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ABR Arbor Realty Trust

Filed: 30 Oct 20, 8:46am
0001253986abr:PreferredEquityInvestmentsInMortgageLoansMember2020-01-012020-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2020

or

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

Commission file number: 001-32136

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland

    

20-0057959

(State or other jurisdiction of
incorporation)

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

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

11553
(Zip Code)

(Registrant’s telephone number, including area code): (516506-4200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading symbols

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ABR

New York Stock Exchange

Preferred Stock, 8.25% Series A Cumulative Redeemable, par value $0.01 per share

ABR-PA

New York Stock Exchange

Preferred Stock, 7.75% Series B Cumulative Redeemable, par value $0.01 per share

ABR-PB

New York Stock Exchange

Preferred Stock, 8.50% Series C Cumulative Redeemable, par value $0.01 per share

ABR-PC

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Issuer has 116,131,077 shares of common stock, $0.01 par value per share, outstanding at October 23, 2020.

Forward-Looking Statements

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

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. We use words such as “anticipate,” “expect,” “believe,” “intend,” “should,” “will,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words.  Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results.  Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally, and the real estate market specifically, in particular, due to the uncertainties created by the novel coronavirus (“COVID-19”) pandemic; the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition; adverse changes in our status with government-sponsored enterprises affecting our ability to originate loans through such programs; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in federal and state laws and regulations, including changes in tax laws; the availability and cost of capital for future investments; and competition. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this report.  The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Additional information regarding these and other risks and uncertainties we face is contained in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 14, 2020 and in our other reports and filings with the SEC.

Although we believe 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. FINANCIAL INFORMATION

Item 1. Financial Statements

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

    

September 30, 

    

December 31, 

2020

2019

(Unaudited)

Assets:

Cash and cash equivalents

$

192,204

$

299,687

Restricted cash

 

110,263

 

210,875

Loans and investments, net (allowance for credit losses: $146,745 and $71,069, respectively)

4,910,872

4,189,960

Loans held-for-sale, net

631,138

861,360

Capitalized mortgage servicing rights, net

335,235

286,420

Securities held-to-maturity, net (allowance for credit losses: $1,628 and $0, respectively)

118,260

88,699

Investments in equity affiliates

 

82,322

 

41,800

Real estate owned, net

 

2,894

 

13,220

Due from related party

 

23,814

 

10,651

Goodwill and other intangible assets

106,716

110,700

Other assets

 

175,500

 

125,788

Total assets

$

6,689,218

$

6,239,160

Liabilities and Equity:

Credit facilities and repurchase agreements

$

1,449,940

$

1,678,288

Collateralized loan obligations

 

2,516,032

 

2,130,121

Debt fund

68,629

Senior unsecured notes

 

662,289

 

319,799

Convertible senior unsecured notes, net

266,706

284,152

Junior subordinated notes to subsidiary trust issuing preferred securities

 

141,470

 

140,949

Due to related party

 

802

 

13,100

Due to borrowers

 

76,304

 

79,148

Allowance for loss-sharing obligations

71,160

34,648

Other liabilities

 

181,279

 

134,299

Total liabilities

 

5,365,982

 

4,883,133

Commitments and contingencies (Note 14)

 

 

Equity:

Arbor Realty Trust, Inc. stockholders' equity:

Preferred stock, cumulative, redeemable, $0.01 par value: 100,000,000 shares authorized; special voting preferred shares; 17,632,371 and 20,369,265 shares issued and outstanding, respectively; 8.25% Series A, $38,788 aggregate liquidation preference; 1,551,500 shares issued and outstanding; 7.75% Series B, $31,500 aggregate liquidation preference; 1,260,000 shares issued and outstanding; 8.50% Series C, $22,500 aggregate liquidation preference; 900,000 shares issued and outstanding

89,472

 

89,501

Common stock, $0.01 par value: 500,000,000 shares authorized; 115,930,351 and 109,706,214 shares issued and outstanding, respectively

 

1,159

 

1,097

Additional paid-in capital

 

1,222,945

 

1,154,932

Accumulated deficit

 

(120,539)

 

(60,920)

Total Arbor Realty Trust, Inc. stockholders' equity

1,193,037

1,184,610

Noncontrolling interest

130,199

171,417

Total equity

 

1,323,236

 

1,356,027

Total liabilities and equity

$

6,689,218

$

6,239,160

Note: Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities, or VIEs, as we are the primary beneficiary of these VIEs. As of September 30, 2020 and December 31, 2019, assets of our consolidated VIEs totaled $3,112,755 and $2,784,756, respectively, and the liabilities of our consolidated VIEs totaled $2,518,745 and $2,209,599, respectively. See Note 15 for discussion of our VIEs.

See Notes to Consolidated Financial Statements.

