including persons holding shares in broker accounts under street
names.
Equity
Compensation Plan Information
Information regarding securities authorized for issuance under
our equity compensation plans which are set forth under the
caption Equity Compensation Plan Information of the
2009 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, 2008, 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.©
2009.
33
Arbor
Realty Trust, Inc.
Total
Return Performance
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Period Ending
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Index
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04/7/04
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12/31/04
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12/31/05
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12/31/06
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12/31/07
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12/31/08
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Arbor Realty Trust, Inc.
|
|
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100.00
|
|
|
|
124.28
|
|
|
|
142.84
|
|
|
|
182.82
|
|
|
|
108.85
|
|
|
|
23.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Russell 2000
|
|
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100.00
|
|
|
|
109.23
|
|
|
|
114.21
|
|
|
|
135.18
|
|
|
|
133.07
|
|
|
|
88.11
|
|
|
|
|
|
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NAREIT All REIT Index
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100.00
|
|
|
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124.09
|
|
|
|
134.37
|
|
|
|
180.53
|
|
|
|
148.34
|
|
|
|
92.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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 2008, we issued 559,354 shares of common stock to ACM as
incentive compensation earned under the management agreement for
the quarters ended December 31, 2007, March 31, 2008
and June 30, 2008. The issuances of these
559,354 shares were not registered under the Securities Act
in reliance on the exemption from registration provided by
Section 4(2) thereof.
34
|
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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 for the periods indicated. The selected
historical consolidated financial information presented below
under the captions Consolidated Statement of Operations
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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|
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|
|
|
|
|
|
|
|
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Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
204,135,097
|
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
|
$
|
121,109,157
|
|
|
$
|
57,927,230
|
|
Other income
|
|
|
3,232,795
|
|
|
|
39,503
|
|
|
|
867,157
|
|
|
|
498,250
|
|
|
|
42,265
|
|
Total revenue
|
|
|
207,367,892
|
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
121,607,407
|
|
|
|
57,969,495
|
|
Interest expense
|
|
|
108,656,702
|
|
|
|
147,710,194
|
|
|
|
92,693,419
|
|
|
|
45,745,424
|
|
|
|
19,372,575
|
|
Other-than-temporary impairment
|
|
|
17,573,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
132,000,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees related party
|
|
|
3,539,854
|
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
12,430,546
|
|
|
|
3,614,830
|
|
Other expenses
|
|
|
20,040,131
|
|
|
|
14,974,230
|
|
|
|
11,291,352
|
|
|
|
10,216,873
|
|
|
|
4,558,592
|
|
Total expenses
|
|
|
281,810,667
|
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
68,392,843
|
|
|
|
27,545,997
|
|
(Loss) income from equity affiliates
|
|
|
(2,347,296
|
)
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
8,453,440
|
|
|
|
525,000
|
|
Income allocated to minority interest
|
|
|
4,439,773
|
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
11,280,981
|
|
|
|
5,875,816
|
|
Provision for income taxes
|
|
|
|
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(81,229,844
|
)
|
|
|
84,533,878
|
|
|
|
50,413,807
|
|
|
|
50,387,023
|
|
|
|
25,072,682
|
|
(Loss) earnings per share, basic
|
|
|
(3.54
|
)
|
|
|
4.44
|
|
|
|
2.94
|
|
|
|
2.99
|
|
|
|
1.81
|
|
(Loss) earnings per share, diluted(1)
|
|
|
(3.54
|
)
|
|
|
4.44
|
|
|
|
2.93
|
|
|
|
2.98
|
|
|
|
1.78
|
|
Dividends declared per common share(2)(3)(4)(5)
|
|
|
2.10
|
|
|
|
2.46
|
|
|
|
2.57
|
|
|
|
2.24
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
2,181,683,619
|
|
|
$
|
2,592,093,930
|
|
|
$
|
1,993,525,064
|
|
|
$
|
1,246,825,906
|
|
|
$
|
831,783,364
|
|
Related party loans, net
|
|
|
|
|
|
|
|
|
|
|
7,752,038
|
|
|
|
7,749,538
|
|
|
|
7,749,538
|
|
Total assets
|
|
|
2,579,236,489
|
|
|
|
2,901,493,534
|
|
|
|
2,204,345,211
|
|
|
|
1,396,075,357
|
|
|
|
912,295,177
|
|
Repurchase agreements
|
|
|
60,727,789
|
|
|
|
244,937,929
|
|
|
|
395,847,359
|
|
|
|
413,624,385
|
|
|
|
409,109,372
|
|
Collateralized debt obligations
|
|
|
1,152,289,000
|
|
|
|
1,151,009,000
|
|
|
|
1,091,529,000
|
|
|
|
299,319,000
|
|
|
|
|
|
Junior subordinated notes to subsidiary trust issuing preferred
securities
|
|
|
276,055,000
|
|
|
|
276,055,000
|
|
|
|
222,962,000
|
|
|
|
155,948,000
|
|
|
|
|
|
Notes payable
|
|
|
518,435,437
|
|
|
|
596,160,338
|
|
|
|
94,574,240
|
|
|
|
115,400,377
|
|
|
|
165,771,447
|
|
Note payable related party
|
|
|
4,200,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000,000
|
|
|
|
|
|
Total liabilities
|
|
|
2,298,241,821
|
|
|
|
2,433,376,191
|
|
|
|
1,842,765,882
|
|
|
|
1,044,775,284
|
|
|
|
589,292,273
|
|
Minority interest in operating partnership units
|
|
|
|
|
|
|
72,854,258
|
|
|
|
65,468,252
|
|
|
|
63,691,556
|
|
|
|
60,249,731
|
|
Minority interesting in consolidated entity
|
|
|
(10,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
281,005,649
|
|
|
|
395,263,085
|
|
|
|
296,111,077
|
|
|
|
287,608,517
|
|
|
|
262,753,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations(6)
|
|
$
|
290,565,879
|
|
|
$
|
2,007,838,793
|
|
|
$
|
1,458,153,387
|
|
|
$
|
953,937,330
|
|
|
$
|
782,301,133
|
|
|
|
|
(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
|
35
|
|
|
|
|
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)
|
|
In January 2009, we elected not to
pay a common stock distribution with respect to the quarter
ended December 31, 2008 and we believe the dividends paid
fully satisfy our 2008 REIT distribution requirements.
|
|
(3)
|
|
On January 25, 2008, our board
of directors authorized and we declared a distribution to our
stockholders of $0.62 per share of common stock, payable with
respect to the quarter ended December 31, 2007, to
stockholders of record at the close of business on
February 15, 2008. We made this distribution on
February 26, 2008.
|
|
(4)
|
|
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.
|
|
(5)
|
|
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.
|
|
(6)
|
|
Year ended December 31, 2005
originations are net of a $59.4 million participation in
one of our loans.
|
36
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion in conjunction with
the sections of this report entitled Risk Factors,
Forward-Looking Statements, and Selected
Consolidated Financial Information of Arbor Realty Trust, Inc.
and Subsidiaries and the historical consolidated financial
statements of Arbor Realty Trust, Inc. and Subsidiaries,
including related notes, included elsewhere in this report.
Overview
We are a Maryland corporation that was formed in June 2003 to
invest in multi-family and commercial real estate-related
bridge, junior participating interests in first mortgages,
mezzanine loans, preferred and direct equity and, in limited
cases, discounted mortgage notes and other real estate-related
assets, which we refer to collectively as structured finance
investments. We have also invested 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 decreases or the cost of borrowings increases,
this will have a negative impact on earnings. However, 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 and
liquidity.
|
|
|
|
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. If there are increases in
foreclosures and non-performing loans and investments, certain
of these expenses, particularly employee compensation expenses
and asset management related expenses, may increase.
|
We are organized and conduct our operations to qualify as a real
estate investment trust, or a REIT and to comply with the
provisions of the Internal Revenue Code with respect thereto. A
REIT is generally not subject to federal income tax on that
portion of its REIT-taxable income which is distributed to its
stockholders provided that at least 90% of its REIT-taxable
income is distributed and provided that certain other
requirements are met. Certain of our assets that produce
non-qualifying income may be held in taxable REIT subsidiaries.
Unlike other subsidiaries of a REIT, the income of a taxable
REIT subsidiary is subject to Federal and state income taxes. We
did not record a provision for income taxes related to the
assets that are held in taxable REIT subsidiaries for the year
ended December 31, 2008.
On July 1, 2003, ACM, our manager, contributed
$213.1 million of structured finance assets, encumbered by
$169.2 million of borrowings in exchange for an equity
interest in our operating partnership represented by
3,146,724 units of limited partnership interest and 629,345
warrants to acquire additional units of limited partnership
interest. In addition, certain employees of ACM became our
employees. We are externally managed and advised by ACM and pay
ACM a management fee in accordance with a management agreement.
ACM originates, underwrites and services all structured finance
assets on behalf of our operating partnership.
Concurrently with ACMs asset contribution, we consummated
a private placement of 1.6 million units, each consisting
of five shares of our common stock and one warrant to purchase
one share of common stock, for $75.00 per unit, resulting in
gross proceeds of $120.2 million. Gross proceeds from the
private placement combined with the concurrent equity
contribution by ACM totaled approximately $164.1 million in
equity capital.
On April 13, 2004, we sold 6,750,000 shares of our
common stock at a price to the public of $20.00 per share, for
net proceeds of approximately $124.4 million after
deducting the underwriting discount and the other estimated
37
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 portion of the
over-allotment option granted to the underwriters of our initial
public offering. 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. In
addition, in June 2007, we issued 2,700,000 shares of
common stock in a public offering.
Sources
of Operating Revenues
We derive our operating revenues primarily through interest
received from making real estate-related bridge, mezzanine and
junior participation loans and preferred equity investments.
Interest income earned on these loans and investments
represented approximately 96%, 90%, and 93% of our total
revenues in 2008, 2007, and 2006, respectively.
Interest income is also derived from profits of equity
participation interests. In 2008, 2007 and 2006 interest income
from participation interests represented approximately 1%, 10%,
and 6% of total revenues, respectively.
We also derive interest income from our investments in CRE
mortgage related securities. Interest on these investments
represented 2% of our total revenues in 2008 and less than 1% of
our total revenues in 2007 and 2006.
Property operating income is derived from our real estate owned.
In 2008, property operating income represented 1% of total
revenue. No such income was recognized in 2007 and 2006.
In addition, we derived operating revenue from income from swap
derivatives, which represented income from interest rate swaps
on junior subordinated notes relating to trust preferred
securities. In 2006, income from swap derivatives represented
less than 1% of our total revenues. There was no such revenue in
2008 and 2007.
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 2008, 2007 and 2006.
(Loss)
Income from Equity Affiliates and Gain on Sale of Loans and Real
Estate
We derive income from equity affiliates relating to joint
ventures that were formed with equity partners to acquire,
develop
and/or sell
real estate assets. These joint ventures are not majority owned
or controlled by us, and are not consolidated in our financial
statements. These investments are recorded under either the
equity or cost method of accounting as appropriate. We record
our share of net income and losses from the underlying
properties on a single line item in the consolidated statements
of operations as (loss) income from equity affiliates. In 2008,
loss from equity affiliates totaled $2.3 million. In 2007
and 2006, income from equity affiliates totaled
$34.6 million and $4.8 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, disposition at an
anticipated return and (2) real estate notes generally at a
discount from lenders in situations where the borrower wishes to
restructure and reposition its short-term debt and the lender
wishes to divest certain assets from its portfolio. No such
income has been recorded to date.
Significant
Accounting Estimates and Critical Accounting Policies
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with U.S. Generally Accepted Accounting Principles
(GAAP). The preparation of financial statements in
conformity with GAAP requires the use of estimates and
assumptions that could affect the reported amounts in our
consolidated financial statements. Actual results could differ
from these estimates. A summary of our significant accounting
policies is presented in Note 2 of the Notes to
Consolidated Financial Statements set forth in Item 8
hereof. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the
consolidated financial statements included in this report.
Certain of the accounting policies used in the preparation of
these consolidated financial statements are particularly
important for an understanding of the financial position and
results of
38
operations presented in the historical consolidated financial
statements included in this report and require the application
of significant judgment by management and, as a result, are
subject to a degree of uncertainty.
Loans and
Investments
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS 115) requires that
at the time of purchase, we designate a security as
held-to-maturity, available-for-sale, or trading depending on
ability and intent. We do not have any trading securities at
this time. Securities available-for-sale are reported at fair
value, while securities and investments held-to-maturity are
reported at amortized cost. Unrealized losses that are
determined to be other-than-temporary are recognized in earnings
in accordance with SFAS 115. The determination of
other-than-temporary impairment is a subjective process
requiring judgments and assumptions. The process may include,
but is not limited to, assessment of recent market events and
prospects for near term recovery, assessment of cash flows,
internal review of the underlying assets securing the
investments, credit of the issuer and the rating of the
security, as well as our ability and intent to hold the
investment. We closely monitor market conditions on which we
base such decisions.
In accordance with Emerging Issues Task Force (EITF)
99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets, we also assess certain of our held-to-maturity
securities, other than those of high credit quality, to
determine whether significant changes in estimated cash flows or
unrealized losses on these securities, if any, reflect a decline
in value which is other-than-temporary and, accordingly, written
down to its fair value against earnings. On a quarterly basis,
we review these changes in estimated cash flows, which could
occur due to actual prepayment and credit loss experience, to
determine if an other-than-temporary impairment is deemed to
have occurred. The determination of other-than-temporary
impairment is a subjective process requiring judgments and
assumptions. We calculate a revised yield based on the current
amortized cost of the investment, including any
other-than-temporary impairments recognized to date, and the
revised yield is then applied prospectively to recognize
interest income.
Loans held for investment are intended to be held-to-maturity
and, accordingly, are carried at cost, net of unamortized loan
origination costs and fees, loan purchase discounts, and net of
the allowance for loan losses when such loan or investment is
deemed to be impaired. We invest in preferred equity interests
that, in some cases, allow us to participate in a percentage of
the underlying 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.
Impaired
Loans and Allowance for Loan Losses
Loans are considered impaired when, based upon current
information and events, it is probable that we will be unable to
collect all amounts due for both principal and interest
according to the contractual terms of the loan agreement.
Specific valuation allowances are established for impaired loans
based on the fair value of collateral on an individual loan
basis. The fair value of the collateral is determined by
selecting the most appropriate valuation methodology, or
methodologies, among several generally available and accepted in
the commercial real estate industry. The determination of the
most appropriate valuation methodology is based on the key
characteristics of the collateral type. These methodologies
include the evaluation of operating cash flow from the property
during the projected holding period, and estimated sales value
of the collateral computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs, discounted at market
discount rates.
If upon completion of the valuation, the fair value of the
underlying collateral securing the impaired loan is less than
the net carrying value of the loan, an allowance is created with
a corresponding charge to the provision for loan losses. The
allowance for each loan is maintained at a level believed
adequate by management to absorb probable losses. We had a
$130.5 million allowance for loan losses at
December 31, 2008 related to ten loans in our portfolio
with an aggregate carrying value, net of reserves, of
approximately $312.7 million. At December 31, 2007, we
had a $2.5 million allowance for loan losses related to two
loans in our portfolio with an aggregate carrying value, net of
reserves, of approximately $58.5 million.
39
Repurchase
Obligations
In certain circumstances, we have financed the purchase of
investments from a counterparty through a repurchase agreement
with that same counterparty. We currently record these
investments in the same manner as other investments financed
with repurchase agreements, with the investment recorded as an
asset and the related borrowing under the repurchase agreement
as a liability on our consolidated balance sheet. Interest
income earned on the investments and interest expense incurred
on the repurchase obligations are reported separately on the
consolidated statement of operations. These transactions may not
qualify as a purchase by us under FSP
FAS 140-3
which is effective for fiscal years beginning after
November 15, 2008. We would be required to present the net
investment on our balance sheet as a derivative with the
corresponding change in fair value of the derivative being
recorded in the statement of operations. The value of the
derivative would reflect not only changes in the value of the
underlying investment, but also changes in the value of the
underlying credit provided by the counterparty. See Note 2
Summary of Significant Accounting Policies
Recently Issued Accounting Pronouncements of the
Notes to Consolidated Financial Statements set forth
in Item 8 hereof.
Capitalized
Interest
We capitalize interest in accordance with SFAS No. 58
Capitalization of Interest Costs in Financial Statements
that Include Investments Accounted for by the Equity
Method. This statement amended SFAS No. 34
Capitalization of Interest Costs to include
investments (equity, loans and advances) accounted for by the
equity method as qualifying assets of the investor while the
investee has activities in progress necessary to commence its
planned principal operations, provided that the investees
activities include the use of funds to acquire qualifying assets
for its operations. One of our joint ventures, which is
accounted for using the equity method, has used funds to acquire
qualifying assets for its planned principal operations. During
2007, the joint venture sold both of the acquired properties and
we discontinued the capitalization of interest on its remaining
investment in the joint venture as activities required under
SFAS No. 34 ceased to continue. We capitalized
$0.3 million and $0.9 million of interest during the
years ended December 31, 2007 and 2006, respectively,
relating to this investment. We did not capitalize interest
during the year ended December 31, 2008.
Revenue
Recognition
Interest Income. Interest income is recognized
on the accrual basis as it is earned from loans, investments and
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 from the purchase or
origination of the loan or security. 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 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. For the years
ended December 31, 2008, 2007 and 2006, we recorded
$1.0 million, $30.0 million and $13.2 million of
interest on such loans and investments, respectively.
Property operating income. Property operating
income represents operating income associated with the
operations of an office building recorded as real estate owned,
net. For the year ended December 31, 2008, we recorded
approximately $3.2 million of property operating income
relating to real estate owned. There was no property operating
income in 2007 or 2006.