2

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

Interest income

$

81,701

$

80,509

$

253,307

$

233,957

Interest expense

 

37,888

 

48,064

 

129,172

 

138,213

Net interest income

 

43,813

 

32,445

 

124,135

 

95,744

Other revenue:

Gain on sales, including fee-based services, net

19,895

21,298

60,566

51,897

Mortgage servicing rights

42,357

29,911

96,708

62,852

Servicing revenue, net

13,348

13,790

40,156

39,954

Property operating income

1,033

2,237

3,976

8,187

Loss on derivative instruments, net

(753)

(5,003)

(58,852)

(6,726)

Other income, net

 

1,050

 

325

 

3,404

 

1,314

Total other revenue

 

76,930

 

62,558

 

145,958

 

157,478

Other expenses:

Employee compensation and benefits

32,962

32,861

101,652

 

93,647

Selling and administrative

9,356

10,882

29,013

 

31,122

Property operating expenses

1,300

2,563

4,778

 

7,649

Depreciation and amortization

1,922

1,841

5,830

 

5,663

Impairment loss on real estate owned

1,000

Provision for loss sharing (net of recoveries)

(2,227)

735

21,706

1,557

Provision for credit losses (net of recoveries)

(7,586)

59,510

 

Total other expenses

 

35,727

 

48,882

 

222,489

 

140,638

Income before extinguishment of debt, sale of real estate, income from equity affiliates and income taxes

 

85,016

 

46,121

 

47,604

 

112,584

Loss on extinguishment of debt

(3,546)

(128)

Loss on sale of real estate

(1,868)

(1,868)

Income from equity affiliates

32,358

3,718

56,758

9,133

Provision for income taxes

(17,785)

(6,623)

(15,493)

(10,963)

Net income

 

97,721

 

43,216

 

83,455

 

110,626

Preferred stock dividends

 

1,888

 

1,888

 

5,665

 

5,665

Net income attributable to noncontrolling interest

13,836

7,363

11,012

19,429

Net income attributable to common stockholders

$

81,997

$

33,965

$

66,778

$

85,532

Basic earnings per common share

$

0.72

$

0.36

$

0.60

$

0.95

Diluted earnings per common share

$

0.72

$

0.35

$

0.59

$

0.93

Weighted average shares outstanding:

Basic

113,766,446

 

94,486,839

 

111,775,436

 

89,899,074

Diluted

133,997,087

 

117,468,044

 

132,401,315

 

113,033,968

Dividends declared per common share

$

0.31

$

0.29

$

0.91

$

0.84

See Notes to Consolidated Financial Statements.

3

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

($ in thousands, except shares)

Three Months Ended September 30, 2020

Total Arbor

Common

Realty Trust, Inc.

Preferred

Preferred 

Common

Stock Par

Additional Paid-

Accumulated

Stockholders'

Noncontrolling

    

Stock Shares

    

Stock Value

    

Stock Shares

    

Value

    

in Capital

    

Deficit

    

Equity

    

Interest

    

Total Equity

Balance – June 30, 2020

 

24,080,765

$

89,500

 

112,211,461

$

1,122

$

1,182,449

$

(167,165)

$

1,105,906

$

151,870

$

1,257,776

Issuance of common stock

 

 

3,579,266

36

40,506

40,542

40,542

Stock-based compensation, net

 

 

 

139,624

 

1

 

(10)

 

 

(9)

 

 

(9)

Distributions - common stock

 

 

 

 

 

 

(35,371)

 

(35,371)

 

 

(35,371)

Distributions - preferred stock

 

 

 

 

 

 

(1,888)

 

(1,888)

 

 

(1,888)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

(5,880)

 

(5,880)

Redemption of OP Units

(2,736,894)

(28)

(28)

(29,627)

(29,655)

Net income

 

 

 

 

 

 

83,885

 

83,885

 

13,836

 

97,721

Balance – September 30, 2020

 

21,343,871

$

89,472

 

115,930,351

$

1,159

$

1,222,945

$

(120,539)

$

1,193,037

$

130,199

$

1,323,236

Nine Months Ended September 30, 2020

Balance - January 1, 2020

24,195,594

$

89,501

109,706,214

$

1,097

$

1,154,932

$

(60,920)

$

1,184,610

$

171,417

$

1,356,027

Cummulative-effect adjustment (Note 2)

(24,106)

(24,106)

(4,501)

(28,607)

Balance - January 1, 2020 (as adjusted for the adoption of ASU 2016-13)

 

24,195,594

$

89,501

 

109,706,214

$

1,097

$

1,154,932

$

(85,026)

$

1,160,504

$

166,916

$

1,327,420

Issuance of common stock

 

 

6,887,274

69

78,481

78,550

78,550

Repurchase of common stock

(1,625,777)

(16)

(12,745)

(12,761)

(12,761)

Issuance of common stock from convertible debt

363,013

3

90

93

93

Stock-based compensation, net

 

 

 

599,627

 

6

 

3,786

 

 

3,792

 

 

3,792

Distributions - common stock

 

 

 

 

 

 

(102,283)

 

(102,283)

 

 

(102,283)

Distributions - preferred stock

 

 

 

 

 

 

(5,673)

 

(5,673)

 

 

(5,673)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

(18,102)

 

(18,102)

Redemption of OP Units

(2,851,723)

(29)

(1,599)

(1,628)

(29,627)

(31,255)

Net income

 

 

 

 

 

 

72,443

 

72,443

 

11,012

 

83,455

Balance – Semptember 30, 2020

 

21,343,871

$

89,472

 

115,930,351

$

1,159

$

1,222,945

$

(120,539)

$

1,193,037

$

130,199

$

1,323,236

See Notes to Consolidated Financial Statements.

4

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Continued)

($ in thousands, except shares)

Three Months Ended September 30, 2019

Total Arbor

Common

Realty Trust, Inc.

Preferred

Preferred 

Common

Stock Par

Additional Paid-

Accumulated

Stockholders'

Noncontrolling

    

Stock Shares

    

Stock Value

    

Stock Shares

    

Value

    

in Capital

    

Deficit

    

Equity

    

Interest

    

Total Equity

Balance - June 30, 2019

 

24,195,594

$

89,501

 

94,225,567

$

942

$

998,897

$

(72,321)

$

1,017,019

$

168,959

$

1,185,978

Issuance of common stock

 

 

187,000

2

2,292

2,294

2,294

Issuance of common stock from convertible debt

 

 

 

3,563

 

 

 

 

 

 

Stock-based compensation, net

 

 

 

358,460

 

4

 

2,166

 

 

2,170

 

 

2,170

Distributions - common stock

 

 

 

 

 

 

(27,431)

 

(27,431)

 

 

(27,431)

Distributions - preferred stock

 

 

 

 

 

 

(1,891)

 

(1,891)

 

 

(1,891)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

(5,940)

 

(5,940)

Net income

 

 

 

 

 

 

35,853

 

35,853

 

7,363

 

43,216

Balance – September 30, 2019

 

24,195,594

$

89,501

 

94,774,590

$

948

$

1,003,355

$

(65,790)

$

1,028,014

$

170,382

$

1,198,396

Nine Months Ended September 30, 2019

Balance – January 1, 2019

    

24,365,084

    

$

89,502

    

83,987,707

    

$

840

    

$

879,029

    

$

(74,133)

    

$

895,238

    

$

170,328

    

$

1,065,566

Issuance of common stock

9,387,000

93

117,786

117,879

117,879

Repurchase of common stock

(920,000)

(9)

(11,565)

(11,574)

(11,574)

Issuance of common stock from convertible debt

 

 

 

214,029

 

2

 

2,505

 

 

2,507

 

 

2,507

Extinguishment of convertible senior unsecured notes

 

 

 

 

 

(1,337)

 

 

(1,337)

 

 

(1,337)

Stock-based compensation, net

 

 

 

963,865

 

10

 

3,930

 

 

3,940

 

 

3,940

Forfeiture of unvested restricted stock

(18,120)

Issuance of common stock from special dividend

 

 

 

901,432

 

9

 

10,070

 

 

10,079

 

 

10,079

Issuance of OP Units and special voting preferred stock from special dividend

 

221,666

 

2

 

 

 

 

 

2

 

2,476

 

2,478

Distributions - common stock

 

 

 

 

 

 

(77,178)

 

(77,178)

 

 

(77,178)

Distributions - preferred stock

 

 

 

 

 

 

(5,676)

 

(5,676)

 

 

(5,676)

Distributions - noncontrolling interest

 

 

 

 

 

 

 

 

(17,242)

 

(17,242)

Redemption of OP Units

 

(391,156)

 

(3)

 

258,677

 

3

 

2,937

 

 

2,937

 

(4,609)

 

(1,672)

Net income

 

 

 

 

 

 

91,197

 

91,197

 

19,429

 

110,626

Balance – Semptember 30, 2019

 

24,195,594

$

89,501

 

94,774,590

$

948

$

1,003,355

$

(65,790)

$

1,028,014

$

170,382

$

1,198,396

See Notes to Consolidated Financial Statements.

5

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

Nine Months Ended September 30, 

2020

    

2019

Operating activities:

Net income

$

83,455

$

110,626

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

Depreciation and amortization

 

5,830

 

5,663

Stock-based compensation

 

7,286

 

7,574

Amortization and accretion of interest and fees, net

 

3,172

 

3,113

Amortization of capitalized mortgage servicing rights

36,129

36,731

Originations of loans held-for-sale

(3,940,322)

(3,358,750)

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

4,169,411

3,301,918

Payoffs and paydowns of loans held-for-sale

117

75

Loss on sale of real estate

1,868

Mortgage servicing rights

(96,708)

(62,852)

Write-off of capitalized mortgage servicing rights from payoffs

12,610

15,827

Impairment loss on real estate owned

1,000

Provision for loss sharing (net of recoveries)

21,706

1,557

Provision for credit losses (net of recoveries)

59,510

Net recoveries (charge-offs) for loss sharing obligations

399

(330)

Deferred tax benefit

(5,172)

(1,026)

Income from equity affiliates

 

(56,758)

 

(9,133)

Loss on extinguishment of debt

3,546

128

Changes in operating assets and liabilities

(2,378)

5,030

Net cash provided by operating activities

303,701

57,151

Investing Activities:

Loans and investments funded, originated and purchased, net

 

(1,425,051)

 

(1,895,092)

Payoffs and paydowns of loans and investments

 