40
Stock
Based Compensation
We record stock-based compensation expense at the grant date
fair value of the related stock-based award in accordance with
SFAS No. 123R, Accounting for Stock-Based
Compensation, (SFAS 123R). We measure the
compensation costs for these shares as of the date of the grant,
with subsequent re-measurement for any unvested shares granted
to non-employees with such amounts expensed against earnings, at
the grant date (for the portion that vest immediately) or
ratably over the respective vesting periods. The cost of these
grants is amortized over the vesting term using an accelerated
method in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 28 Accounting
for Stock Appreciation Rights and Other Variable Stock Options
or Award Plans (FIN 28), and
SFAS 123R. Dividends are paid on the restricted shares as
dividends are paid on shares of our common stock whether or not
they are vested. Stock based compensation was disclosed in our
Consolidated Statement of Operations under employee
compensation and benefits for employees and under
selling and administrative expense for non-employees.
Income
Taxes
We are organized and conduct our operations to qualify as a REIT
and to comply with the provisions of the Internal Revenue Code
with respect thereto. A REIT is generally not subject to federal
income tax on taxable income which is distributed to its
stockholders, provided that at least 90% of taxable income is
distributed and provided that certain other requirements are
met. Certain of our assets that produce non-qualifying income
are held in taxable REIT subsidiaries. Unlike other subsidiaries
of a REIT, the income of a taxable REIT subsidiary is subject to
federal and state income taxes.
In July 2006, the FASB released Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
FAS 109. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This
interpretation was effective January 1, 2007. The adoption
of FIN 48 did not have a material impact on our financial
results.
Variable
Interest Entities
In December 2003, the Financial Accounting Standards Board
issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46R) as a
revision to FIN No. 46, which requires a variable
interest entity (VIE) to be consolidated by its
primary beneficiary (PB). The PB is the party that
absorbs a majority of the VIEs anticipated losses
and/or a
majority of the expected returns.
On a quarterly basis, we evaluate our loans and investments and
investments in equity affiliates to determine whether they are
VIEs. This evaluation resulted in us determining that our bridge
loans, junior participation loans, mezzanine loans, preferred
equity investments and investments in equity affiliates were
potential variable interests. For each of these investments, we
have evaluated (1) the sufficiency of the fair value of the
entities equity investments at risk to absorb losses,
(2) that as a group the holders of the equity investments
at risk have (a) the direct or indirect ability through
voting rights to make decisions about the entities
significant activities, (b) the obligation to absorb the
expected losses of the entity and their obligations are not
protected directly or indirectly, (c) the right to receive
the expected residual return of the entity and their rights are
not capped, (3) substantially all of the entities
activities do not involve or are not conducted on behalf of an
investor that has disproportionately fewer voting rights in
terms of its obligation to absorb the expected losses or its
right to receive expected residual returns of the entity, or
both.
Entities that issue junior subordinated notes are considered
VIEs. However, 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 our investments were funded by
the entities that issued the junior subordinated notes, they are
not considered to be at risk. In addition, we have evaluated our
investments in
41
collateralized debt obligation securities and have determined
that the issuing entities are considered VIEs under the
provisions of FIN 46, but have determined that we are not
the primary beneficiary.
As of December 31, 2008, we have identified 45 loans and
investments which were made to entities determined to be VIEs.
However, for the 45 VIEs identified, we have determined that we
are not the primary beneficiaries and as such the VIEs should
not be consolidated in our financial statements. For all other
investments, we have determined they are not VIEs. As such, we
have continued to account for these loans and investments as a
loan or joint venture, as appropriate. A summary of our
identified VIEs is presented in Note 9 of the Notes
to Consolidated Financial Statements set forth in
Item 8 hereof.
Derivatives
and Hedging Activities
In accordance with SFAS No. 133, the carrying values
of interest rate swaps and the underlying hedged liabilities are
reflected at their fair value. As of December 31, 2008 we
have retained the services of Chatham Financial Corporation, a
Statement on Auditing Standards No. 70 (SAS
70), Service Organizations compliant, third
party financial services company to determine these fair values.
Changes in the fair value of these derivatives are either offset
against the change in the fair value of the hedged liability
through earnings or recognized in other comprehensive income
(loss) until the hedged item is recognized in earnings. The
ineffective portion of a derivatives change in fair value
is immediately recognized in earnings. Derivatives that do not
qualify for cash flow hedge accounting treatment are adjusted to
fair value through earnings.
Because the valuations of our hedging activities are based on
estimates, the fair value may change if our estimates are
inaccurate. For the effect of hypothetical changes in market
interest rates on our interest rate swaps, see Interest
Rate Risk in Quantitative and Qualitative
Disclosures About Market Risk, set forth in Item 7A
hereof.
Fair
Value Measurements
We adopted SFAS No. 157, Fair Value
Measurements for financial assets and liabilities
effective January 1, 2008. This standard defines fair
value, provides guidance for measuring fair value and requires
certain disclosures. This standard does not require any new fair
value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements.
Fair value is defined as the price at which an asset could be
exchanged in a current transaction between knowledgeable,
willing parties. A liabilitys fair value is defined as the
amount that would be paid to transfer the liability to a new
obligor, not the amount that would be paid to settle the
liability with the creditor. Where available, fair value is
based on observable market prices or parameters or derived from
such prices or parameters. Where observable prices or inputs are
not available, valuation models are applied. These valuation
techniques involve some level of management estimation and
judgment, the degree of which is dependent on the price
transparency for the instruments or market and the
instruments complexity.
Assets and liabilities disclosed at fair value are categorized
based upon the level of judgment associated with the inputs used
to measure their fair value. Hierarchical levels, defined by
SFAS 157 and directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
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Level 1 Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date. The types of assets and liabilities carried at
Level 1 fair value generally are government and agency
securities, equities listed in active markets, investments in
publicly traded mutual funds with quoted market prices and
listed derivatives.
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Level 2 Inputs (other than quoted prices
included in Level 1) are either directly or indirectly
observable for the asset or liability through correlation with
market data at the measurement date and for the duration of the
instruments anticipated life. Level 2 inputs include
quoted market prices in markets that are not active for an
identical or similar asset or liability, and quoted market
prices in active markets for a similar asset or liability. Fair
valued assets and liabilities that are generally included in
this category are non-government securities, municipal bonds,
certain hybrid financial instruments, certain mortgage and asset
backed
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42
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securities including CDO bonds, certain corporate debt, certain
commitments and guarantees, certain private equity investments
and certain derivatives.
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Level 3 Inputs reflect managements best
estimate of what market participants would use in pricing the
asset or liability at the measurement date. These valuations are
based on significant unobservable inputs that require a
considerable amount of judgment and assumptions. Consideration
is given to the risk inherent in the valuation technique and the
risk inherent in the inputs to the model. Generally, assets and
liabilities carried at fair value and included in this category
are certain mortgage and asset-backed securities, certain
corporate debt, certain private equity investments, certain
municipal bonds, certain commitments and guarantees and certain
derivatives.
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Determining which category an asset or liability falls within
the hierarchy requires significant judgment and we evaluate its
hierarchy disclosures each quarter.
At December 31, 2008, we measured certain financial assets
and financial liabilities at fair value on a recurring basis,
including available-for-sale securities and derivative financial
instruments. Fair values of our derivative financial instruments
were approximated on current market data received from financial
sources that trade such instruments and are based on prevailing
market data and derived from third party proprietary models
based on well recognized financial principles and reasonable
estimates about relevant future market conditions. These items
were included in other assets and other liabilities on the
consolidated balance sheet. In accordance with SFAS 157, we
incorporated credit valuation adjustments in the fair values of
its derivative financial instruments to reflect counterparty
nonperformance risk. In addition, the fair value of our
available-for-sale securities were approximated on current
market quotes received from financial sources that trade such
securities.
At December 31, 2008, we measured certain financial assets
and financial liabilities at fair value on a nonrecurring basis,
including loans and securities held-to-maturity. Fair values of
loans were estimated using discounted cash flow methodology,
using discount rates, which, in the opinion of management, best
reflect current market interest rates that would be offered for
loans with similar characteristics and credit quality. Loans are
designated as held for investment and are intended to be held to
maturity and, accordingly, are carried at cost, net of
unamortized loan origination costs and fees, loan purchase
discounts, and net of the allowance for loan losses when such
loan or investment is deemed to be impaired. We consider a loan
impaired when, based upon current information and events, it is
probable that it will be unable to collect all amounts due for
both principal and interest according to the contractual terms
of the loan agreement. We perform evaluations of its loans to
determine if the fair value of the underlying collateral
securing the impaired loan is less than the net carrying value
of the loan, which may result in an allowance and corresponding
charge to the provision for loan losses. In addition, the fair
values of our securities-held-to maturity were approximated on
current market quotes received from financial sources that trade
such securities.
Recently
Issued Accounting Pronouncements
For a discussion of the impact of new accounting pronouncements
on our financial condition or results of operations, see
Note 2 Summary of Significant Accounting
Policies Recently Issued Accounting
Pronouncements of the Notes to Consolidated
Financial Statements, set forth in Item 8 hereof.
Changes
in Financial Condition
Our loan portfolio balance, including our held-to-maturity
securities, decreased $352.2 million, or 14%, to
$2.2 billion at December 31, 2008, with a weighted
average current interest pay rate of 6.13%, as compared to
$2.6 billion, with a weighted average current interest pay
rate of 8.18%, at December 31, 2007. At December 31,
2008, advances on financing facilities totaled
$2.0 billion, with a weighted average funding cost of
3.51%, as compared to $2.3 billion, with a weighted average
funding cost of 6.16% at December 31, 2007.
In 2008, we originated 13 loans and investments totaling
$175.0 million, of which $163.9 million was funded as
of December 31, 2008. We also purchased seven CRE
collateralized debt obligation bond securities at a discounted
price of approximately $58.1 million with a face amount of
approximately $82.7 million. Of the new loans and
investments, eight were bridge loans totaling
$97.7 million, four were mezzanine loans totaling
43
$42.3 million, and one was a junior participating interest
totaling $35.0 million. We have received full satisfaction
of 25 loans totaling $512.4 million, partial repayment on
loans totaling $52.5 million and 16 loans were refinanced
during the year totaling $320.5 million. In addition, 19
loans totaling approximately $451.2 million were extended
in accordance with the extension options of the corresponding
loan agreements.
Since December 31, 2008, we have not originated any loans.
We have received $10.9 million for the repayment in full of
four loans, all of which were loans on properties that were
either sold or refinanced outside of Arbor.
Cash and cash equivalents decreased $21.4 million, or 96%,
to $0.8 million at December 31, 2008 compared to
$22.2 million at December 31, 2007. All highly liquid
investments with original maturities of three months or less are
considered to be cash equivalents. The decrease was primarily
due to approximately a $34.6 million increase in funding of
additional cash collateral for a portion of our interest rate
swaps whose value has declined as a result of reductions in the
projected LIBOR rates.
Restricted cash decreased $45.9 million, or 33%, to
$93.2 million at December 31, 2008 compared to
$139.1 million at December 31, 2007. Restricted cash
is kept on deposit with the trustees for our collateralized debt
obligations (CDOs), and primarily represents
proceeds from loan repayments which will be used to purchase
replacement loans as collateral for the CDOs. The decrease was
primarily due to the redeployment of funds during 2008 from
proceeds received near the end of 2007 from the full
satisfaction of loans held in the CDO and the transfer of loans
from other financing facilities to the CDOs.
Other assets increased $56.0 million, or 67%, to
$139.7 million at December 31, 2008 compared to
$83.7 million at December 31, 2007. The increase was
primarily due to a $34.6 million increase in funding
additional cash collateral for a portion of our interest rate
swaps whose value has declined as a result of reductions in the
projected LIBOR rates. See Item 7A Quantitative and
Qualitative Disclosures About Market Risk for further
information relating to our derivatives. The increase was also
due to a $16.5 million third party member receivable
recorded during the second quarter of 2008 in connection with
the Prime Outlets Member LLC (POM) transaction. This
amount reflects the third party members pro-rata portion
of the $48.5 million debt recorded from the consolidated
entity in notes payable at December 31, 2008. In addition,
in 2008, we paid approximately $4.8 million of margin calls
related to the financing of certain held-to-maturity securities,
as well as a $4.7 million increase in the fair value of
non-qualifying CDO basis swaps. These increases were partially
offset by a decrease of $5.4 million in deferred financing
costs associated with the amortization of costs associated with
our financing sources.
Securities held to maturity were $58.2 million at
December 31, 2008, and reflects the purchase of
$82.7 million of investment grade CRE collateralized debt
obligation bonds for $58.1 million during the second
quarter of 2008. A portion of the $24.6 million discount
received on the purchases of these bonds will be accreted into
interest income on an effective yield adjusted for actual
prepayment activity over the estimated life remaining of
5.8 years of the securities as a yield adjustment. During
the fourth quarter of 2008, we determined that one bond, with an
amortized cost of approximately $1.4 million, was
other-than-temporarily impaired, resulting in a
$1.4 million impairment charge to our financial statements.
We did not have any securities held-to-maturity at
December 31, 2007. See Note 5 of the Notes to
the Consolidated Financial Statements set forth in
Item 8 hereof for a further description of these
transactions.
Real estate owned, net was $46.5 million at
December 31, 2008, representing the net carrying value of
an office property which we foreclosed on during the second
quarter of 2008. In addition, we recorded a $41.4 million
first lien on the property in mortgage notes payable. See
Note 3 of the Notes to the Consolidated Financial
Statements set forth in Item 8 hereof for a further
description of these transactions.
Prepaid management fee increased $7.3 million, or 38%, to
$26.3 million at December 31, 2008 due to a
$7.3 million incentive management fee paid on the
$33 million of cash received in June 2008 from the
agreement to transfer 16.67% of our 24.17% interest in POM, one
of our equity affiliates. Upon the closing of this transaction,
which is expected to occur on or before June 26, 2009, we
will exchange our 16.67% interest in POM for approximately
$37 million of preferred and common operating partnership
units in another REIT, at which time the deferred management fee
will be recognized as expense. See Note 6 of the
Notes to the Consolidated Financial Statements set
forth in Item 8 hereof for further description of this
transaction.
44
Other liabilities increased $67.3 million, or 100%, from
$67.4 million at December 31, 2007 compared to
$134.6 million at December 31, 2008. The increase was
primarily due to a $68.3 million increase in unrealized
losses on the fair value of our interest rate swaps, due to a
reduction in LIBOR rates, with a corresponding offset to other
comprehensive loss.
In 2008, we recorded $16.2 million in other-than-temporary
impairment charges against our available-for-sale securities,
shares of common stock of CBRE Realty Finance, Inc.,
representing an adjustment to their fair value at
December 31, 2008. These securities had a fair value of
$0.5 million and $15.7 million at December 31,
2008 and December 31, 2007, respectively. As of
December 31, 2008, these securities have been in an
unrealized loss position for less than twelve months. Generally
accepted accounting principles in the United States (GAAP)
require that these securities are evaluated periodically to
determine whether a decline in their value is
other-than-temporary, though it is not intended to indicate a
permanent decline in value. We believe that based on recent
market events and the unfavorable prospects for near-term
recovery of value, that there is a lack of evidence to support
the conclusion that the fair value decline is temporary. Prior
to the third quarter of 2008, changes in the fair market value
of our available-for-sale securities were considered unrealized
gains or losses and were recorded as a component of other
comprehensive income or loss.
In June 2008, ACM, our manager, exercised its right to redeem
its 3,776,069 operating partnership units in the operating
partnership for shares of our common stock on a one-for-one
basis. As a result, ACMs operating partnership ownership
interest in us was reduced to zero and the balance of minority
interest was charged directly to equity in additional paid-in
capital, as of June 30, 2008. See Notes 8 and 12 of
the Notes to the Consolidated Financial Statements
set forth in Item 8 hereof for a further description of
this transaction.
In June 2008, we issued an aggregate of 70,000 shares of
restricted common stock under the stock incentive plan to
certain employees of ours and ACM. One third of the
70,000 shares of restricted stock granted to each of the
employees were vested as of the date of grant, another one third
will vest in June 2009, and the remaining third will vest in
June 2010.
In April 2008, 14,000 restricted shares were issued to
non-management members of the board of directors under the stock
incentive plan. One third of the restricted stock granted was
vested as of the date of grant, another one third will vest in
April 2009, and the remaining third will vest in April 2010.
In April 2008, we issued 216,740 shares of restricted
common stock under the stock incentive plan to certain employees
of ours and 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 2009, the third one-fifth
will vest in April 2010, the fourth one-fifth will vest in April
2011, and the remaining one-fifth will vest in April 2012.
ACM was paid an aggregate of 559,354 shares of common stock
for its fourth quarter 2007, first quarter 2008 and second
quarter 2008 incentive management fees during the year ended
December 31, 2008.