674,929

 

1,243,791

Deferred fees

 

10,338

 

16,806

Investments in real estate, net

 

(131)

 

(207)

Proceeds from sale of real estate, net

7,499

Contributions to equity affiliates

 

(98)

 

(9,140)

Purchase of securities held-to-maturity, net

(37,927)

(20,000)

Payoffs and paydowns of securities held-to-maturity

8,914

4,590

Due to borrowers and reserves

(50,168)

(23,276)

Net cash used in investing activities

(811,695)

(682,528)

Financing activities:

Proceeds from repurchase agreements and credit facilities

 

7,565,743

 

6,866,169

Paydowns and payoffs of repurchase agreements and credit facilities

 

(7,792,471)

 

(6,616,055)

Proceeds from issuance of collateralized loan obligations

668,000

533,000

Payoffs and paydowns of collateralized loan obligations

(282,874)

(250,250)

Payoffs of debt fund

(70,000)

Proceeds from issuance of common stock

78,550

117,879

Settlements of convertible senior unsecured notes

(22,145)

(3,149)

Proceeds from issuance of senior unsecured notes

345,750

90,000

Redemption of OP Units

(31,255)

(1,673)

Payments of withholding taxes on net settlement of vested stock

(3,494)

(3,634)

Repurchase of common stock

(12,761)

(11,574)

Distributions paid on common stock

 

(102,283)

 

(77,178)

Distributions paid on noncontrolling interest

(18,102)

(17,242)

Distributions paid on preferred stock

(5,673)

(5,676)

Payment of deferred financing costs

 

(17,086)

 

(10,578)

Net cash provided by financing activities

299,899

610,039

Net decrease in cash, cash equivalents and restricted cash

(208,095)

(15,338)

Cash, cash equivalents and restricted cash at beginning of period

 

510,562

 

340,669

Cash, cash equivalents and restricted cash at end of period

$

302,467

$

325,331

See Notes to Consolidated Financial Statements.

6

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

(in thousands)

Nine Months Ended September 30, 

    

2020

    

2019

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents at beginning of period

$

299,687

$

160,063

Restricted cash at beginning of period

210,875

180,606

Cash, cash equivalents and restricted cash at beginning of period

$

510,562

$

340,669

Cash and cash equivalents at end of period

$

192,204

$

135,285

Restricted cash at end of period

110,263

190,046

Cash, cash equivalents and restricted cash at end of period

$

302,467

$

325,331

Supplemental cash flow information:

Cash used to pay interest

$

108,573

$

121,972

Cash used to pay taxes

22,810

15,686

Supplemental schedule of non-cash investing and financing activities:

Cummulative-effect adjustment (Note 2)

$

28,607

$

Issuance of common stock from convertible debt

93

2,507

Distributions accrued on 8.25% Series A preferred stock

267

267

Distributions accrued on 7.75% Series B preferred stock

203

203

Distributions accrued on 8.50% Series C preferred stock

159

159

Settlements of convertible senior unsecured notes

4,778

1,337

Fair value of conversion feature of convertible senior unsecured notes

185

1,175

Special dividend - common stock issued

10,079

Redemption of OP Units for common stock

2,939

Special dividend - special voting preferred stock and OP Units issued

2,478

See Notes to Consolidated Financial Statements.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Note 1 — Description of Business

Arbor Realty Trust, Inc. (“we,” “us,” or “our”) is a Maryland corporation formed in 2003. We operate through 2 business segments: our Structured Loan Origination and Investment Business, or "Structured Business," and our Agency Loan Origination and Servicing Business, or "Agency Business."

Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, single-family rental and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity. We also invest in real estate-related joint ventures and may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.

Through our Agency Business, we originate, sell and service a range of multifamily finance products through the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the government-sponsored enterprises, or "GSEs"), the Government National Mortgage Association ("Ginnie Mae"), Federal Housing Authority ("FHA") and the U.S. Department of Housing and Urban Development (together with Ginnie Mae and FHA, "HUD"). We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We are an approved Fannie Mae Delegated Underwriting and Servicing ("DUS") lender nationally, a Freddie Mac Multifamily Conventional Loan lender, seller/servicer, in New York, New Jersey and Connecticut, a Freddie Mac affordable, manufactured housing, senior housing and small balance loan ("SBL") lender, seller/servicer, nationally and a HUD MAP and LEAN senior housing/healthcare lender nationally. We also originate and sell finance products through conduit/commercial mortgage-backed securities ("CMBS") programs and during the third quarter of 2019, we began to originate and service permanent financing loans underwritten using the guidelines of our existing agency loans sold to the GSEs, which we refer to as "Private Label" loans. We pool and securitize the Private Label loans and sell certain securities in the securitizations to third-party investors, while retaining the highest risk bottom tranche certificate.

Substantially all of our operations are conducted through our operating partnership, Arbor Realty Limited Partnership ("ARLP"), for which we serve as the general partner, and ARLP's subsidiaries. We are organized to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes. A REIT is generally not subject to federal income tax on that portion of its REIT-taxable income that 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 REIT income, primarily within the Agency Business, are operated through taxable REIT subsidiaries ("TRS"), which is part of our TRS consolidated group (the "TRS Consolidated Group") and is subject to U.S. federal, state and local income taxes. In general, our TRS entities may hold assets that the REIT cannot hold directly and may engage in real estate or non-real estate-related business. See Note 17 for details.