45
Comparison
of Results of Operations for Year Ended 2008 and 2007
The following table sets forth our results of operations for the
years ended December 31, 2008 and 2007:
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Year Ended December 31,
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Increase/(Decrease)
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2008
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2007
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Amount
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Percent
|
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Revenue:
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|
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Interest income
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$
|
204,135,097
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$
|
273,984,357
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$
|
(69,849,260
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)
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(25)%
|
Property operating income
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|
|
3,150,466
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|
|
|
|
|
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|
3,150,466
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nm
|
Other income
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|
|
82,329
|
|
|
|
39,503
|
|
|
|
42,826
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108%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
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207,367,892
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|
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|
274,023,860
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(66,655,968
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)
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(24)%
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|
|
|
|
|
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Expenses:
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|
|
|
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Interest expense
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|
108,656,702
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|
|
|
147,710,194
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|
|
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(39,053,492
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)
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(26)%
|
Employee compensation and benefits
|
|
|
8,110,003
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|
|
|
9,381,055
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(1,271,052
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)
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(14)%
|
Selling and administrative
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8,197,368
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|
|
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5,593,175
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|
|
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2,604,193
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47%
|
Property operating expenses
|
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|
2,980,901
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|
|
|
|
|
|
|
2,980,901
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nm
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Depreciation and amortization
|
|
|
751,859
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|
|
|
|
|
|
|
751,859
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nm
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Other-than-temporary impairment
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17,573,980
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|
|
|
|
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17,573,980
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|
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nm
|
Provision for loan losses
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|
132,000,000
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|
|
|
2,500,000
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|
|
|
129,500,000
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|
nm
|
Management fee related party
|
|
|
3,539,854
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|
|
|
25,004,975
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|
|
|
(21,465,121
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)
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(86)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
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|
281,810,667
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|
|
|
190,189,399
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|
|
|
91,621,268
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48%
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|
|
|
|
|
|
|
|
|
|
|
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(Loss) income before (loss) income from equity affiliates,
minority interest and provision for income taxes
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|
|
(74,442,775
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)
|
|
|
83,834,461
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|
|
(158,277,236
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)
|
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nm
|
(Loss) income from equity affiliates
|
|
|
(2,347,296
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)
|
|
|
34,573,594
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|
|
|
(36,920,890
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)
|
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nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest and provision for income
taxes
|
|
|
(76,790,071
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)
|
|
|
118,408,055
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|
|
(195,198,126
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)
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nm
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Income allocated to minority interest
|
|
|
4,439,773
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|
|
|
16,989,177
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(12,549,404
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)
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(74)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(Loss) income before provision for income taxes
|
|
|
(81,229,844
|
)
|
|
|
101,418,878
|
|
|
|
(182,648,722
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)
|
|
nm
|
Provision for income taxes
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|
|
|
|
|
|
16,885,000
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|
|
|
(16,885,000
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)
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nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(81,229,844
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)
|
|
$
|
84,533,878
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|
|
$
|
(165,763,722
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)
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Interest income decreased $69.8 million, or 25%, to
$204.1 million in 2008 from $274.0 million in 2007.
This decrease was due in part to the recognition of
$37.6 million of interest income from profits and equity
interests from our investment in equity affiliates during 2007
as compared to $1.3 million in 2008.
Excluding these transactions, interest income decreased
$33.5 million, or 14%, compared to the same period of the
prior year. This was primarily due to a 16% decrease in the
average yield on the assets from 9.34% in 2007 to 7.80% in 2008.
This decrease in yield was the result of a decrease in LIBOR
over the same period and a reduction in the yield on new
originations compared to higher yielding loan payoffs from the
same period in 2007. This was partially offset by a portion of
our portfolio having LIBOR floors and fixed rates of interest.
In addition, interest income from cash equivalents decreased
$4.5 million to $4.4 million for 2008 compared to
$8.9 million for 2007 as a result of decreased average
restricted and unrestricted cash balances as well as lower
interest rates.
Property operating income of $3.2 million in 2008
represents operating income associated with the operations of an
office building recorded as real estate owned, net. There was no
property operating income in 2007.
46
Other income increased $42,826, or 108%, to $82,329 in 2008 from
$39,503 in 2007. This was primarily due to increased
miscellaneous asset management fees on our loan and investment
portfolio.
Expenses
Interest expense decreased $39.1 million, or 26%, to
$108.7 million in 2008 from $147.7 million in 2007.
This decrease was primarily due to a 26% decrease in the average
cost of these borrowings from 6.76% for 2007 to 5.00% for 2008
due to a reduction in average LIBOR on the portion of our debt
that was floating over the same period. This decrease was also
due to $2.9 million in gains recorded in 2008 related to
the recognition of mark-to-market adjustments on certain of our
CDO basis swaps. In addition, there was a 1% decrease in the
average balance of our debt facilities from the year ended
December 31, 2007 as compared to the year ended
December 31, 2008 as a result of decreased leverage on our
portfolio due to the paying down of certain outstanding
indebtedness by repayment of loans, the transfer of assets to
our CDO vehicles which carry a lower cost of funds and from
available capital.
Employee compensation and benefits expense decreased
$1.3 million, or 14%, to $8.1 million in 2008 from
$9.4 million in 2007. These expenses represent salaries,
benefits, stock-based compensation related to employees, and
incentive compensation for those employed by us during these
periods. This decrease was primarily due to a decrease in
employee compensation and benefits, partially offset by an
increase in costs related to restricted stock awards granted to
employees in 2008.
Selling and administrative expense increased $2.6 million,
or 47%, to $8.2 million in 2008 from $5.6 million in
2007. These costs include, but are not limited to, professional
and consulting fees, marketing costs, insurance expense,
directors fees, licensing fees, travel and placement fees,
and stock-based compensation relating to the cost of restricted
stock granted to our directors and certain employees of our
manager. The increase was primarily due to expenses related to
the Prime Outlets transaction and other increases in
professional fees including general corporate legal expenses.
This increase was also due to $0.4 million of losses
recognized from the sales of two properties securing two bridge
loans during 2008. See Note 3 of the Notes to the
Consolidated Financial Statements set forth in Item 8
hereof for further details on these transactions.
Property operating expenses of $3.0 million in 2008
represents all expenses related to the operations of an office
building recorded as real estate owned, net. There were no
property operating expenses in 2007.
Depreciation and amortization expense of $0.8 million in
2008 represents depreciation on property, leasehold
improvements, and equipment associated with the consolidation of
an office building as real estate owned, net. There were no
depreciation and amortization expenses in 2007.
Other-than-temporary impairment charges of $17.6 million in
2008 primarily represents the recognition of a
$16.2 million impairment that was considered
other-than-temporary relating to the fair market value of our
available-for-sale securities at December 31, 2008. Prior
to September 30, 2008, changes in the fair market value of
our available-for-sale securities were considered unrealized
gains or losses and were recorded as a component of other
comprehensive income or loss. Other-than-temporary impairment
charges in 2008 also included $1.4 million for the
recognition of an impairment that was considered
other-than-temporary relating to one of our securities
held-to-maturity. These securities represent common stock and a
CDO bond security, both issued by CBRE, another commercial REIT.
There were no other-than-temporary impairment charges in 2007.
Provision for loan losses totaled $132.0 million for the
year ended December 31, 2008, and $2.5 million for the
year ended December 31, 2007. The provision recorded in
2008 was based on our normal quarterly loan reviews during the
year, where it was determined that ten loans with an aggregate
carrying value of $443.2 million, before reserves, became
impaired. We performed quarterly evaluations of the loans and
determined that the fair value of the underlying collateral
securing the impaired loans was less than the net carrying value
of the loan, resulting in us recording a $132.0 million
provision for loan losses. The provision recorded in 2007 was
based on our normal quarterly loan review at December 31,
2007, where it was determined that two loans with an aggregate
carrying value of $58.5 million, before reserves, were
impaired.
Management fees decreased $21.5 million, or 86%, to
$3.5 million in 2008 from $25.0 million in 2007. 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 incentive management
fees decreased by $21.8 million, or
47
100%, to $0 in 2008 from $21.8 million in 2007. This
decrease was due to losses in 2008, versus income in 2007,
primarily due to $132.0 million of provisions for loan
losses, along with other-than-temporary impairment charges on
our available-for-sale and held-to-maturity securities totaling
$17.6 million in 2008. This decrease was also due to
$72.2 million of income from profits and equity interests
in 2007. The base management fees increased by
$0.3 million, or 10%, to $3.5 million in 2008 from
$3.2 million in 2007. This increase is primarily due to
increased average stockholders equity directly
attributable to greater undistributed profits and capital raised
from the June 2007 public offering of our common stock.
Losses
or Income From Equity Affiliates
Losses from equity affiliates totaled $2.3 million in 2008.
Income from two of our investments in equity affiliates totaled
$34.6 million for 2007. The $2.3 million loss recorded
during 2008 reflects a portion of the joint ventures
losses from a $10.2 million equity investment, partially
offset by $0.7 million in income from two of our other
investments.
Income
Allocated to Minority Interest
Income allocated to minority interest decreased by
$12.5 million, or 74%, to $4.4 million in 2008 from
$17.0 million in 2007. These amounts represent the portion
of our income allocated to our manager as well as a third
partys interest in a consolidated subsidiary which holds a
note payable that is accruing interest expense. This decrease
was primarily due to a decrease in our managers limited
partnership interest in us. Our manager had a weighted average
limited partnership interest of 7.6% in our operating
partnership in 2008 compared to 16.6% in 2007. In June 2008, our
manager exercised its right to redeem its 3,776,069 operating
partnership units in our operating partnership for shares of our
common stock on a one-for-one basis. As a result, our
managers operating partnership ownership interest
percentage was reduced to zero at June 30, 2008. This
decrease was also due to a 43% decrease in the average income
before minority interest reduced by the provision for income
taxes for the first two quarters of 2008 as compared to all four
quarters of 2007. 2008 included a loss allocated to minority
interest of $0.3 million representing a third party
members share of a $1.0 million distribution received
from a profits interest. In addition, 2008 also included a gain
allocated to minority interest of $0.3 million representing
the portion of loss allocated to the third partys interest
in a consolidated subsidiary, which holds a note payable that is
accruing interest expense. This note payable is related to the
POM transaction discussed in Note 6 of the Notes to
the Consolidated Financial Statements set forth in
Item 8 hereof.
Provision
for Income Taxes
We are organized and conduct our operations to qualify as a REIT
for federal income tax purposes. As a REIT, we are generally not
subject to federal income tax on our REIT - taxable income
that we distribute to our stockholders, provided that we
distribute at least 90% of our REIT - taxable income and
meet certain other requirements. As of December 31, 2008
and 2007, we were in compliance with all REIT requirements and,
therefore, have not provided for income tax expense on our
REIT - taxable income for years ended December 31,
2008 and 2007.
Certain of our assets that produce non-qualifying income are
owned by our taxable REIT subsidiaries, the income of which is
subject to federal and state income taxes. During the year ended
December 31, 2007, we recorded a $16.9 million
provision on income from these taxable REIT subsidiaries. No
such provision had been recognized for the year ended
December 31, 2008. The provision for the year ended
December 31, 2007 resulted from $38.3 million of
pretax income from our taxable REIT subsidiaries.
48
Comparison
of Results of Operations for Year Ended 2007 and 2006
The following table sets forth our results of operations for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
|
$
|
101,150,956
|
|
|
59%
|
Income from swap derivative
|
|
|
|
|
|
|
696,960
|
|
|
|
(696,960
|
)
|
|
nm
|
Other income
|
|
|
39,503
|
|
|
|
170,197
|
|
|
|
(130,694
|
)
|
|
(77)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
100,323,302
|
|
|
58%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
147,710,194
|
|
|
|
92,693,419
|
|
|
|
55,016,775
|
|
|
59%
|
Employee compensation and benefits
|
|
|
9,381,055
|
|
|
|
6,098,826
|
|
|
|
3,282,229
|
|
|
54%
|
Selling and administrative
|
|
|
5,593,175
|
|
|
|
5,192,526
|
|
|
|
400,649
|
|
|
8%
|
Provision for loan losses
|
|
|
2,500,000
|
|
|
|
|
|
|
|
2,500,000
|
|
|
nm
|
Management fee related party
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
12,173,184
|
|
|
95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
73,372,837
|
|
|
63%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income from equity affiliates, minority interest
and provision for income taxes
|
|
|
83,834,461
|
|
|
|
56,883,996
|
|
|
|
26,950,465
|
|
|
47%
|
Income from equity affiliates
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
29,789,302
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
118,408,055
|
|
|
|
61,668,288
|
|
|
|
56,739,767
|
|
|
92%
|
Income allocated to minority interest
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
5,884,696
|
|
|
53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
101,418,878
|
|
|
|
50,563,807
|
|
|
|
50,855,071
|
|
|
101%
|
Provision for income taxes
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
16,735,000
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
|
$
|
34,120,071
|
|
|
68%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Interest income increased $101.2 million, or 59%, to
$274.0 million in 2007 from $172.8 million in 2006.
This increase was due in part to the recognition of
$37.6 million of interest income from profits and equity
interests from our investment in equity affiliates during 2007
as compared to $10.4 million in 2006.
Excluding these transactions, interest income increased
$74.0 million, or 46%, over the same period. This increase
was primarily due to a $938.7 million, or 63%, increase in
the average balance of the loan and investment portfolio from
$1.5 billion in 2006 to $2.4 billion in 2007 due to
increased loan and investment originations. This was partially
offset by an 11% decrease in the average yield on assets from
10.48% in 2006 to 9.34% in 2007. This decrease in yield was the
result of a reduction in yield on new originations compared to
higher yielding loan payoffs during 2006 and 2007, partially
offset by an increase in LIBOR over the same period. Interest
income from cash equivalents increased $4.2 million to
$8.9 million for 2007 compared to $4.7 million for
2006 as a result of increased restricted cash balances due to
the issuance of CDO III in December 2006.
Income from swap derivative totaled $0.7 million during
2006 and was the result of a change in accounting treatment
according to a new technical clarification of accounting for
interest rate swaps in 2006 on one of our junior subordinated
notes relating to trust preferred securities. This reflected the
cumulative fair value of the interest rate swap on one of our
trust preferred securities on the date it was deemed an
ineffective cash flow hedge. This swap was terminated in January
2007.
49
Other income decreased $0.1 million, or 77%, to
$0.1 million from $0.2 million in 2006. This was
primarily due to decreased miscellaneous asset management fees
on our loan and investment portfolio.
Expenses
Interest expense increased $55.0 million, or 59%, to
$147.7 million in 2007 from $92.7 million in 2006.
This increase was primarily due to an $897.0 million, or
70%, increase in the average balance of our debt facilities from
$1.3 billion in 2006 to $2.2 billion in 2007 as a
result of increased portfolio growth and financing facilities.
This was partially offset by a 5% decrease in the average cost
of these borrowings from 7.11% for 2006 to 6.76% for 2007, due
to reduced borrowing costs primarily as a result of an increase
in average CDO debt, combined with an increase in income from
interest rate swaps on our variable rate debt associated with
certain of our fixed rate loans, partially offset by an increase
in average LIBOR.
Employee compensation and benefits expense increased
$3.3 million, or 54%, to $9.4 million in 2007 from
$6.1 million in 2006. This increase was primarily due to
the expansion of staffing needs associated with the areas of
asset management, structured securitization and underwriting due
to the growth of the business and increased size of our
portfolio. These expenses represent salaries, benefits,
stock-based compensation related to employees, and incentive
compensation for those employed by us during these periods.
Selling and administrative expense increased $0.4 million,
or 8%, to $5.6 million in 2007 from $5.2 million in
2006. Theses costs include, but are not limited to, professional
and consulting fees, marketing costs, insurance expense,
directors fees, licensing fees, travel and placement fees,
and stock-based compensation relating to the cost of restricted
stock granted to our directors and certain employees of our
manager. The increase is primarily due to professional fees,
including legal, accounting services, and consulting fees
relating to investor relations, Sarbanes-Oxley compliance and
regulatory filings.
Provision for loan losses totaled $2.5 million for the year
ended December 31, 2007 and there was no provision for loan
losses for the year ended December 31, 2006. The provision
recorded was based on our normal quarterly loan review at
December 31, 2007, where it was determined that two
multi-family loans were impaired. We performed an evaluation of
the loans and determined that the fair value of the underlying
collateral securing the impaired loans was less than the net
carrying value of the loan resulting in us recording a
$2.5 million provision for loan losses.
Management fee expense increased $12.2 million, or 95%, to
$25.0 million in 2007 from $12.8 million in 2006.
These amounts represent compensation in the form of base
management fees and incentive compensation management fees as
provided for in the management agreement with our manager. The
base management fee expense increased by $0.6 million, or
22%, to $3.2 million in 2007 from $2.6 million in
2006. This increase is primarily due to increased
stockholders equity directly attributable to greater
undistributed profits and capital raised from the June 2007
public offering of our common stock over the same period in
2006. The incentive compensation management fee expense
increased $11.6 million, or 114%, to $21.8 million in
2007 from $10.2 million in 2006. This increase was due in
part to the recognition of $37.6 million of interest income
from profits and equity interests and $34.6 million of
income from equity affiliates during 2007 as compared to
$10.4 million of interest income from profits and equity
interest and $4.8 million of income from equity investments
in 2006.
Income
From Equity Affiliates
Income from equity affiliates increased $29.8 million to
$34.6 million in 2007 from $4.8 million for 2006. This
increase was due to $29.6 million in gains recognized on
the sale of properties within one of our equity affiliates, and
$5.0 million of income from excess proceeds received from
the sale and refinancing of certain properties in the portfolio
of another of our investments in equity affiliates. During 2006,
we recognized $4.8 million of revenue from excess proceeds
received from the refinancing of properties of one of our
investments in equity affiliates.
Income
Allocated to Minority Interest
Income allocated to minority interest increased
$5.9 million, or 53%, to $17.0 million in 2007 from
$11.1 million in 2006. These amounts represent the portion
of our income allocated to our manager. This increase
50
was primarily due to a 65% increase in income before minority
interest reduced by the provision for income taxes over the
prior year, partially offset by a decrease in our managers
limited partnership interest in us. Our manager had a weighted
average limited partnership interest of 16.6% and 18.0% in our
operating partnership in 2007 and 2006, respectively. At
December 31, 2007, our manager had a limited partnership
interest of 15.5% in our operating partnership.
Provision
for Income Taxes
We are organized and conduct our operations to qualify as a REIT
and to comply with the provisions of the Internal Revenue Code.
As a REIT, we generally are not subject to federal income tax on
the portion of our REIT taxable income which is distributed to
our stockholders, provided that at least 90% of the taxable
income is distributed and provided that certain other
requirements are met. As of December 31, 2007 and 2006, we
were in compliance with all REIT requirements and, therefore,
have not provided for income tax expense on our REIT taxable
income for the year ended December 31, 2007 and 2006.
We also have certain investments in taxable REIT subsidiaries
which are subject to federal and state income taxes. During the
year ended December 31, 2007 and 2006, we recorded a
$16.9 million and $0.2 million provision,
respectively, on income from these taxable REIT subsidiaries.
The increased provision for the year ended December 31,
2007 compared to the year ended December 31, 2006 resulted
from an increase in taxable income related to the sales of
certain properties of our investments in equity affiliates that
are held in taxable REIT subsidiaries.
Liquidity
and Capital Resources
Sources
of Liquidity
Liquidity is a measurement of the ability to meet potential cash
requirements. Our short-term and long-term liquidity needs
include ongoing commitments to repay borrowings, fund future
loans and investments, fund additional cash collateral from
potential declines in the value of a portion of our interest
rate swaps, fund operating costs and distributions to our
stockholders as well as other general business needs. Our
primary sources of funds for liquidity consist of proceeds from
equity offerings, debt facilities and cash flows from
operations. Our equity sources consist of funds raised from our
private equity offering in July 2003, net proceeds from our
initial public offering of our common stock in April 2004, net
proceeds from our public offering of our common stock in June
2007 and depending on market conditions, proceeds from capital
market transactions including the future issuance of common,
convertible
and/or
preferred equity securities. Our debt facilities include the
issuance of floating rate notes resulting from our CDOs, the
issuance of junior subordinated notes to subsidiary trusts
issuing preferred securities and borrowings under credit
agreements. Net cash provided by operating activities include
interest income from our loan and investment portfolio reduced
by interest expense on our debt facilities, cash from equity
participation interests, repayments of outstanding loans and
investments and funds from junior loan participation
arrangements.
We believe our existing sources of funds will be adequate for
purposes of meeting our short-term and long-term liquidity
needs. Our loans and investments are financed under existing
credit facilities and their credit status is continuously
monitored; therefore, these loans and investments are expected
to generate a generally stable return. Our ability to meet our
long-term liquidity and capital resource requirements is subject
to obtaining additional debt and equity financing. If we are
unable to renew our sources of financing on substantially
similar terms or at all, it would have an adverse effect on our
business and results of operations. Any decision by our lenders
and investors to enter into such transactions with us will
depend upon a number of factors, such as our financial
performance, compliance with the terms of our existing credit
arrangements, industry or market trends, the general
availability of and rates applicable to financing transactions,
such lenders and investors resources and policies
concerning the terms under which they make such capital
commitments and the relative attractiveness of alternative
investment or lending opportunities.
Recent conditions in capital and credit markets have made
certain forms of financing less attractive, and in certain cases
less available, therefore we will continue to rely on cash flows
provided by operating and investing activities for working
capital and potential changes in dividend policy in our efforts
towards capital preservation.
51
To maintain our status as a REIT under the Internal Revenue
Code, we must distribute annually at least 90% of our
REIT - taxable income. These distribution requirements
limit our ability to retain earnings and thereby replenish or
increase capital for operations. However, we believe that our
capital resources and access to financing will provide us with
financial flexibility and market responsiveness at levels
sufficient to meet current and anticipated capital requirements.
In December 2008, the IRS issued Revenue Procedure
2008-68
that allows listed REITs to offer shareholders elective stock
dividends, which are paid in a combination of cash and common
stock with at least 10% of the total distribution paid in cash,
to satisfy the dividend requirement through 2009.
Equity
Offerings
Our authorized capital provides for the issuance of up to
500 million shares of common stock, par value $0.01 per
share, and 100 million shares of preferred stock, par value
$0.01 per share.
In March 2007, we filed a shelf registration statement on
Form S-3
with the SEC under the 1933 Act with respect to an
aggregate of $500.0 million of debt securities, common
stock, preferred stock, depositary shares and warrants, that may
be sold by us from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the Commission declared
this shelf registration statement effective.
In June 2007, we sold 2,700,000 shares of our common stock
registered on the shelf registration statement in a public
offering at a price of $27.65 per share, for net proceeds of
approximately $73.6 million after deducting the
underwriting discount and the other estimated offering expenses.
We used the proceeds to pay down debt and finance our loan and
investment portfolio. The underwriters did not exercise their
over allotment option for additional shares.
In August 2008, we entered into an equity placement program
sales agreement with a securities agent whereby we may issue and
sell up to three million shares of our common stock through the
agent who agrees to use its commercially reasonable efforts to
sell such shares during the term of the agreement and under the
terms set forth therein. To date, we have not utilized this
equity placement program.
At December 31, 2008, we had $425.3 million available
under the shelf registration described above and
25,142,410 shares outstanding.
Debt
Facilities
We also maintain liquidity through two term credit agreements,
one of which has a revolving credit component, three master
repurchase agreements, one working capital facility, one note
payable, three junior loan participations and one bridge loan
warehousing credit agreement with seven different financial
institutions or companies. In addition, we have issued three
collateralized debt obligations or CDOs and nine separate junior
subordinated notes. London inter-bank offered rate, or LIBOR,
refers to one-month LIBOR unless specifically stated. As of
December 31, 2008, these facilities had an aggregate
capacity of $2.2 billion and borrowings were approximately
$2.0 billion.
52
The following is a summary of our debt facilities as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
Maturity
|
|
Debt Facilities
|
|
Commitment
|
|
|
Carrying Value
|
|
|
Available(1)
|
|
|
Dates
|
|
|
Repurchase agreements. Interest is variable based on pricing
over LIBOR
|
|
$
|
223,766,501
|
|
|
$
|
60,727,789
|
|
|
$
|
163,038,712
|
|
|
|
2009 - 2010
|
|
Collateralized debt obligations. Interest is variable based on
pricing over three-month LIBOR
|
|
|
1,166,089,000
|
|
|
|
1,152,289,000
|
|
|
|
13,800,000
|
|
|
|
2011 - 2013
|
|
Junior subordinated notes. Interest is variable based on pricing
over three-month LIBOR
|
|
|
276,055,000
|
|
|
|
276,055,000
|
|
|
|
|
|
|
|
2034 - 2037
|
|
Notes payable. Interest is variable based on pricing over Prime
or LIBOR
|
|
|
579,838,926
|
|
|
|
518,435,437
|
|
|
|
61,403,489
|
|
|
|
2009 - 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,245,749,427
|
|
|
$
|
2,007,507,226
|
|
|
$
|
238,242,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
subject to certain conditions and
bank approval.
|
These debt facilities are described in further detail in
Note 7 of the Notes to the Consolidated Financial
Statements set forth in Item 8 hereof.
Repurchase
Agreements
Repurchase obligation financings provide us with a revolving
component to our debt structure. Repurchase agreements provide
stand alone financing for certain assets and interim, or
warehouse financing, for assets that we plan to contribute to
our CDOs. At December 31, 2008, the aggregate outstanding
balance under these facilities was $60.7 million.
We have a $200.0 million repurchase agreement with a
financial institution, effective October 2006, which was amended
in December 2007 to increase the committed amount of the
facility to $200.0 million from $150.0 million. The
agreement has a term expiring in October 2009 and bears interest
at pricing over LIBOR, varying on the type of asset financed. At
December 31, 2008, the outstanding balance under this
facility was $37.0 million with a current weighted average
note rate of 1.50%.
We have a $100.0 million repurchase agreement with a second
institution that bears interest at pricing over LIBOR and had a
maturity date of September 2008. In January 2008, we were
notified that no further advances could be taken under this
facility. The facility matured in September 2008 and, under the
terms of the repurchase agreement, the facility was to be paid
in its entirety by December 2008. In December 2008, we amended
this facility extending the maturity to June 2009. The amendment
also includes an increase in interest rate pricing over LIBOR to
250 basis points, a paydown of $3.1 million by
January 31, 2009 and full repayment of the facility by June
2009. At December 31, 2008, the aggregate outstanding
balance under this facility was $15.6 million with a
current weighted average note rate of 3.07%. In addition, at
January 31, 2009, the aggregate outstanding balance under
this facility was $7.4 million.
We have an uncommitted master repurchase agreement with a third
financial institution, effective April 2008, entered into for
the purpose of financing our CRE CDO bond securities. The
agreement has a term expiring in May 2010 and bears interest at
pricing over LIBOR, varying on the type of asset financed.
During the year ended December 31, 2008, we paid
approximately $4.8 million of margin calls related to
certain assets financed in this facility, due to a decrease in
values associated with a change in market interest rate spreads.
At December 31, 2008, the outstanding balance under this
facility was $8.2 million with a current weighted average
note rate of 2.48%.
We had a $100.0 million master repurchase agreement with
Nomura Credit and Capital, Inc. that expired in December 2007.
We exercised our right under the repurchase agreement to extend
the repayment date until June
53
2008. No further advances were permitted under the agreement.
This repurchase agreement bore interest at pricing over LIBOR,
varying on the type of asset financed. This facility was repaid
in its entirety in February 2008.
CDOs
We completed three separate CDOs since 2005 by issuing to third
party investors, tranches of investment grade collateralized
debt obligations through newly-formed wholly-owned subsidiaries
(the Issuers). The Issuers hold assets, consisting
primarily of real-estate related assets and cash which serve as
collateral for the CDOs. The assets pledged as collateral for
the CDOs were contributed from our existing portfolio of assets.
By contributing these real estate assets to the various CDOs,
these transactions resulted in a decreased cost of funds
relating to the corresponding CDO assets and created capacity in
our existing credit facilities.
The Issuers issued tranches of investment grade floating-rate
notes of approximately $305.0 million, $356.0 million
and $447.5 million for CDO I, CDO II and CDO III,
respectively. CDO III also has a $100.0 million revolving
note which was not drawn upon at the time of issuance. The
revolving note facility has a commitment fee of 0.22% per annum
on the undrawn portion of the facility. The tranches were issued
with floating rate coupons based on three-month LIBOR plus
pricing of 0.44% - 0.77%. Proceeds from the sale of the
investment grade tranches issued in CDO I, CDO II and CDO
III of $267.0 million, $301.0 million and
$317.1 million, respectively, were used to repay higher
costing outstanding debt under our repurchase agreements and
notes payable. The CDOs may be replenished with substitute
collateral for loans that are repaid during the first four years
for CDO I and the first five years for CDO II and CDO III,
subject to certain customary provisions. Thereafter, the
outstanding debt balance will be reduced as loans are repaid.
Proceeds from the repayment of assets which serve as collateral
for the CDOs must be retained in its structure as restricted
cash until such collateral can be replaced and therefore not
available to fund current cash needs. If such cash is not used
to replenish collateral, it could have a negative impact on our
anticipated returns. Proceeds from CDO I and CDO II are
distributed quarterly with approximately $2.0 million and
$1.2 million, respectively, being paid to investors as a
reduction of the CDO liability. For accounting purposes, CDOs
are consolidated in our financial statements.
At December 31, 2008, the outstanding note balance under
CDO I, CDO II and CDO III was $275.3 million,
$343.3 million and $533.7 million, respectively.
The continued turmoil in the structured finance markets, in
particular the sub-prime residential loan market, has negatively
impacted the credit markets generally, and, as a result,
investor demand for commercial real estate collateralized debt
obligations has been substantially curtailed. In recent years,
we have relied to a substantial extent on CDO financings to
obtain match funded financing for our investments. Until the
market for commercial real estate CDOs recovers, we may be
unable to utilize CDOs to finance our investments and we may
need to utilize less favorable sources of financing to finance
our investments on a long-term basis. There can be no assurance
as to when demand for commercial real estate CDOs will return or
the terms of such securities investors will demand or whether we
will be able to issue CDOs to finance our investments on terms
beneficial to us.
Our CDO bonds contain interest coverage and asset over
collateralization covenants that must be met in order for us to
receive such payments. If we fail these covenants in any of our
CDOs, all cash flows from the applicable CDO would be diverted
to repay principal and interest on the outstanding CDO bonds and
we would not receive any residual payments until that CDO
regained compliance with such tests. We were in compliance with
all such covenants as of December 31, 2008. In the event of
a breach of the CDO covenants that could not be cured in the
near-term, we would be required to fund our non-CDO expenses,
including management fees and employee costs, distributions
required to maintain REIT status, debt costs, and other expenses
with (i) cash on hand, (ii) income from any CDO not in
breach of a covenant test, (iii) income from real property
and unencumbered loan assets, (iv) sale of assets,
(v) or accessing the equity or debt capital markets, if
available. We have the ability to cure covenant breaches which
would resume normal residual payments to us by purchasing
non-performing loans out of the CDOs. However, we may not have
sufficient liquidity available to do so at such time.
Junior
Subordinated Notes
The junior subordinated notes are unsecured, have a maturity of
29 to 30 years, pay interest quarterly at a floating rate
of interest based on three-month LIBOR and, absent the
occurrence of special events, are not
54
redeemable during the first five years. At December 31,
2008, the aggregate outstanding balance under these facilities
was $276.1 million with a current weighted average note
rate of 7.21%.
Notes
Payable
Notes payable consists of two term credit agreements, a
revolving credit line, a working capital facility, a bridge loan
warehousing credit agreement, a note payable and a junior loan
participation. At December 31, 2008, the aggregate
outstanding balance under these facilities was
$518.4 million.
In June 2007, we entered into a $60.0 million working
capital facility with Wachovia. In July 2008, the facility was
extended for one year to June 2009 and was amended to decrease
the amount of the facility to $45.0 million from
$60.0 million. In addition, the amendment includes required
quarterly paydowns of $3.0 million beginning
October 1, 2008 and an interest rate increase from
210 bps over Libor to 500 bps over Libor. At
December 31, 2008, the aggregate outstanding balance under
this facility was $41.9 million with a current weighted
average note rate of 5.51%.
In November 2007, we entered in two new credit agreements with
Wachovia which replaced two of our existing repurchase
agreements totaling $757.0 million with Wachovia and an
affiliate of Wachovia. The outstanding balance under these two
repurchase agreements totaled approximately $542.0 million
at the time the repurchase agreements were replaced. The first
credit agreement consists of a $473.0 million term loan and
a $100.0 million revolving commitment which has a
commitment period of two years with a one year auto extension
feature, subject to certain criteria, to November 2010. The
second credit agreement is a $69.0 million term loan which
has a commitment period of two years with a one year extension
period to November 2010. These two new credit agreements each
bear interest at pricing over LIBOR, and have eliminated the
mark to market risk as it relates to interest rate spreads that
existed under the terms of the repurchase agreements.
The $473.0 million term loan has repayment provisions which
included reducing the outstanding balance to $425.0 million
by December 31, 2007 and also required a further reduction
of the outstanding balance to $300.0 million by
December 31, 2008. The advance rates for this term facility
are similar to the advance rates that existed under the previous
repurchase agreements. At December 31, 2008, the
outstanding balance under this facility was $280.2 million
with a current weighted average note rate of 3.34%. The
$100.0 million revolving commitment is used to finance new
investments and can be increased with lender approval to
$200.0 million now that the term loan has been paid down
below $400.0 million. The term loan was paid down to
$400.0 million on February 15, 2008. At
December 31, 2008, the outstanding balance under this
revolving facility was $64.8 million with a current
weighted average note rate of 3.08%.
The $69.0 million term loan includes $10.0 million of
annual repayment provisions in quarterly installments. The
advance rate on this term facility is higher than the advance
rate for the collateral that was in the repurchase agreement and
eliminates the mark to market risk as it relates to interest
rate spreads that existed under the terms of the repurchase
agreement. We have also pledged our 24% equity interest in Prime
Outlets Members, LLC (POM) as part of the agreement.
In the second and third year of this term facility, we will be
required to paydown this facility by an additional amount equal
to distributions in excess of $10.0 million per year
received by us from our investment in POM, if any. In connection
with the POM transaction in July 2008, we agreed to pay down
approximately $11.6 million of this facility from proceeds
received from this transaction. In addition, 16.7% of our 24.2%
equity interest in POM was released as collateral in conjunction
with this paydown. At December 31, 2008, the outstanding
balance under this facility was $32.9 million with a
current weighted average note rate of 2.98%.
We have a $90.0 million bridge loan warehousing credit
agreement with a fifth financial institution, effective June
2005, to provide financing for bridge loans. This agreement
bears a variable rate of interest, payable monthly, based on
Prime plus 0% or pricing over 1, 2, 3 or
6-month
LIBOR, at our option. In October 2008, this facility was amended
to extend the maturity date to October 2009. The amendment also
includes an increase in interest rate pricing over LIBOR of
approximately 135 basis points on all new additions to the
facility and a reduction of the committed amount to
$70.0 million. At December 31, 2008, the outstanding
balance under this facility was $43.8 million with a
current weighted average note rate of 5.15%.
55
We have a $48.5 million note payable related to the POM
transaction. The note is initially secured by our 16.67%
interest in POM, matures in July 2016 and bears interest at a
fixed rate of 4.00%.
We have three junior loan participations with a total
outstanding balance at December 31, 2008 of
$6.3 million. These participation borrowings have a
maturity date equal to the corresponding mortgage loan and are
secured by the participants interest in the mortgage
loans. Interest expense is based on a portion of the interest
received from the loans.
Mortgage
Note Payable
During the second quarter of 2008, we recorded a
$41.4 million first lien mortgage related to the
foreclosure of an entity in which we had a $5.0 million
mezzanine loan. The mortgage bears interest at a fixed rate, has
a maturity date of June 2012 and the outstanding balance of this
mortgage was $41.4 million at December 31, 2008.
Note
Payable Related Party
During the fourth quarter of 2008, we borrowed $4.2 million
from our manager, ACM. At December 31, 2008, we had
outstanding borrowings due to ACM totaling $4.2 million,
which was recorded in notes payable related party.
In January 2009, the loan was repaid in full.
The working capital facility, bridge loan warehousing credit
agreement, term and revolving credit agreements, and the master
repurchase agreements require that we pay interest monthly,
based on pricing over LIBOR. The amount of our pricing over
these rates varies depending upon the structure of the loan or
investment financed pursuant to the specific agreement.