Note 2 — Basis of Presentation and Significant Accounting Policies

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), for interim financial statements and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared under GAAP have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with our financial statements and notes thereto included in our 2019 Annual Report.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Principles of Consolidation

These consolidated financial statements include our financial statements and the financial statements of our wholly owned subsidiaries, partnerships and other joint ventures in which we own a controlling interest, including variable interest entities (“VIEs”) of which we are the primary beneficiary. Entities in which we have a significant influence are accounted for under the equity method. Our VIEs are described in Note 15. All significant inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that could materially affect the amounts reported in the consolidated financial statements and accompanying notes. During the nine months ended September 30, 2020, there has been a global outbreak of COVID-19, which has forced many countries, including the United States, to declare national emergencies, to institute "stay-at-home" orders, to close financial markets and to restrict operations of non-essential businesses. Such actions are creating significant disruptions in global supply chains, and adversely impacting many industries. COVID-19 has had, and may continue to have, a prolonged adverse impact on economic and market conditions, which could lead to an extended period of global economic slowdown. The impact of COVID-19 on companies is evolving rapidly, and the extent and duration of the economic fallout from this pandemic, both globally and to our business, remain unclear, making any estimate or assumption as of September 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from those estimates.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. The net gain/loss from changes in fair value of derivative instruments previously recorded to other income, net is now recorded to loss on derivative instruments, net. These reclassifications had no effect on the previously reported net income.

Recently Adopted Accounting Pronouncements

Credit Losses

On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which utilizes a current expected credit loss methodology (“CECL”) for the recognition of credit losses for our structured loans and investments, held-to-maturity debt securities and our loss-sharing obligations related to the Fannie Mae DUS program, at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected credit losses. This methodology replaces the multiple existing impairment methods in GAAP and generally requires that a loss be incurred before it is recognized. We adopted ASU 2016-13 using the modified retrospective method, therefore, the results for reporting periods prior to January 1, 2020 are unadjusted and reported in accordance with previously applicable GAAP. In connection with the adoption of ASU 2016-13, we recorded a $28.6 million increase to accumulated deficit, which was net of a deferred tax asset of $3.6 million at January 1, 2020.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

The following table illustrates the impact of adopting ASU 2016-13 (in thousands):

January 1, 2020

    

As Reported

    

    

    

    

 

Under

 

As Reported

 

Impact of

 

ASU 2016-13

 

Pre-Adoption

 

Adoption

Assets:

 

  

 

  

 

  

Allowance for credit losses:

 

  

 

  

 

  

Structured loans and investments (1)

$

88,363

$

71,069

$

17,294

Held-to-maturity debt securities

 

501

501

Deferred tax assets

27,307

23,713

3,594

Liabilities:

 

  

 

  

 

  

Allowance for loss-sharing obligations

 

16,847

 

2,441

 

14,406

(1)See Note 3 for details by asset class.

Other Accounting Pronouncements Adopted

Description

    

Adoption Date

    

Effect on Financial Statements

In November 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU amends the guidance for determining whether a decision-making fee is a variable interest and requires companies to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required under GAAP).

First quarter of 2020

The adoption of this guidance did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with changes between hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. Early adoption is permitted upon issuance of the update.

First quarter of 2020

The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU eliminates step two from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value with the carrying amount of goodwill.

First quarter of 2020

The adoption of this guidance did not have a material impact on our consolidated financial statements.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Recently Issued Accounting Pronouncements

Description

    

Effective Date

    

Effect on Financial Statements

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), which includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity's own equity. The guidance also simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20 and requires entities to use the "if-converted" method when calculating diluted earnings per share for convertible instruments.

First quarter of 2022, with early adoption permitted beginning in the first quarter of 2021

We are currently evaluating the timing of our adoption and the impact this guidance may have on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.

This ASU is effective as of March 12, 2020 through December 31, 2022

We have not adopted any of the optional expedients or exceptions through September 30, 2020, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.

Significant Accounting Policies

See Item 8 – Financial Statements and Supplementary Data in our 2019 Annual Report for a description of our significant accounting policies. Upon the adoption of ASU 2016-13 on January 1, 2020, we adjusted certain significant accounting policies, as follows:

Allowance for Credit Losses. We estimate allowances for credit losses on our structured loans and investments (including unfunded loan commitments), loss-sharing obligations related to the Fannie Mae DUS program and our held-to-maturity debt securities under CECL. This method is based on expected credit losses for the life of the investment as of each balance sheet date. Our estimation of credit losses utilizes information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future. We have licensed a third party model to assist with the measurement of expected credit losses, which utilizes incurred losses inherent in the portfolio. The loss factors are determined through the generation of probability of defaults (PD) and loss given defaults (LGD) for similar loans with similar credit. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect our expected credit losses.