The working capital facility, term and revolving credit
agreements, bridge loan warehousing credit agreement, and the
master repurchase agreements require that we pay down borrowings
under these facilities pro-rata as principal payments on our
loans and investments are received. In addition, if upon
maturity of a loan or investment we decide to grant the borrower
an extension option, the financial institutions have the option
to extend the borrowings or request payment in full on the
outstanding borrowings of the loan or investment extended. The
financial institutions also have the right to request immediate
payment of any outstanding borrowings on any loan or investment
that is at least 60 days delinquent.
Cash
Flow From Operations
We continually monitor our cash position to determine the best
use of funds to both maximize our return on funds and maintain
an appropriate level of liquidity. Historically, in order to
maximize the return on our funds, cash generated from operations
has generally been used to temporarily pay down borrowings under
credit facilities whose primary purpose is to fund our new loans
and investments. Consequently, when making distributions in the
past, we have borrowed the required funds by drawing on credit
capacity available under our credit facilities. However, given
current market conditions, we may have to maintain adequate
liquidity from operations to make any future distributions.
Restrictive
Covenants
Each of the credit facilities contains various financial
covenants and restrictions, including minimum net worth, minimum
liquidity, debt-to-equity ratios and fixed and senior fixed
charge coverage 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 pledge more collateral, or 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. If we are unable to retire our
borrowings in such a situation, (i) we may need to
prematurely sell the assets securing such debt, (ii) the
lenders could accelerate the debt and foreclose on the assets
that are pledged as collateral to such lenders, (iii) such
lenders could force us into bankruptcy, (iv) such lenders
could force us to take other actions to protect the value of
their collateral and (v) our other debt financings could
become
56
immediately due and payable. Any such event would have a
material adverse effect on our liquidity, the value of our
common stock, our ability to make distributions to our
stockholders and our ability to continue as a going concern.
Violations of these covenants may also result in our being
unable to borrow unused amounts under our credit facilities,
even if repayment of some or all borrowings is not required.
Additionally, to the extent that we were to realize additional
losses relating to our loans and investments, it would put
additional pressure on our ability to continue to meet these
covenants.
We were in compliance with all financial covenants and
restrictions for the periods presented with the exception of a
minimum liquidity requirement with three financial institutions
at December 31, 2008. We are required to have a minimum
unrestricted cash and cash equivalents total balance ranging
from $5.0 million to $15.0 million, depending on the
financial institution. We have obtained waivers of these
covenants for December 31, 2008 from all three financial
institutions and expect to be in compliance with these covenant
calculations or receive the waivers and amendments in future
periods.
Share
Repurchase Plan
In August 2006, the Board of Directors authorized a stock
repurchase plan that enabled us to buy up to one million shares
of our common stock. At managements discretion, shares
were acquired on the open market, through privately negotiated
transactions or pursuant to a
Rule 10b5-1
plan. A
Rule 10b5-1
plan permits us to repurchase shares at times when we might
otherwise be prevented from doing so. As of December 31,
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 $25.10 per share). This
plan expired on February 9, 2007 and we did not purchase
any shares during the year ended December 31, 2007.
Contractual
Commitments
As of December 31, 2008, we had the following material
contractual obligations (payments in thousands):
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Payments Due by Period(1)
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Contractual Obligations
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2009
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2010
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2011
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2012
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2013
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Thereafter
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Total
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Notes payable(2)
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$
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463,635
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$
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1,300
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$
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5,000
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$
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|
|
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$
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48,500
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$
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|
|
$
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518,435
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Collateralized debt obligations(3)
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96,284
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29,152
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200,397
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826,456
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|
|
|
|
|
|
|
|
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1,152,289
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Repurchase agreements
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52,515
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8,213
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60,728
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Trust preferred securities
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276,055
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|
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276,055
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Mortgage note payable
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41,440
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41,440
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Note payable - related party
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4,200
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|
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|
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4,200
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Outstanding unfunded commitments(4)
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38,783
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25,185
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10,344
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1,101
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|
389
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|
670
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76,472
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Totals
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$
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655,417
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$
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63,850
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$
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215,741
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$
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868,997
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$
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48,889
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$
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276,725
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$
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2,129,619
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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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The maturity date for the
$473.0 million committed Wachovia term and
$100.0 million committed revolving facilities do not
include their one year auto extension features. The
$69.0 million term loan does not include its one year
extension option.
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(3)
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Comprised of $275.3 million of
CDO I debt, $343.7 million of CDO II debt and
$533.7 million of CDO III debt with a weighted average
remaining maturity of 2.07, 3.10 and 3.54 years,
respectively, as of December 31, 2008.
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(4)
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In accordance with certain loans
and investments, we have outstanding unfunded commitments of
$76.5 million as of December 31, 2008, 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. In relation to the $76.5 million
outstanding balance at December 31, 2008, our restricted
cash balance contained approximately $26.8 million of cash
held to fund the portion of the unfunded commitments for loans
financed by our CDO vehicles.
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57
Off-Balance-Sheet
Arrangements
We have several off-balance-sheet investments, including joint
ventures and structured finance investments. These investments
all have varying ownership structures. Substantially all of our
joint venture arrangements are accounted for under the equity
method of accounting as we have the ability to exercise
significant influence, but not control over the operating and
financial decisions of these joint venture arrangements. Our
off-balance-sheet arrangements are discussed in Note 6,
Investments in Equity Affiliates of the Notes
to Consolidated Financial Statements set forth in
Item 8 hereof.
Management
Agreement
Base Management Fees. In exchange for the
services that ACM provides us pursuant to the management
agreement, we pay our manager a monthly base management fee in
an amount equal to:
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(1)
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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),
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(2)
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0.625% per annum of our operating partnerships equity
between $400 million and $800 million, and
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(3)
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0.50% per annum of our operating partnerships equity in
excess of $800 million.
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The base management fee is not calculated based on the
managers performance or the types of assets it selects for
investment on our behalf, but it is affected by the performance
of these assets because it is based on the value of our
operating partnerships equity. We incurred
$3.5 million, $3.2 million and $2.6 million in
base management fees for services rendered in 2008, 2007 and
2006, respectively.
Incentive Compensation. Pursuant to the
management agreement, our manager is also entitled to receive
incentive compensation in an amount equal to:
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(1)
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25% of the amount by which:
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(a)
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our operating partnerships funds from operations per
operating partnership unit, adjusted for certain gains and
losses, exceeds
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(b)
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the product of (x) the greater of 9.5% per annum or the
10-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
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(2) the weighted average of our operating
partnerships outstanding operating partnership units.
For the year ended December 31, 2008, ACM did not earn an
incentive compensation fee and an overpayment of the incentive
fee was recorded and included in due from related party in the
amount of $2.9 million. Installments of the annual
incentive compensation are subject to quarterly recalculation
and potential reconciliation at the end of the fiscal year, and
any overpayments are required to be repaid in accordance with
the management agreement. During the first and second quarters
of 2008, ACM received incentive compensation installments
totaling $2.9 million, of which $1.4 million was
elected by ACM to be paid in 116,680 shares of common stock
and $1.5 million paid in cash. In addition, we recorded a
$7.3 million deferred management fee related to the
incentive compensation fee earned from the monetization of the
POM equity kicker transaction in June 2008, which was
subsequently paid and reclassified to prepaid management fees.
Upon the closing of this transaction, which is expected to occur
on or before June 26, 2009, we will recognize the
$7.3 million as management fee expense. The
$7.3 million incentive compensation fee was elected by ACM
to be paid in 355,903 shares of common stock and
$4.1 million paid in cash.
In 2007, ACM earned an incentive compensation installment
totaling $40.8 million, of which $13.7 million was
elected by ACM to be paid in 556,631 shares of common stock
and $27.1 million paid in cash. Included in the
$40.8 million of incentive compensation was
$21.8 million recorded as management fee expense and
$19.0 million
58
recorded as prepaid management fees related to the incentive
compensation management fee on the deferred revenue recognized
on the transfer of control of the 450 West 33rd Street
property of one of our equity affiliates. As of
December 31, 2007, ACMs fourth quarter installment of
$2.9 million was included in due to related party. As
provided for in the management agreement, ACM elected to be paid
its fourth quarter incentive compensation management fee
partially in 86,772 shares of common stock with the
remainder to be paid in cash totaling $1.5 million, which
was subsequently paid in February 2008.
In 2006, ACM earned incentive compensation installments totaling
$10.2 million, of which $8.5 million was elected by
ACM to be paid in 306,764 shares of common stock. As of
December 31, 2006, ACMs fourth quarter installment of
$3.6 million was included in due to related party. As
provided for in the management agreement, ACM elected to receive
this entire incentive compensation fee in common stock, which
was subsequently paid in February 2007 in common shares totaling
121,005.
We pay the annual incentive compensation in four installments,
each within 60 days of the end of each fiscal quarter. The
calculation of each installment is based on results for the
12 months ending on the last day of the fiscal quarter for
which the installment is payable. These installments of the
annual incentive compensation are subject to recalculation and
potential reconciliation at the end of such fiscal year. Subject
to the ownership limitations in our charter, at least 25% of
this incentive compensation is payable to our manager in shares
of our common stock having a value equal to the average closing
price per share for the last 20 days of the fiscal quarter
for which the incentive compensation is being paid.
The incentive compensation is accrued as it is earned. In
accordance with Issue 4(b) of
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, the expense incurred for incentive
compensation paid in common stock is determined using the
valuation method described above and the quoted market price of
our common stock on the last day of each quarter. At December 31
of each year, we remeasure the incentive compensation paid to
our manager in the form of common stock in accordance with Issue
4(a) of
EITF 96-18
which discusses how to measure at the measurement date when
certain terms are not known prior to the measurement date.
Accordingly, the expense recorded for such common stock is
adjusted to reflect the fair value of the common stock on the
measurement date when the final calculation of the annual
incentive compensation is determined. In the event that the
annual incentive compensation calculated as of the measurement
date is less than the four quarterly installments of the annual
incentive compensation paid in advance, our manager will refund
the amount of such overpayment in cash and we would record a
negative incentive compensation expense in the quarter when such
overpayment is determined.
Origination Fees. Our manager is entitled to
100% of the origination fees paid by borrowers on all loans and
investments that do not exceed 1% of the loans principal
amount. We retain 100% of the origination fee that exceeds 1% of
the loans principal amount.
Term and Termination. The management agreement
has an initial term of two years and is renewable automatically
for an additional one year period every year thereafter, unless
terminated with six months prior written notice. If we
terminate or elect not to renew the management agreement in
order to manage our portfolio internally, we are required to pay
a termination fee equal to the base management fee and incentive
compensation for the
12-month
period preceding the termination. If, without cause, we
terminate or elect not to renew the management agreement for any
other reason, including a change of control of us, we are
required to pay a termination fee equal to two times the base
management fee and incentive compensation paid for the
12-month
period preceding the termination.
Inflation
Changes in the general level of interest rates prevailing in the
economy in response to changes in the rate of inflation
generally have little effect on our income because the majority
of our interest-earning assets and interest-bearing liabilities
have floating rates of interest. However, the significant
decline in interest rates during the latter part of 2007 and
2008 triggered LIBOR floors on certain of our variable rate
interest-earning assets. This resulted in an increase in
interest rate spreads as the rates we pay on variable rate
interest-bearing liabilities declined at a greater pace than the
rates we earned on our variable rate interest-earning assets.
Additionally, we have various fixed rate loans in our portfolio
which are financed with variable rate LIBOR borrowings. In
connection with these loans,
59
we have entered into various interest swaps to hedge our
exposure to the interest rate risk on our variable rate LIBOR
borrowings as it relates to certain fixed rate loans in our
portfolio. However, the value of our interest-earning assets,
our ability to realize gains from the sale of assets, and the
average life of our interest-earning assets, among other things,
may be affected. See Item 7A - Quantitative and
Qualitative Disclosures about Market Risk.
Related
Party Transactions
Related
Party Loans
At December 31, 2008, due from related party was
$2.9 million as a result of an overpayment of incentive
management compensation based on the results of the twelve
months ended December 31, 2008. Refer to the section
Management Agreement above for further details.
Due to related party was $1.0 million at December 31,
2008 and consisted of $0.8 million of management fees that
were due to ACM and remitted in February 2009 and
$0.2 million of unearned fees due to ACM that were also
remitted by us in February 2009. Due to related party was
$2.4 million at December 31, 2007 and consisted of
$3.2 million of management fees that were due to ACM and
remitted in February 2008, which was partially offset by
$0.8 million of extension and filing fees received by ACM
which were remitted to us in January 2008.
During the fourth quarter of 2008, we borrowed $4.2 million
from our manager, ACM. At December 31, 2008, we had
outstanding borrowings due to ACM totaling $4.2 million,
which was recorded in notes payable related party.
In January 2009, the loan was repaid in full.
In 2008, ACM purchased from third party investors, investment
grade CDO notes issued by certain of our subsidiaries, with an
aggregate face value of $20.4 million for $8.2 million.
At June 30, 2007, we had a $1.3 million first mortgage
co-op loan which was past its maturity date. The loan was
contributed to us by Arbor Commercial Mortgage in 2003 as part
of the initial capitalization for ACMs equity ownership in
ARLP. In July 2007, ACM purchased the $1.3 million loan
back from us at par including all accrued and unpaid interest.
We had also sold a participating interest in the loan for
$125,000 which was recorded as a financing and was included in
notes payable. The loan participation was satisfied in September
2007.
In June 2007, we provided a $0.6 million mezzanine loan for
the development of a 38 unit rental apartment complex in
Connecticut that matures in July 2012 and bears interest at a
fixed rate of 7.97%. The first mortgage loan was originated by
ACM. The borrower was delinquent and in October 2007, ACM
purchased the $0.6 million loan from us at par including
all accrued and unpaid interest.
ACM has a 50% non-controlling interest in an entity, which owns
15% of a real estate holding company that owns and operates a
factory outlet center. At December 31, 2007, ACMs
investment in this joint venture was approximately
$0.2 million. We had a $28.3 million preferred equity
investment to this joint venture, which was collateralized by a
pledge of the ownership interest in this commercial real estate
property. This loan was funded by ACM in September 2005 and was
purchased by us in March 2006. The loan required monthly
interest payments based on one month LIBOR and was due to mature
in September 2007. Interest income recorded from this loan for
the year ended December 31, 2006 was approximately
$2.7 million. The loan was repaid in full in November 2006.
During the first quarter 2006, ACM originated permanent
financing of $31.5 million to a borrower to repay an
existing $30.0 million bridge loan with us. Pursuant to the
terms of the bridge loan agreement, we had a right of first
offer to provide permanent financing, a right of first refusal
to match the terms and conditions from a third party lender and
a potential prepayment fee of $0.9 million. In August 2006,
ACM received a $0.5 million fee for the securitization of
the $31.5 million permanent financing. This fee was
remitted to us in August 2006 in consideration of us waving our
right of first refusal and potential prepayment fee under the
original terms of the bridge loan.
During 2006, we originated a $7.2 million bridge loan and a
$0.3 million preferred equity investment secured by
garden-style and townhouse apartments in South Carolina. We also
had a 25.0% carried profits interest in the borrowing entity. In
January 2008, the borrowing entity refinanced the property
through ACMs Fannie Mae program and we received
$0.3 million for our profits interest as well as full
repayment of the $0.3 million preferred equity investment
and the $7.0 million outstanding balance on the bridge
loan. We retained the 25% carried profits interest.
60
At December 31, 2006, we had a $7.75 million first
mortgage loan that bore interest at a variable rate of one month
LIBOR plus 4.25% and was scheduled to mature in March 2006. In
March 2006, this loan was extended for one year with no other
change in terms. The underlying property was sold to a third
party in March 2007. We provided the financing to the third
party and, in conjunction with the sale, the original loan was
repaid in full in March 2007. The original loan was made to a
not-for-profit corporation that holds and manages investment
property from the endowment of a private academic institution.
Two of our directors are members of the board of trustees of the
original borrower and the private academic institution. Interest
income recorded from the original loan for the year ended
December 31, 2007 and 2006, was approximately
$0.1 million and $0.7 million, respectively.
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 could 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 was 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 were redeemed for shares of our
common stock or cash an equivalent number of shares of special
voting preferred stock would be redeemed and cancelled. As a
result of the ACM asset contribution and the related formation
transactions, ACM owned approximately a 16% limited partnership
interest in our operating partnership and the remaining 84%
interest in our operating partnership was owned by us.
In June 2008, our external manager exercised its right to redeem
its approximate 3.8 million operating partnership units in
our operating partnership for shares of our common stock on a
one-for-one basis. In addition, the special voting preferred
shares paired with each operating partnership unit, pursuant to
a pairing agreement, were redeemed simultaneously and cancelled.
ACM currently holds approximately 21% of the voting power of our
outstanding common stock.
We and our operating partnership have entered into a management
agreement with ACM pursuant to which ACM has agreed to provide
us with structured finance investment opportunities and loan
servicing as well as other services necessary to operate our
business. As discussed above in Contractual
Commitments, we have agreed to pay our manager an annual
base management fee and incentive compensation each fiscal
quarter and share with ACM a portion of the origination fees
that we receive on loans we originate with ACM pursuant to this
agreement.
Under the terms of the management agreement, ACM has also
granted us a right of first refusal with respect to all
structured finance investment opportunities in the multi-family
and commercial real estate markets that are identified by ACM or
its affiliates.
In addition, Mr. Kaufman has entered into a non-competition
agreement with us pursuant to which he has agreed not to pursue
structured finance investment opportunities in the multi-family
and commercial real estate markets, except as approved by our
board of directors.
We are dependent upon our manager (ACM), with whom we have a
conflict of interest, to provide services to us that are vital
to our operations. Our chairman, chief executive officer and
president, Mr. Ivan Kaufman, is also the chief executive
officer and president of our manager, and, our chief financial
officer, Mr. Paul Elenio, is the chief financial officer of
our manager. In addition, Mr. Kaufman and the Kaufman
entities together beneficially own
61
approximately 92% 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.
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.
Funds
from Operations
We are presenting funds from operations (FFO) because we believe
it to be an important supplemental measure of our operating
performance in that it is frequently used by analysts, investors
and other parties in the evaluation of real estate investment
trusts (REITs). We also use FFO for the calculation of the
incentive compensation for our manager, ACM. The revised White
Paper on FFO approved by the Board of Governors of the National
Association of Real Estate Investment Trusts, or NAREIT, in
April 2002 defines FFO as net income (loss) (computed in
accordance with generally accepted accounting principles in the
United States (GAAP)), excluding gains (losses) from sales of
depreciated real properties, plus real estate related
depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. We consider
gains and losses on the sales of real estate investments to be a
normal part of our recurring operating activities in accordance
with GAAP and should not be excluded when calculating FFO.
FFO is not intended to be an indication of our cash flow from
operating activities (determined in accordance with GAAP) or a
measure of our liquidity, nor is it entirely indicative of
funding our cash needs, including our ability to make cash
distributions. Our calculation of FFO may be different from the
calculation used by other companies and, therefore,
comparability may be limited.
FFO for the years ended December 31, 2008, 2007 and 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (loss) income, GAAP basis
|
|
$
|
(81,229,844
|
)
|
|
$
|
84,533,877
|
|
|
$
|
50,413,807
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
Depreciation real estate owned
|
|
|
751,859
|
|
|
|
|
|
|
|
|
|
Depreciation investment in equity affiliates
|
|
|
1,193,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
$
|
(79,284,478
|
)
|
|
$
|
101,523,054
|
|
|
$
|
61,518,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO per common share
|
|
$
|
(3.46
|
)
|
|
$
|
4.44
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
22,916,648
|
|
|
|
22,870,159
|
|
|
|
21,001,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk is the exposure to loss resulting from changes in
interest rates, foreign currency exchange rates, commodity
prices, equity prices and real estate values. The primary market
risks that we are exposed to are real estate risk and interest
rate risk.
Market
Conditions
We are subject to market changes in the debt and secondary
mortgage markets. These markets are currently experiencing
disruptions, which could have a short-term adverse impact on our
earnings and financial condition.
Current conditions in the debt markets include reduced liquidity
and increased risk adjusted premiums. These conditions may
increase the cost and reduce the availability of debt. We
attempt to mitigate the impact of debt market disruptions by
obtaining adequate debt facilities from a variety of financing
sources. There can be no assurance, however, that we will be
successful in these efforts, that such debt facilities will be
adequate or that the cost of such debt facilities will be at
similar terms.
The secondary mortgage markets are also currently experiencing
disruptions resulting from reduced investor demand for
collateralized debt obligations and increased investor yield
requirements for these obligations. In light of these
conditions, we currently expect to finance our loan and
investment portfolio with our current capital and debt
facilities.
Real
Estate Risk
Commercial mortgage assets may be viewed as exposing an investor
to greater risk of loss than residential mortgage assets since
such assets are typically secured by larger loans to fewer
obligors than residential mortgage assets. Multi-family and
commercial property values and net operating income derived from
such properties are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to,
events such as natural disasters including hurricanes and
earthquakes, acts of war
and/or
terrorism (such as the events of September 11,
2001) and others that may cause unanticipated and uninsured
performance declines
and/or
losses to us or the owners and operators of the real estate
securing our investment; national, regional and local economic
conditions (which may be adversely affected by industry
slowdowns and other factors); local real estate conditions (such
as an oversupply of housing, retail, industrial, office or other
commercial space); changes or continued weakness in specific
industry segments; construction quality, construction delays,
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 reducing the value of
collateral, and a lack of liquidity in the market, could reduce
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 our loans, securities held-to-maturity and liabilities
as of December 31, 2008, and assuming the balances of these
assets and liabilities remain unchanged for the subsequent
twelve months, a 0.5% increase in
63
LIBOR would decrease our annual net income and cash flows by
approximately $2.6 million. This is primarily due to
various interest rate floors that are in effect at a rate that
is above a 0.5% increase in LIBOR which would limit the effect
of a 0.5% increase, and increased expense on variable rate debt,
partially offset by our interest rate swaps that effectively
convert a portion of the variable rate LIBOR based debt, as it
relates to certain fixed rate assets, to a fixed basis that is
not subject to a 0.5% increase. Based on the loans and
liabilities as of December 31, 2008, and assuming the
balances of these loans and liabilities remain unchanged for the
subsequent twelve months, a 0.5% decrease in LIBOR would
increase our annual net income and cash flows by approximately
$1.8 million. This is primarily due to various interest
rate floors which limit the effect of a decrease on interest
income and decreased expense on variable rate debt, partially
offset by our interest rate swaps that effectively converted a
portion of the variable rate LIBOR based debt, as it relates to
certain fixed rate assets, to a fixed basis that is not subject
to a decrease.
As of December 31, 2007, a 1.5% increase in LIBOR would
have decreased our annual net income and cash flows in the
subsequent twelve months by approximately $1.3 million.
This is primarily due to various interest rate floors that are
in effect at a rate that is above a 1.5% increase in LIBOR which
would limit the effect of a 1.5% increase, and increased expense
on variable rate debt, partially offset by our interest rate
swaps that effectively convert a portion of the variable rate
LIBOR based debt, as it relates to certain fixed rate assets, to
a fixed basis that is not subject to a 1.5% increase. As of
December 31, 2007, a 1.5% decrease in LIBOR would have
increased our annual net income and cash flows by approximately
$12.5 million. This is primarily due to various interest
rate floors which limit the effect of a 1.5% decrease on
interest income and decreased expense on variable rate debt,
partially offset by our interest rate swaps that effectively
converted a portion of the variable rate LIBOR based debt, as it
relates to certain fixed rate assets, to a fixed basis that is
not subject to a 1.5% decrease.
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.
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, 2008 and 2007, we had ten of these
interest rate swap agreements outstanding that have combined
notional values of $1.3 billion for both periods. 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, 2008, and December 31,
2007, if there were a 50 basis point increase in forward
interest rates, the value of these interest rate swaps would
have decreased by approximately $0.1 million for both
periods. If there were a 50 basis point decrease in forward
interest rates, the value of these interest rate swaps would
have increased by approximately $0.1 million for both
periods.
In connection with the issuance of variable rate junior
subordinate notes, we entered into various interest rate swap
agreements. These swaps have total notional values of
$236.5 million and $191.5 million, respectively, as of
December 31, 2008 and December 31, 2007. 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, 2008 and December 31, 2007, 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 $3.3 million
and $2.9 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 $3.4 million and $3.0 million,
respectively.
As of December 31, 2008, we had 33 interest rate swap
agreements outstanding that have a combined notional value of
$689.9 million. As of December 31, 2007 we had 27
interest rate swap agreements outstanding with combined notional
values of $584.7 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, 2008 and
December 31, 2007, if there had been a 50 basis point
increase in forward interest rates, the fair market value of
these interest rate swaps
64
would have increased by approximately $15.7 million and
$14.9 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 $16.2 million and $15.4 million,
respectively.
Certain of our interest rate swaps, which are designed to hedge
interest rate risk associated with a portion of our loans and
investments, could require the funding of additional cash
collateral for changes in the market value of these swaps. Due
to the prolonged volatility in the financial markets that began
in 2007, the value of these interest rate swaps have declined
substantially. As a result, at December 31, 2008 and 2007,
we funded approximately $46.5 million and
$11.9 million, respectively, in cash related to these
swaps. If we continue to experience significant changes in the
outlook of interest rates, these contracts could continue to
decline in value, which would require additional cash to be
funded. However, at maturity the value of these contracts return
to par and all cash will be recovered. If we do not have
available cash to meet these requirements, this could result in
the early termination of these interest rate swaps, leaving us
exposed to interest rate risk associated with these loans and
investments, which could adversely impact our financial
condition.
Our hedging transactions using derivative instruments also
involve certain additional risks such as counterparty credit
risk, the enforceability of hedging contracts and the risk that
unanticipated and significant changes in interest rates will
cause a significant loss of basis in the contract. The
counterparties to our derivative arrangements are major
financial institutions with high credit ratings with which we
and our affiliates may also have other financial relationships.
As a result, we do not anticipate that any of these
counterparties will fail to meet their obligations. There can be
no assurance that we will be able to adequately protect against
the foregoing risks and will ultimately realize an economic
benefit that exceeds the related amounts incurred in connection
with engaging in such hedging strategies.
We utilize interest rate swaps to limit interest rate risk.
Derivatives are used for hedging purposes rather than
speculation. We do not enter into financial instruments for
trading purposes.
65
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
THE CONSOLIDATED FINANCIAL STATEMENTS OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Page
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
69
|
|
|
|
|
70
|
|
|
|
|
71
|
|
|
|
|
73
|
|
|
|
|
123
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
66
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, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 8. 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 the Company at December 31, 2008 and
2007, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set
forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2009 expressed an unqualified opinion
thereon.
New York, New York
March 9, 2009
67
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
832,041
|
|
|
$
|
22,219,541
|
|
Restricted cash
|
|
|
93,219,133
|
|
|
|
139,136,105
|
|
Loans and investments, net
|
|
|
2,181,683,619
|
|
|
|
2,592,093,930
|
|
Available-for-sale securities, at fair value
|
|
|
529,104
|
|
|
|
15,696,743
|
|
Securities held-to-maturity, net
|
|
|
58,244,348
|
|
|
|
|
|
Investment in equity affiliates
|
|
|
29,310,953
|
|
|
|
29,590,190
|
|
Real estate owned, net
|
|
|
46,478,994
|
|
|
|
|
|
Due from related party
|
|
|
2,933,344
|
|
|
|
|
|
Prepaid management fee related party
|
|
|
26,340,397
|
|
|
|
19,047,949
|
|
Other assets
|
|
|
139,664,556
|
|
|
|
83,709,076
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,579,236,489
|
|
|
$
|
2,901,493,534
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Repurchase agreements
|
|
$
|
60,727,789
|
|
|
$
|
244,937,929
|
|
Collateralized debt obligations
|
|
|
1,152,289,000
|
|
|
|
1,151,009,000
|
|
Junior subordinated notes to subsidiary trust issuing preferred
securities
|
|
|
276,055,000
|
|
|
|
276,055,000
|
|
Notes payable
|
|
|
518,435,437
|
|
|
|
596,160,338
|
|
Note payable related party
|
|
|
4,200,000
|
|
|
|
|
|
Mortgage note payable
|
|
|
41,440,000
|
|
|
|
|
|
Due to related party
|
|
|
993,192
|
|
|
|
2,429,109
|
|
Due to borrowers
|
|
|
32,330,603
|
|
|
|
18,265,906
|
|
Deferred revenue
|
|
|
77,123,133
|
|
|
|
77,123,133
|
|
Other liabilities
|
|
|
134,647,667
|
|
|
|
67,395,776
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,298,241,821
|
|
|
|
2,433,376,191
|
|
|
|
|
|
|
|
|
|
|
Minority interest in operating partnership
|
|
|
|
|
|
|
72,854,258
|
|
Minority interest in consolidated entity
|
|
|
(10,981
|
)
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 100,000,000 shares
authorized; 0 shares issued and outstanding at
December 31, 2008 and 3,776,069 shares issued and
outstanding at December 31, 2007
|
|
|
|
|
|
|
37,761
|
|
Common stock, $0.01 par value: 500,000,000 shares
authorized; 25,421,810 shares issued,
25,142,410 shares outstanding at December 31, 2008 and
20,798,735 shares issued, 20,519,335 shares
outstanding at December 31, 2007
|
|
|
254,218
|
|
|
|
207,987
|
|
Additional paid-in capital
|
|
|
447,321,186
|
|
|
|
365,376,136
|
|
Treasury stock, at cost 279,400 shares
|
|
|
(7,023,361
|
)
|
|
|
(7,023,361
|
)
|
(Accumulated deficit) retained earnings
|
|
|
(62,939,722
|
)
|
|
|
65,665,951
|
|
Accumulated other comprehensive loss
|
|
|
(96,606,672
|
)
|
|
|
(29,001,389
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
281,005,649
|
|
|
|
395,263,085
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,579,236,489
|
|
|
$
|
2,901,493,534
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
68
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
204,135,097
|
|
|
$
|
273,984,357
|
|
|
$
|
172,833,401
|
|
Property operating income
|
|
|
3,150,466
|
|
|
|
|
|
|
|
|
|
Income from swap derivative
|
|
|
|
|
|
|
|
|
|
|
696,960
|
|
Other income
|
|
|
82,329
|
|
|
|
39,503
|
|
|
|
170,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
207,367,892
|
|
|
|
274,023,860
|
|
|
|
173,700,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
108,656,702
|
|
|
|
147,710,194
|
|
|
|
92,693,419
|
|
Employee compensation and benefits
|
|
|
8,110,003
|
|
|
|
9,381,055
|
|
|
|
6,098,826
|
|
Selling and administrative
|
|
|
8,197,368
|
|
|
|
5,593,175
|
|
|
|
5,192,526
|
|
Property operating expenses
|
|
|
2,980,901
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
751,859
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment
|
|
|
17,573,980
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
132,000,000
|
|
|
|
2,500,000
|
|
|
|
|
|
Management fee related party
|
|
|
3,539,854
|
|
|
|
25,004,975
|
|
|
|
12,831,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
281,810,667
|
|
|
|
190,189,399
|
|
|
|
116,816,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (loss) income from equity affiliates,
minority interest and provision for income taxes
|
|
|
(74,442,775
|
)
|
|
|
83,834,461
|
|
|
|
56,883,996
|
|
(Loss) income from equity affiliates
|
|
|
(2,347,296
|
)
|
|
|
34,573,594
|
|
|
|
4,784,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest and provision for income
taxes
|
|
|
(76,790,071
|
)
|
|
|
118,408,055
|
|
|
|
61,668,288
|
|
Income allocated to minority interest
|
|
|
4,439,773
|
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
|
|
|
(81,229,844
|
)
|
|
|
101,418,878
|
|
|
|
50,563,807
|
|
Provision for income taxes
|
|
|
|
|
|
|
16,885,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(81,229,844
|
)
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share
|
|
$
|
(3.54
|
)
|
|
$
|
4.44
|
|
|
$
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share
|
|
$
|
(3.54
|
)
|
|
$
|
4.44
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
2.10
|
|
|
$
|
2.46
|
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,916,648
|
|
|
|
19,022,616
|
|
|
|
17,161,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
22,916,648
|
|
|
|
22,870,159
|
|
|
|
21,001,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
69
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
YEAR
ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Stock
|
|
|
Common
|
|
|
Common
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
(Accumulated
|
|
|
Other
|
|
|
|
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Par
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Treasury
|
|
|
Deficit)/Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Income/(Loss)
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
Balance- January 1, 2006
|
|
|
|
|
|
|
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 for management incentive fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,129
|
|
|
|
2,431
|
|
|
|
6,277,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,280,213
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279,400
|
)
|
|
|
(7,023,361
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,023,361
|
)
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,695
|
|
|
|
947
|
|
|
|
(947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,329,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,329,689
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,134,107
|
)
|
|
|
|
|
|
|
(44,134,107
|
)
|
Forfeited unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(445
|
)
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to minority interest from increased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,715
|
)
|
Net income
|
|
$
|
50,413,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,413,807
|
|
|
|
|
|
|
|
50,413,807
|
|
Net unrealized gain on securities available-for-sale
|
|
|
796,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796,922
|
|
|
|
796,922
|
|
Unrealized gain on derivative financial instruments
|
|
|
100,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,112
|
|
|
|
100,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2006
|
|
$
|
51,310,841
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
17,388,770
|
|
|
$
|
173,888
|
|
|
$
|
273,037,744
|
|
|
|
(279,400
|
)
|
|
$
|
(7,023,361
|
)
|
|
$
|
27,732,489
|
|
|
$
|
2,152,556
|
|
|
$
|
296,111,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
27,000
|
|
|
|
73,599,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,626,068
|
|
Issuance of common stock for management incentive fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,864
|
|
|
|
5,909
|
|
|
|
15,971,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,977,425
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,101
|
|
|
|
1,190
|
|
|
|
(1,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,454,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,454,957
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,600,416
|
)
|
|
|
|
|
|
|
(46,600,416
|
)
|
Adjustment to minority interest from decreased ownership in ARLP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,041
|
|
Net income
|
|
$
|
84,533,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,533,878
|
|
|
|
|
|
|
|
84,533,878
|
|
Net unrealized loss on securities available-for-sale
|
|
|
(1,018,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,018,841
|
)
|
|
|
(1,018,841
|
)
|
Reclass adjustment of net loss on securities available-for-sale
realized in net income
|
|
|
98,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,376
|
|
|
|
98,376
|
|
Unrealized loss on derivative financial instruments
|
|
|
(30,233,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,233,480
|
)
|
|
|
(30,233,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2007
|
|
$
|
53,379,933
|
|
|
|
3,776,069
|
|
|
$
|
37,761
|
|
|
|
20,798,735
|
|
|
$
|
207,987
|
|
|
$
|
365,376,136
|
|
|
|
(279,400
|
)
|
|
$
|
(7,023,361
|
)
|
|
$
|
65,665,951
|
|
|
$
|
(29,001,389
|
)
|
|
$
|
395,263,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for management incentive fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559,354