Our method for calculating the estimate of expected credit loss takes into account historical experience and current conditions for similar loans and reasonable and supportable forecasts about the future. The reasonable and supportable forecast period is determined based on our assessment of the most likely scenario of assumptions and plausible outcomes for the US economy, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect our loss experience. We regularly evaluate the reasonable and supportable forecast period to determine if a change is needed.

Beyond our reasonable and supportable forecast period, we generally revert to historical loss information over the remaining loan/asset period, taken from a period that most accurately reflects the expectation of conditions expected to exist during the period of reversion. We may make adjustments to historical loss information for differences in risk that may not reflect the characteristics of our current portfolio, including but not limited to, loan-to-value and debt service coverage ratios, among other relevant factors. The method of reversion selected represents the best estimate of the collectability of the investments and is reevaluated each reporting period. We generally expect to use an average historical loss for reversion, utilizing an immediate or straight line method for the remaining life of the investments.

We also perform a qualitative assessment beyond model estimates, and apply qualitative adjustments as necessary. Our qualitative analysis includes a review of data that may directly impact our estimates including internal and external information about the loan or

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

property including current market conditions, asset specific conditions, property operations or borrower/sponsor details (i.e. refinance, sale, bankruptcy) which allows us to more accurately and reasonably determine the amount of the expected loss for these investments. We also evaluate the contractual life of our assets to determine if changes are needed for contractual extension options, renewals, modifications and prepayments.

To the extent possible, we estimate our allowance for credit losses using a pooling approach for homogeneous assets with similar risk characteristics with the goal of enhancing the precision of their estimate. If particular assets no longer display risk characteristics that are similar to those of the pool, we may decide to revise our pools or perform an individual assessment of expected credit losses. If it is determined that a foreclosure is probable, or we expect repayment through the operation or sale of the collateral and the borrower is experiencing financial difficulty, we calculate expected credit losses based on the fair value of the collateral as of the reporting date.

During the loan review process, if we determine that it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of a loan, we consider that loan impaired. We evaluate the capitalization and market discount rates, as well as the borrower's operating income and cash flows, in estimating the value of the underlying collateral when determining if a loan is impaired. We may also obtain a third party appraisal, which may value the collateral through an "as-is" or "stabilized value" methodology. Such appraisals may be used as an additional source of valuation information only and no adjustments are made to appraisals. If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, we record a specific allowance for credit losses with a corresponding charge to the provision for credit losses, and remove the impaired loan from the CECL analysis described above.

If the loan modification constitutes a concession whereas we do not receive ample consideration in return for the modification, and the borrower is experiencing financial difficulties and cannot repay the loan under the current terms, then the modification is considered by us to be a troubled debt restructuring. We record interest on modified loans on an accrual basis to the extent the modified loan is contractually current. The allowance for credit losses on a troubled debt restructuring is measured using the same method as all other loans held for investment.

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

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

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Note 3 — Loans and Investments

Our Structured Business loan and investment portfolio consists of ($ in thousands):

    

    

    

    

    

Wtd. Avg.

    

    

Remaining

Wtd. Avg.

Wtd. Avg.

Percent of

Loan

Wtd. Avg.

Months to

First Dollar

Last Dollar

September 30, 2020

Total

Count

Pay Rate (1)

Maturity

LTV Ratio (2)

LTV Ratio (3)

Bridge loans (4)

$

4,648,098

91

%  

234

 

5.24

%  

15.5

 

0

%  

77

%

Preferred equity investments

 

216,882

 

4

%  

12

 

7.03

%  

53.2

 

66

%  

89

%

Mezzanine loans

171,148

4

%  

29

7.52

%  

45.2

31

%  

81

%

Other (5)

 

60,759

 

1

%  

20

 

4.89

%  

79.9

 

0

%  

70

%

 

5,096,887

 

100

%  

295

 

5.39

%  

18.9

 

4

%  

78

%

Allowance for credit losses

(146,745)

Unearned revenue

 

(39,270)

Loans and investments, net

$

4,910,872

December 31, 2019

Bridge loans (4)

$

3,836,832

 

90

%  

217

 

5.77

%  

18.0

 

0

%  

75

%

Preferred equity investments

 

181,058

 

4

%  

10

 

7.62

%  

68.8

 

69

%  

89

%

Mezzanine loans

191,575

4

%  

24

9.70

%  

36.7

22

%  

73

%

Other (5)

70,146

2

%  

21

2.88

%  

84.8

0

%  

70

%

 

4,279,611

 

100

%  

272

 

5.98

%  

22.1

 

4

%  

76

%

Allowance for credit losses

 

(71,069)

Unearned revenue

 

(18,582)

Loans and investments, net

$

4,189,960

(1)“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balance (“UPB”) of each loan in our portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at maturity are not included in the weighted average pay rate as shown in the table.
(2)The “First Dollar Loan-to-Value (“LTV”) Ratio” is calculated by comparing the total of our senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will absorb a total loss of our position.
(3)The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.
(4)As of September 30, 2020 and December 31, 2019, bridge loans included 9 and 11, respectively, single-family rental loans with an aggregate UPB of $150.8 million and $66.7 million, respectively, of which $53.7 million and $30.0 million, respectively, was funded.
(5)As of September 30, 2020 and December 31, 2019, other included 20 and 12, respectively, single-family rental permanent loans with an aggregate UPB of $60.8 million and $41.6 million, respectively, and, at December 31, 2019, there were 9 purchased loans with an aggregate UPB of $28.6 million.