|
|
|
|
5,594
|
|
|
|
5,970,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,976,255
|
|
Redemption of operating partnership units for common stock
|
|
|
|
|
|
|
(3,776,069
|
)
|
|
|
(37,761
|
)
|
|
|
3,776,069
|
|
|
|
37,761
|
|
|
|
72,622,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,622,686
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,740
|
|
|
|
3,007
|
|
|
|
(3,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeit unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,088
|
)
|
|
|
(131
|
)
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,354,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,354,579
|
|
Distributions common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,375,829
|
)
|
|
|
|
|
|
|
(47,375,829
|
)
|
Net loss
|
|
$
|
(81,229,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,229,844
|
)
|
|
|
|
|
|
|
(81,229,844
|
)
|
Reclass adjustment of unrealized net loss on securities
available- for-sale realized in net loss
|
|
|
1,018,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018,841
|
|
|
|
1,018,841
|
|
Unrealized loss on derivative financial instruments
|
|
|
(68,624,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,624,124
|
)
|
|
|
(68,624,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2008
|
|
$
|
(148,835,127
|
)
|
|
|
|
|
|
$
|
|
|
|
|
25,421,810
|
|
|
$
|
254,218
|
|
|
$
|
447,321,186
|
|
|
|
(279,400
|
)
|
|
$
|
(7,023,361
|
)
|
|
$
|
(62,939,722
|
)
|
|
$
|
(96,606,672
|
)
|
|
$
|
281,005,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
70
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(81,229,844
|
)
|
|
$
|
84,533,878
|
|
|
$
|
50,413,807
|
|
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
751,859
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
3,047,479
|
|
|
|
2,454,957
|
|
|
|
2,329,689
|
|
Other-than-temporary impairment
|
|
|
17,573,980
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
132,000,000
|
|
|
|
2,500,000
|
|
|
|
|
|
Minority interest
|
|
|
4,439,773
|
|
|
|
16,989,177
|
|
|
|
11,104,481
|
|
Amortization and accretion of interest
|
|
|
853,990
|
|
|
|
1,587,481
|
|
|
|
(219,820
|
)
|
Non-cash incentive compensation to manager related
party
|
|
|
1,385,918
|
|
|
|
9,146,905
|
|
|
|
8,453,489
|
|
Loss (earnings) from equity affiliates
|
|
|
2,347,296
|
|
|
|
(24,150,787
|
)
|
|
|
|
|
Gain on sale of securities available-for-sale
|
|
|
|
|
|
|
(30,182
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(86,476,411
|
)
|
|
|
(7,018,970
|
)
|
|
|
(6,336,004
|
)
|
Prepaid management fee related party
|
|
|
(4,100,000
|
)
|
|
|
(14,460,587
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
(2,200,000
|
)
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
77,123,133
|
|
|
|
|
|
Other liabilities
|
|
|
62,999,714
|
|
|
|
12,475,857
|
|
|
|
(212,413
|
)
|
Deferred origination fees
|
|
|
(219,303
|
)
|
|
|
48,899
|
|
|
|
(471,814
|
)
|
Due to related party
|
|
|
(2,971,372
|
)
|
|
|
688,620
|
|
|
|
32,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
50,403,079
|
|
|
$
|
159,688,381
|
|
|
$
|
65,094,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments originated and purchased, net
|
|
|
(401,391,738
|
)
|
|
|
(1,926,833,770
|
)
|
|
|
(1,449,405,924
|
)
|
Payoffs and paydowns of loans and investments
|
|
|
679,855,282
|
|
|
|
1,336,775,919
|
|
|
|
704,467,014
|
|
Due to borrowers
|
|
|
14,064,697
|
|
|
|
2,198,611
|
|
|
|
5,375,940
|
|
Purchases of securities available-for-sale
|
|
|
|
|
|
|
(16,715,584
|
)
|
|
|
|
|
Purchases of securities held-to-maturity
|
|
|
(58,062,500
|
)
|
|
|
|
|
|
|
|
|
Investment in real estate, net
|
|
|
(1,231,577
|
)
|
|
|
|
|
|
|
|
|
Prepayments on securities available-for-sale
|
|
|
|
|
|
|
3,358,184
|
|
|
|
7,897,845
|
|
Proceeds from sales of securities available-for-sale
|
|
|
|
|
|
|
18,792,594
|
|
|
|
|
|
Contributions to equity affiliates
|
|
|
(3,000,000
|
)
|
|
|
(24,455,557
|
)
|
|
|
(7,282,707
|
)
|
Distributions from equity affiliates
|
|
|
931,941
|
|
|
|
51,250,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities
|
|
$
|
231,166,105
|
|
|
$
|
(555,629,540
|
)
|
|
$
|
(738,947,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable and repurchase agreements
|
|
|
269,996,534
|
|
|
|
807,615,891
|
|
|
|
702,024,038
|
|
Payoffs and paydowns of notes payable and repurchase agreements
|
|
|
(531,931,575
|
)
|
|
|
(456,939,223
|
)
|
|
|
(770,627,202
|
)
|
Proceeds from notes payable related party
|
|
|
4,200,000
|
|
|
|
|
|
|
|
|
|
Proceeds from collateralized debt obligations
|
|
|
56,000,000
|
|
|
|
72,200,000
|
|
|
|
803,750,000
|
|
Payoffs and paydowns of collateralized debt obligations
|
|
|
(54,720,000
|
)
|
|
|
(12,720,000
|
)
|
|
|
(11,540,000
|
)
|
Change in restricted cash
|
|
|
45,916,972
|
|
|
|
(54,364,043
|
)
|
|
|
(49,275,786
|
)
|
Payments on margin calls related to repurchase agreements
|
|
|
(4,845,810
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of junior subordinated notes
|
|
|
|
|
|
|
53,093,000
|
|
|
|
67,014,000
|
|
Payments on swaps to hedge counterparties
|
|
|
(175,190,000
|
)
|
|
|
(41,840,000
|
)
|
|
|
|
|
Receipts on swaps to hedge counterparties
|
|
|
140,550,000
|
|
|
|
29,980,000
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
74,655,000
|
|
|
|
|
|
Offering expenses paid
|
|
|
|
|
|
|
(1,001,795
|
)
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(7,023,361
|
)
|
Issuance of ARSR preferred stock
|
|
|
|
|
|
|
|
|
|
|
116,000
|
|
Distributions paid to minority interest
|
|
|
(4,682,326
|
)
|
|
|
(9,289,130
|
)
|
|
|
(9,704,497
|
)
|
Distributions paid on common stock
|
|
|
(47,375,829
|
)
|
|
|
(46,600,416
|
)
|
|
|
(44,134,107
|
)
|
Payment of deferred financing costs
|
|
|
(874,650
|
)
|
|
|
(4,385,441
|
)
|
|
|
(18,416,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities
|
|
$
|
(302,956,684
|
)
|
|
$
|
410,403,843
|
|
|
$
|
662,183,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash
|
|
$
|
(21,387,500
|
)
|
|
$
|
14,462,684
|
|
|
$
|
(11,670,452
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
22,219,541
|
|
|
|
7,756,857
|
|
|
|
19,427,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
832,041
|
|
|
$
|
22,219,541
|
|
|
$
|
7,756,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay interest, net of capitalized interest
|
|
$
|
116,916,357
|
|
|
$
|
151,577,313
|
|
|
$
|
85,650,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used to pay taxes
|
|
$
|
86,214
|
|
|
$
|
19,032,748
|
|
|
$
|
93,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral on swaps to hedge counterparties
|
|
$
|
3,500,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity affiliates
|
|
$
|
|
|
|
$
|
6,856,960
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of real estate, net
|
|
$
|
45,247,417
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of mortgage note payable
|
|
$
|
41,440,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of operating partnership units for common stock
|
|
$
|
72,622,686
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for management incentive fee
|
|
$
|
5,976,255
|
|
|
$
|
15,977,425
|
|
|
$
|
6,280,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
72
Note 1
Description of Business / Form of Ownership
Arbor Realty Trust, Inc. (the Company) is a Maryland
corporation that was formed in June 2003 to invest in a
diversified portfolio of multi-family and commercial real estate
related assets, primarily consisting of bridge loans, mezzanine
loans, junior participating interests in first mortgage loans,
and preferred and direct equity. The Company may also directly
acquire real property and invest in real estate-related notes
and certain mortgage-related securities. The Company conducts
substantially all of its operations through its operating
partnership, Arbor Realty Limited Partnership
(ARLP), and ARLPs wholly-owned subsidiaries.
The Company is externally managed and advised by Arbor
Commercial Mortgage, LLC (ACM).
The Company is organized and conducts its operations to qualify
as a real estate investment trust (REIT) for federal
income tax purposes. A REIT is generally not subject to federal
income tax on its REIT - taxable income that it distributes
to its stockholders, provided that it distributes at least 90%
of its REIT - taxable income and meets certain other
requirements. Certain assets of the Company that produce
non-qualifying income are owned by its taxable REIT
subsidiaries, the income of which is subject to federal and
state income taxes.
The Companys charter provides for the issuance of up to
500 million shares of common stock, par value
$0.01 per share, and 100 million shares of
preferred stock, par value $0.01 per share. The Company was
incorporated in June 2003 and was initially capitalized through
the sale of 67 shares of common stock for $1,005.
On July 1, 2003, Arbor Commercial Mortgage, LLC
(ACM) contributed $213.1 million of structured
finance assets and $169.2 million of borrowings supported
by $43.9 million of equity in exchange for a commensurate
equity ownership in ARLP. In addition, certain employees of ACM
were transferred to ARLP. These assets, liabilities and
employees represent a substantial portion of ACMs
structured finance business (the SF Business). The
Company is externally managed and advised by ACM and pays ACM a
management fee in accordance with a management agreement. ACM
also sources originations, provides underwriting services and
services all structured finance assets on behalf of ARLP, and
its wholly owned subsidiaries.
On July 1, 2003, the Company completed a private equity
offering of 1,610,000 units (including an overallotment
option), each consisting of five shares of common stock and one
warrant to purchase one share of common stock at $75.00 per
unit. The Company sold 8,050,000 shares of common stock in
the offering. Gross proceeds from the private equity offering
totaled $120.2 million. Gross proceeds from the private
equity offering combined with the concurrent equity contribution
by ACM totaled approximately $164.1 million in equity
capital. The Company paid and accrued offering expenses of
$10.1 million resulting in stockholders equity and
minority interest of $154.0 million as a result of the
private placement.
In April 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 other estimated offering expenses. The Company used the
proceeds to pay down indebtedness. 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 629,345 operating partnership units.
Additionally, in 2004 and 2005, the Company issued 973,354 and
282,776 shares of common stock, respectively, from the
exercise of warrants under its Warrant Agreement dated
July 1, 2003, the (Warrant Agreement) and
received net proceeds of $12.9 million and
$4.2 million, respectively.
On March 2, 2007, the Company filed a shelf registration
statement on
Form S-3
with the SEC under the Securities Act of 1933, as amended (the
1933 Act) with respect to an aggregate of
$500.0 million of debt securities, common stock, preferred
stock, depositary shares and warrants, that may be sold by the
Company from time to time pursuant to Rule 415 of the
1933 Act. On April 19, 2007, the Commission declared
this shelf registration statement effective.
73
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
In June 2007, the Company completed a public offering in which
it sold 2,700,000 shares of its common stock registered for
$27.65 per share, and received net proceeds of approximately
$73.6 million after deducting the underwriting discount and
the other estimated offering expenses. The Company used the
proceeds to pay down debt and finance its loan and investment
portfolio. The underwriters did not exercise their over
allotment option for additional shares. At December 31,
2008, the Company had $425.3 million remaining under the
previously mentioned shelf registration.
In June 2008, the Companys external manager exercised its
right to redeem its approximate 3.8 million operating
partnership units in the Companys operating partnership
for shares of the Companys common stock on a
one-for-one
basis. In addition, the special voting preferred shares paired
with each operating partnership unit, pursuant to a pairing
agreement, were redeemed simultaneously and cancelled by the
Company.
The Company had 25,142,410 shares outstanding at
December 31, 2008 and 20,519,335 shares outstanding at
December 31, 2007.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of the Company, its wholly owned
subsidiaries, and partnerships or other joint ventures in which
the Company controls. Entities which the Company does not
control and entities which are variable interest entities which
the Company is not the primary beneficiary, are accounted for
under the equity method. In the opinion of management, all
adjustments considered necessary for a fair presentation have
been included. All significant inter-company transactions and
balances have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to
current period presentation. Stock based compensation was
disclosed in the Companys Consolidated Statement of
Operations under employee compensation and benefits
for employees and under selling and administrative
expense for non-employees in the current year presentation and
which have been disclosed as a separate line item in prior
years presentation. Provision for income taxes was
disclosed as a separate line item in the Companys
Consolidated Statement of Operations in the current year
presentation and which have been disclosed as part of selling
and administrative expense in prior years presentation.
The preparation of consolidated financial statements in
conformity with Generally Accepted Accounting Principals in the
United States (GAAP) requires management to make
estimates and assumptions in determining the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
All highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The
Company places its cash and cash equivalents in high quality
financial institutions. The consolidated account balances at
each institution periodically exceeds FDIC insurance coverage
and the Company believes that this risk is not significant.
Restricted
Cash
At December 31, 2008 and 2007, the Company had restricted
cash of $93.2 million and $139.1 million,
respectively, on deposit with the trustees for the
Companys collateralized debt obligations
(CDOs), see Note 7 Debt
Obligations. Restricted cash primarily represents proceeds
from loan repayments which will
74
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
be used to purchase replacement loans as collateral for the CDOs
and interest payments received from loans in the CDOs which are
remitted to the Company quarterly in the month following the
quarter end.
Loans
and Investments
Statement of Financial Accounting Standards (SFAS)
No. 115 Accounting for Certain Investments in Debt
and Equity Securities, (SFAS 115)
requires that at the time of purchase, the Company designate a
security as
held-to-maturity,
available-for-sale,
or trading depending on ability and intent. The Company does not
have any securities designated as trading at this time.
Securities
available-for-sale
are reported at fair value with the net unrealized gains or
losses reported as a component of other comprehensive income,
while securities and investments held to maturity are reported
at amortized cost. Unrealized losses that are determined to be
other-than-temporary
are recognized in earnings in accordance with SFAS 115. The
determination of
other-than-temporary
impairment is a subjective process requiring judgments and
assumptions. The process may include, but is not limited to,
assessment of recent market events and prospects for near term
recovery, assessment of cash flows, internal review of the
underlying assets securing the investments, credit of the issuer
and the rating of the security, as well as the Companys
ability and intent to hold the investment. Management closely
monitors market conditions on which it bases such decisions.
In accordance with Emerging Issues Task Force (EITF)
99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets, the Company also assesses certain of its
held-to-maturity
securities, other than those of high credit quality, to
determine whether significant changes in estimated cash flows or
unrealized losses on these securities, if any, reflect a decline
in value which is
other-than-temporary
and, accordingly, written down to its fair value against
earnings. On a quarterly basis, the Company reviews these
changes in estimated cash flows, which could occur due to actual
prepayment and credit loss experience, to determine if an
other-than-temporary
impairment is deemed to have occurred. The determination of
other-than-temporary
impairment is a subjective process requiring judgments and
assumptions. The Company calculates a revised yield based on the
current amortized cost of the investment, including any
other-than-temporary
impairments recognized to date, and the revised yield is then
applied prospectively to recognize interest income.
Loans held for investment are intended to be held to maturity
and, accordingly, are carried at cost, net of unamortized loan
origination costs and fees, and net of the allowance for loan
losses when such loan or investment is deemed to be impaired.
The Company invests in preferred equity interests that, in some
cases, allow the Company to participate in a percentage of the
underlying propertys cash flows from operations and
proceeds from a sale or refinancing. At the inception of each
such investment, management must determine whether such
investment should be accounted for as a loan, joint venture or
as real estate. To date, management has determined that all such
investments are properly accounted for and reported as loans.
Impaired
Loans and Allowance for Loan Losses
The Company considers a loan impaired when, based upon current
information and events, it is probable that it will be unable to
collect all amounts due for both principal and interest
according to the contractual terms of the loan agreement.
Specific valuation allowances are established for impaired loans
based on the fair value of collateral on an individual loan
basis. The fair value of the collateral is determined by
selecting the most appropriate valuation methodology, or
methodologies, among several generally available and accepted in
the commercial real estate industry. The determination of the
most appropriate valuation methodology is based on the key
characteristics of the collateral type. These methodologies
include the evaluation of operating cash flow from the property
during the projected holding period, and the estimated sales
value of the collateral computed by applying an expected
capitalization rate to the stabilized net operating income of
the specific property, less selling costs, discounted at market
discount rates.
75
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
If upon completion of the valuation, the fair value of the
underlying collateral securing the impaired loan is less than
the net carrying value of the loan, an allowance is created with
a corresponding charge to the provision for loan losses. The
allowance for each loan is maintained at a level believed
adequate by management to absorb probable losses. The Company
had an allowance for loan losses of $130.5 million at
December 31, 2008 relating to ten loans with an aggregate
carrying value, before reserves, of approximately
$443.2 million. At December 31, 2007, the Company had
an allowance for loan losses of $2.5 million relating to
two loans with an aggregate carrying value, before reserves, of
approximately $58.5 million.
Capitalized
Interest
The Company capitalizes interest in accordance with
SFAS No. 58 Capitalization of Interest Costs in
Financial Statements that Include Investments Accounted for by
the Equity Method. This statement amended
SFAS No. 34 Capitalization of Interest
Costs (SFAS 34) to include investments
(equity, loans and advances) accounted for by the equity method
as qualifying assets of the investor while the investee has
activities in progress necessary to commence its planned
principal operations, provided that the investees
activities include the use of funds to acquire qualifying assets
for its operations. One of the Companys joint ventures,
which is accounted for using the equity method, has used funds
to acquire qualifying assets for its planned principal
operations. During 2007 the joint venture sold both of the
acquired properties and the Company discontinued the
capitalization of interest on its remaining investment in the
joint venture as activities required under SFAS 34 ceased
to continue. During the years ended December 31, 2007 and
2006, the Company capitalized $0.3 million and
$0.9 million, respectively of interest relating to this
investment. The Company did not capitalize interest during the
year ended December 31, 2008.