Concentration of Credit Risk

We are subject to concentration risk in that, at September 30, 2020, the UPB related to 22 loans with 5 different borrowers represented 13% of total assets. At December 31, 2019, the UPB related to 24 loans with 5 different borrowers represented 13% of

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

total assets. During both the nine months ended September 30, 2020 and the year ended December 31, 2019, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue. See Note 18 for details on our concentration of related party loans and investments.

We assign a credit risk rating of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, with a pass rating being the lowest risk and a doubtful rating being the highest risk. Each credit risk rating has benchmark guidelines that pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, and remaining loan term and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. This metric provides a helpful snapshot of portfolio quality and credit risk. All portfolio assets are subject to, at a minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed, however, we maintain a higher level of scrutiny and focus on loans that we consider “high risk” and that possess deteriorating credit quality.

Generally speaking, given our typical loan profile, risk ratings of pass, pass/watch and special mention suggest that we expect the loan to make both principal and interest payments according to the contractual terms of the loan agreement. A risk rating of substandard indicates we anticipate the loan may require a modification of some kind. A risk rating of doubtful indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal. Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, market strength or asset quality may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

A summary of the loan portfolio’s internal risk ratings and LTV ratios by asset class as of September 30, 2020 is as follows ($ in thousands):

    

    

    

Wtd. Avg.

    

Wtd. Avg.

 

UPB by Origination Year

First Dollar

Last Dollar

Asset Class / Risk Rating

2020

2019

2018

2017

2016

Prior

Total

LTV Ratio

LTV Ratio

Multifamily:

 

 

Pass

$

646,448

$

354,257

$

19,300

$

47,100

$

$

853

$

1,067,958

 

Pass/Watch

 

512,494

1,108,036

139,300

159,000

28,800

1,947,630

 

Special Mention

34,548

587,393

150,903

117,800

890,644

Substandard

42,100

66,546

34,200

8,250

151,096

Total Multifamily

$

1,193,490

$

2,091,786

$

376,049

$

358,100

$

8,250

$

29,653

$

4,057,328

4

%  

77

%

Land:

Percentage of portfolio

80

%  

Special Mention

$

71,018

$

19,523

$

$

19,975

$

$

$

110,516

Substandard

127,928

127,928

Total Land

$

71,018

$

19,523

$

$

19,975

$

$

127,928

$

238,444

0

%  

92

%

Healthcare:

Percentage of portfolio

5

%  

Pass

$

$

6,600

$

10,000

$

$

$

$

16,600

 

Pass/Watch

41,650

41,650

Special Mention

65,819

51,500

117,319

Substandard

8,500

8,500

Doubtful

4,625

4,625

Total Healthcare

$

$

80,919

$

61,500

$

46,275

$

$

$

188,694

0

%  

79

%

Student Housing:

Percentage of portfolio

4

%  

Special Mention

$

$

44,500

$

3,350

$

$

$

$

47,850

Substandard

23,500

13,000

67,250

103,750

Total Student Housing

$

23,500

$

44,500

$

16,350

$

67,250

$

$

$

151,600

12

%  

79

%

Hotel:

Percentage of portfolio

3

%

Substandard

$

60,000

$

91,000

$

$

$

$

$

151,000

Total Hotel

$

60,000

$

91,000

$

$

$

$

$

151,000

0

%

90

%

Office:

Percentage of portfolio

3

%  

Pass

$

$

$

5,000

$

$

$

$

5,000

Pass/Watch

35,410

35,410

Special Mention

42,799

43,151

9,681

95,631

Doubtful

880

880

Total Office

$

35,410

$

$

47,799

$

43,151

$

$

10,561

$

136,921

3

%  

80

%

Single-Family Rental:

Percentage of portfolio

3

%  

Pass

$

29,804

$

34,640

$

$

$

$

$

64,444

Pass/Watch

1,611

38,061

39,672

Special Mention

10,351

10,351

Total Single-Family Rental

$

41,766

$

72,701

$

$

$

$

$

114,467

0

%  

64

%

Other:

Percentage of portfolio

1

%  

Pass

$

$

4,000

$

$

3,574

$

$

$

7,574

Pass/Watch

9,000

10,006

19,006

Special Mention

26,600

26,600

Substandard

3,553

3,553

Doubtful

1,700

1,700

Total Other

$

$

4,000

$

35,600

$

13,580

$

$

5,253

$

58,433

7

%  

65

%

Percentage of portfolio

1

%  

Grand Total

$

1,425,184

$

2,404,429

$

537,298

$

548,331

$

8,250

$

173,395

$

5,096,887

4

%  

78

%

Geographic Concentration Risk

As of September 30, 2020, 16% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. As of December 31, 2019, 18% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. No other states represented 10% or more of the total loan and investment portfolio.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Allowance for Credit Losses