Revenue
Recognition
Interest Income Interest income is recognized
on the accrual basis as it is earned from loans, investments and
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 of the loan or security. 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 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, 2008, 2007 and 2006, the Company
recorded $1.0 million, $30.0 million and
$13.2 million of interest on such loans and investments,
respectively. These amounts represent interest collected in
accordance with the contractual agreement with the borrower.
Property operating income Property operating
income represents operating income associated with the
operations of an office building recorded as real estate owned,
net. For the year ended December 31, 2008, the Company
recorded approximately $3.2 million of property operating
income relating to the Companys real estate owned. There
was no property operating income in 2007 or 2006.
76
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
Other income Other income represents fees
received for loan structuring and miscellaneous asset management
fees associated with the Companys loans and investments
portfolio.
Gain
or Loss 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
or Losses from Equity Affiliates
The Company invests in joint ventures that are formed to
acquire, develop
and/or sell
real estate assets. These joint ventures are not majority owned
or controlled by the Company, and are not consolidated in its
financial statements. These investments are recorded under
either the equity or cost method of accounting as deemed
appropriate. The Company records its share of the net income and
losses from the underlying properties on a single line item in
the consolidated statement of operations as income from equity
affiliates.
Stock
Based Compensation
The Company records stock-based compensation expense at the
grant date fair value of the related stock-based award in
accordance with SFAS No. 123R, Accounting for
Stock-Based Compensation, (SFAS 123R).
The Company measures the compensation costs for these shares as
of the date of the grant, with subsequent re-measurement for any
unvested shares granted to non-employees of the Company with
such amounts expensed against earnings, at the grant date (for
the portion that vest immediately) or ratably over the
respective vesting periods. The cost of these grants is
amortized over the vesting term using an accelerated method in
accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 28 Accounting
for Stock Appreciation Rights and Other Variable Stock Options
or Award Plans (FIN 28), and
SFAS 123R. Dividends are paid on the restricted shares as
dividends are paid on shares of the Companys common stock
whether or not they are vested. Stock based compensation was
disclosed in the Companys Consolidated statement of
operations under employee compensation and benefits
for employees and under selling and administrative
expense for non-employees.
Income
Taxes
The Company is organized and conducts its operations to qualify
as a REIT and to comply with the provisions of the Internal
Revenue Code with respect thereto. A REIT is generally not
subject to federal income tax on 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.
In July 2006, the FASB released Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
FAS 109. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This
interpretation was effective January 1, 2007. The adoption
of FIN 48 did not have a material impact on the
Companys financial results.
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, Accounting for Derivative
77
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
Instruments and Hedging Activities, net unrealized gains
or losses are reported as a component of accumulated other
comprehensive income/(loss), see Derivatives and Hedging
Activities below. At December 31, 2008, accumulated
other comprehensive loss was $96.6 million and consisted of
net unrealized losses on derivatives designated as cash flow
hedges. There were no unrealized losses related to
available-for-sale
securities at December 31, 2008 as a result of
$17.6 million of
other-than-temporary
impairment charges recognized during the year ended
December 31, 2008. At December 31, 2007, accumulated
other comprehensive loss was $29.0 million and consisted of
$1.0 million in unrealized losses related to available for
sale securities and $28.0 million of unrealized losses on
derivatives designated as cash flow hedges.
Earnings
(Loss) Per Share
In accordance with SFAS No. 128 Earnings Per
Share, the Company presents both basic and diluted
earnings (loss) per share. Basic earnings (loss) per share
excludes dilution and is computed by dividing net income (loss)
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 per share amount.
Derivatives
and Hedging Activities
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), as amended by
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities
(SFAS 138). SFAS 133, as amended by
SFAS 138, requires an entity to recognize all derivatives
as either assets or liabilities in the consolidated balance
sheets and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either
other comprehensive income (loss) in stockholders equity
until the hedged item is recognized in earnings or net income
depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the
hedging activity.
In the normal course of business, the Company may use a variety
of derivative financial instruments to manage, or hedge,
interest rate risk. These derivative financial instruments must
be effective in reducing its interest rate risk exposure in
order to qualify for hedge accounting. When the terms of an
underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of
the instrument are
marked-to-market
with changes in value included in net income for each period
until the derivative instrument matures or is settled. Any
derivative instrument used for risk management that does not
meet the hedging criteria is
marked-to-market
with the changes in value included in net income.
Derivatives are used for hedging purposes rather than
speculation. The Company relies on quotations from a third party
to determine these fair values.
Variable
Interest Entities
FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN 46),
which requires a variable interest entity (VIE) to
be consolidated by its primary beneficiary (PB). The
PB is the party that absorbs a majority of the VIEs
anticipated losses
and/or a
majority of the expected returns.
The Company has evaluated its loans and investments, mortgage
related securities and investments in equity affiliates to
determine whether they are VIEs. This evaluation resulted in the
Company determining that its bridge loans, junior participation
loans, mezzanine loans, preferred equity investments and
investments in equity affiliates were potential variable
interests. For each of these investments, the Company has
evaluated (1) the sufficiency of the fair value of the
entities equity investments at risk to absorb losses,
(2) that as a group the holders of the equity investments
at risk have (a) the direct or indirect ability through
voting rights to make decisions about the entities
78
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
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) substantially all of the entities
activities do not involve or are not conducted on behalf of an
investor that has disproportionately fewer voting rights in
terms of its obligation to absorb the expected losses or its
right to receive expected residual returns of the entity, or
both. In addition, the Company has evaluated its investments in
collateralized debt obligation securities and has determined
that the issuing entities are considered VIEs under the
provisions of FIN 46, but has determined that the Company
is not the primary beneficiary. As of December 31, 2008,
the Company has identified 45 loans and investments which were
made to entities determined to be VIEs.
For the 45 VIEs identified, the Company has determined that it
is not the primary beneficiary, 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 loans or investments in equity affiliates, as appropriate.
Entities that issue junior subordinated notes are considered
VIEs. However, 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, they are not considered to be at risk.
Recently
Issued Accounting Pronouncements
SFAS No. 157 In September
2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157), which defines
fair value, establishes guidelines for measuring fair value and
expands disclosures 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. Effective
January 1, 2008, the Company adopted SFAS 157 for
financial assets and liabilities recognized at fair value on a
recurring and nonrecurring basis. The adoption of SFAS 157
for financial assets and liabilities did not have an impact on
the Companys Consolidated Financial Statements.
In February 2008, the FASB issued FASB Staff Position
(FSP)
FAS 157-2,
which delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The
effective date is delayed by one year to fiscal years beginning
after November 15, 2008 and interim periods within those
fiscal years. The Company is currently evaluating the impact, if
any, regarding the delayed application of SFAS 157 on the
Companys Consolidated Financial Statements.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active which clarifies how
the fair value of a financial instrument is determined when the
market for that financial asset is inactive. The adoption of FSP
FAS 157-3
did not have a material impact on the Companys
consolidated financial statements.
SFAS No. 159 In February
2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities (SFAS 159) which permits
entities to voluntarily choose to measure many financial
instruments, and certain other items at fair value and is
effective for fiscal years beginning after November 15,
2007. The Company adopted SFAS 159 as of January 1,
2008 and elected not to treat any of its financial assets or
liabilities under the fair value option. The adoption of
SFAS 159 did not have an impact on the Companys
Consolidated Financial Statements.
79
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
FIN 39-1
In April 2007, the FASB issued
FIN No. 39-1,
Amendment of FASB Interpretation No. 39
(FIN 39-1).
FIN 39-1
defines right of setoff and specifies what
conditions must be met for a derivative contract to qualify for
this right of setoff.
FIN 39-1
also addresses the applicability of a right of setoff to
derivative instruments and clarifies the circumstances in which
it is appropriate to offset amounts recognized for those
instruments in the balance sheet. In addition,
FIN 39-1
permits offsetting of fair value amounts recognized for multiple
derivative instruments executed with the same counterparty under
a master netting arrangement and fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from
the same master netting arrangement as the derivative
instruments.
FIN 39-1
is effective for the Company beginning January 1, 2008. The
adoption of
FIN 39-1
did not have a material impact on the Companys
consolidated financial statements.
FSP
FAS 140-3
In February 2008, the FASB issued FASB Staff Position
No. FAS 140-3
(FSP
FAS 140-3),
Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions. FSP
FAS 140-3
provides guidance on accounting for a transfer of a financial
asset and a repurchase financing. It presumes that an initial
transfer of a financial asset and a repurchase financing are
considered part of the same arrangement (a linked transaction)
unless certain criteria are met. If the criteria are not met,
the linked transaction would be recorded as a net investment,
likely as a derivative, instead of recording the purchased
financial asset on a gross basis along with a repurchase
financing. FSP
FAS 140-3
applies to reporting periods beginning after November 15,
2008 and is only applied prospectively to transactions that
occur on or after the adoption date. The Company does not
currently expect the adoption of FSP
FAS 140-3
to have a material effect on the Companys Consolidated
Financial Statements.
FSP
FAS 140-4
and FIN 46(R)-8 In December 2008, the
FASB issued FASB Staff Position
No. FAS 140-4
and FIN 46(R)-8 (FSP
FAS 140-4
and FIN 46(R)-8), Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities which increases
disclosure requirements for public companies and is effective
for reporting periods that end after December 15, 2008. FSP
FAS 140-4
and FIN 46(R)-8 amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities to require public
entities to provide additional disclosures about a
transferors continuing involvement with transferred
financial assets. It also amends FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable
Interest Entities to require public enterprises, including
sponsors that have a variable interest in a variable interest
entity, to provide additional disclosures about their
involvement with variable interest entities. The adoption of FSP
FAS 140-4
and FIN 46(R)-8 relates to disclosure only and did not have
an impact on the Companys Consolidated Financial
Statements.
SOP 07-1
In June 2007, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position
(SOP)
07-1
Clarification of the Scope of the Audit and Accounting
Guide Investment Companies and Accounting by Parent Companies
and Equity Method Investors for Investments in Investment
Companies
(SOP 07-1).
SOP 07-1
provides guidance for determining whether an entity is within
the scope of the AICPA Audit and Accounting Guide Investment
Companies. The SOP is effective for fiscal years beginning on or
after December 15, 2007. However, in February 2008 the FASB
issued FSP
SOP 07-1-1
which delays indefinitely the effective date of
SOP 07-1
and prohibits adoption of
SOP 07-1
for an entity that had not adopted
SOP 07-1
before issuance of the final FSP. While the Company maintains an
exemption from the Investment Company Act of 1940, as amended
(Investment Company Act) and is therefore not
regulated as an investment company, it is nonetheless in the
process of assessing whether
SOP 07-1
could be applicable upon becoming effective.
SFAS No. 141(R) In December
2007, the FASB issued SFAS No. 141(R), Business
Combinations (SFAS 141(R)) which replaces
SFAS No. 141, Business Combinations and
requires a company to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquired entity to be measured at their fair values as of the
acquisition date. SFAS 141(R) also requires acquisition
costs to be expensed as incurred and does not permit certain
restructuring activities previously allowed under Emerging
Issues Task Force Issue
No. 95-3
to be recorded as a component of purchase accounting.
SFAS 141(R) applies prospectively to business
80
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company does not anticipate
that the adoption of SFAS 141(R) will have an impact on the
Companys Consolidated Financial Statements.
SFAS No. 160 In December
2007, the FASB issued SFAS No. 160 Accounting
for Non-controlling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 160 clarifies the classification of non-controlling
interests in consolidated statements of financial position and
the accounting for and reporting of transactions between the
Company and holders of such non-controlling interests. Under
SFAS 160, non-controlling interests are considered equity
and should be reported as an element of consolidated equity. The
current practice of classifying minority interests within a
mezzanine section of the statement of financial position will be
eliminated. Under SFAS 160, net income will encompass the
total income of all consolidated subsidiaries and will require
separate disclosure on the face of the income statement of
income attributable to the controlling and non-controlling
interests. Increases and decreases in the non-controlling
ownership interest amount will be accounted for as equity
transactions. When a subsidiary is deconsolidated, any retained,
non-controlling equity investment in the former subsidiary and
the gain or loss on the deconsolidation of the subsidiary must
be measured at fair value. The presentation and disclosure
requirements are to be applied retrospectively for all periods
presented. SFAS 160 is effective for fiscal years beginning
after December 15, 2008 and earlier application is
prohibited. The Company does not currently expect the adoption
of SFAS 160 to have a material effect on the Companys
Consolidated Financial Statements.
SFAS No. 161 In March 2008,
the FASB issued SFAS No. 161 Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133 (SFAS 161).
SFAS 161 requires companies with derivative instruments to
disclose information that should enable financial-statement
users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under FASB Statement No. 133
Accounting for Derivative Instruments and Hedging
Activities and how derivative instruments and related
hedged items affect a companys financial position,
financial performance and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 and early
application is permitted. Because SFAS 161 impacts the
Companys disclosure and not its accounting treatment for
derivative instruments and related hedged items, the
Companys adoption of SFAS 161 will not impact the
Companys Consolidated Financial Statements.
SFAS No. 162 In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days
following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not
currently expect the adoption of SFAS 162 to have a
material effect on the Companys Consolidated Financial
Statements.
EITF 03-6-1
In June 2008, the FASB issued FASB Staff Position
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. This
FSP addresses whether instruments granted in share-based payment
transactions may be participating securities prior to vesting
and, therefore, need to be included in the earnings allocation
in computing basic earnings per share (EPS) pursuant
to the two-class method described in paragraphs 60 and 61
of FASB Statement No. 128, Earnings per Share.
A share-based payment award that contains a non-forfeitable
right to receive cash when dividends are paid to common
shareholders irrespective of whether that award ultimately vests
or remains unvested shall be considered a participating security
as these rights to dividends provide a non-contingent transfer
of value to the holder of the share-based payment award.
Accordingly, these awards should be included in the computation
of basic EPS pursuant to the two-class method. The guidance in
this FSP is effective for the Company for the fiscal year
beginning January 1, 2009 and all interim periods within
2009. All prior period EPS data presented will have to
81
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
be adjusted retrospectively to conform to the provisions of the
FSP. Under the terms of the Companys stock incentive plan,
grantees are entitled to the right to receive dividends on the
unvested portions of their restricted stock awards. There is no
requirement to return these dividends in the event the unvested
awards are forfeited in the future. Shares granted under the
Companys stock incentive plan are considered outstanding
common shares as of the date of grant through the corresponding
vesting periods, therefore, they are included in the
Companys EPS calculations. The Company does not currently
expect the adoption of this FSP to have any impact on the
Companys Consolidated Financial Statements.
|
|
Note 3
|
Loans and
Investments
|
The following table sets forth the composition of the
Companys loan and investment portfolio at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
December 31,
|
|
|
Percent of
|
|
|
Loan
|
|
|
Wtd. Avg
|
|
|
Months to
|
|
|
|
2008
|
|
|
Total
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Bridge loans
|
|
$
|
1,441,846,251
|
|
|
|
62
|
%
|
|
|
58
|
|
|
|
6.22
|
%
|
|
|
16.9
|
|
Mezzanine loans
|
|
|
364,937,818
|
|
|
|
16
|
%
|
|
|
42
|
|
|
|
7.03
|
%
|
|
|
32.7
|
|
Junior participation loans
|
|
|
298,278,363
|
|
|
|
13
|
%
|
|
|
16
|
|
|
|
6.60
|
%
|
|
|
48.0
|
|
Preferred equity investments
|
|
|
205,247,126
|
|
|
|
9
|
%
|
|
|
18
|
|
|
|
4.05
|
%
|
|
|
99.5
|
|
Other
|
|
|
12,418,110
|
|
|
|
nm
|
|
|
|
2
|
|
|
|
8.73
|
%
|
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,322,727,668
|
|
|
|
100
|
%
|
|
|
136
|
|
|
|
6.22
|
%
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
(10,544,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(130,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
2,181,683,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
The following table sets forth the composition of the
Companys loan and investment portfolio at
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
December 31,
|
|
|
Percent of
|
|
|
Loan
|
|
|
Wtd. Avg
|
|
|
Months to
|
|
|
|
2007
|
|
|
Total
|
|
|
Count
|
|
|
Pay Rate
|
|
|
Maturity
|
|
|
Bridge loans
|
|
$
|
1,646,505,888
|
|
|
|
63
|
%
|
|
|
65
|
|
|
|
7.86
|
%
|
|
|
23.7
|
|
Mezzanine loans
|
|
|
384,479,759
|
|
|
|
15
|
%
|
|
|
41
|
|
|
|
9.23
|
%
|
|
|
34.8
|
|
Junior participation loans
|
|
|
340,821,550
|
|
|
|
13
|
%
|
|
|
19
|
|
|
|
7.70
|
%
|
|
|
53.4
|
|
Preferred equity investments
|
|
|
220,387,959
|
|
|
|
9
|
%
|
|
|
20
|
|
|
|
9.42
|
%
|
|
|
74.7
|
|
Other
|
|
|
11,400,272
|
|
|
|
nm
|
|
|
|
2
|
|
|
|
7.99
|
%
|
|
|
76.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,603,595,428
|
|
|
|
100
|
%
|
|
|
147
|
|
|
|
8.18
|
%
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
(9,001,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and investments, net
|
|
$
|
2,592,093,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
82
ARBOR
REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008
Bridge loans are loans to borrowers who are typically seeking
short-term capital to be used in an acquisition of property and
are predominantly secured by first mortgage liens on the
property.
Mezzanine loans and junior participating interests in senior
debt are loans that are subordinate to a conventional first
mortgage loan and senior to the borrowers equity in a
transaction. Mezzanine financing may take the form of loans
secured by pledges of ownership interests in entities that
directly or indirectly control the real property or subordinated
loans secured by second mortgage liens on the property.