A summary of the changes in the allowance for credit losses is as follows (in thousands):

    

Three Months Ended September 30, 2020

    

Land

    

Multifamily

    

Retail

    

Office

    

Hotel

    

Student Housing

    

Healthcare

    

Other

    

Total

Allowance for credit losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

78,094

$

34,606

$

13,981

$

8,532

$

7,672

$

4,110

$

3,930

$

1,886

$

152,811

Provision for credit losses (net of recoveries)

 

(84)

 

103

 

(40)

 

(6,589)

 

(133)

675

 

(21)

 

23

 

(6,066)

Ending balance

$

78,010

$

34,709

$

13,941

$

1,943

$

7,539

$

4,785

$

3,909

$

1,909

$

146,745

Three Months Ended September 30, 2019

Allowance for credit losses

$

67,869

$

$

$

1,500

$

$

$

$

1,700

$

71,069

Nine Months Ended September 30, 2020

Allowance for credit losses:

Beginning balance, prior to adoption of CECL

$

67,869

$

$

$

1,500

$

$

$

$

1,700

$

71,069

Impact of adopting CECL - January 1, 2020

77

16,322

335

287

29

68

64

112

17,294

Provision for credit losses (net of recoveries)

10,064

18,387

13,606

156

7,510

4,717

3,845

97

58,382

Ending balance

$

78,010

$

34,709

$

13,941

$

1,943

$

7,539

$

4,785

$

3,909

$

1,909

$

146,745

Nine Months Ended September 30, 2019

Allowance for credit losses

$

67,869

$

$

$

1,500

$

$

$

$

1,700

$

71,069

The decrease in the provision for credit losses during the three months ended September 30, 2020 of $6.1 million was due to improved market conditions and expected future forecasts during the third quarter of 2020. The increase in the provision for credit losses during the nine months ended September 30, 2020 of $58.4 million, compared to the January 1, 2020 cumulative-effect adjustment upon adoption of CECL of $17.3 million, is primarily attributed to the significant adverse change in the economic outlook during the first half of 2020 due to the COVID-19 pandemic. Our estimate of allowance for credit losses on our structured loans and investments, including related unfunded loan commitments, during 2020 was based on a reasonable and supportable forecast period that was adjusted for the expectations that the markets we operate in will experience declines in economic conditions, increases in unemployment rates and other market driven factors largely the result of the COVID-19 pandemic that will likely impact loan delinquencies, modifications and potential risk of loss. For the periods beyond the reasonable and supportable forecast, we reverted to our historical loss rate, which was adjusted to address for factors that are not present in our existing portfolio. We also made adjustments for loans that are expected to extend based on available extension options and the timing of their maturities in relation to current economic conditions.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

The expected credit losses over the contractual period of our loans also include the obligation to extend credit through our unfunded loan commitments. Our CECL allowance for unfunded loan commitments are adjusted quarterly and correspond with the associated outstanding loans. As of September 30, 2020, we had outstanding unfunded commitments of $194.9 million that we are obligated to fund as borrowers meet certain requirements.

As of September 30, 2020, accrued interest receivable related to our loans totaling $38.1 million was excluded from the estimate of credit losses and is included in other assets on the consolidated balance sheet.

All of our structured loans and investments are collateral dependent, and as such, the measurement of credit losses may be based on the difference between the fair value of the underlying collateral and the carrying value of the assets as of the period end. A summary of our specific loans considered impaired by asset class is as follows (in thousands):

September 30, 2020

Wtd. Avg. First

Wtd. Avg. Last

Carrying

Allowance for

Dollar LTV

Dollar LTV

Asset Class

    

UPB (1)

    

 Value

    

Credit Losses

Ratio

    

Ratio

Land

$

134,215

$

127,378

$

77,869

0

%

98

%

Hotel

 

110,000

 

89,216

 

7,500

 

0

%

 

94

%

Retail

 

30,154

 

28,774

 

13,926

 

11

%

 

74

%

Healthcare

 

4,625

 

4,673

 

3,845

 

0

%

 

83

%

Office

 

2,181

2,181

 

1,500

 

0

%

 

73

%

Commercial

 

1,700

 

1,700

 

1,700

 

63

%

 

63

%

Total

$

282,875

$

253,922

$

106,340

0

%

87

%

December 31, 2019

Land

    

$

134,215

    

$

126,800

    

$

67,869

    

0

%

97

%

Office

 

2,226

 

2,226

 

1,500

 

0

%

 

78

%

Commercial

1,700

1,700

1,700

63

%

63

%

Total

$

138,141

$

130,726

$

71,069

1

%

96

%

(1)Represents the UPB of 10 and 5 impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at September 30, 2020 and December 31, 2019, respectively.

There were 0 loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for credit loss as of September 30, 2020 and December 31, 2019.

At September 30, 2020, 8 loans with an aggregate net carrying value of $53.8 million, net of related loan loss reserves of $9.1 million, were classified as non-performing and, at December 31, 2019, 3 loans with an aggregate net carrying value of $1.8 million, net of related loan loss reserves of $1.7 million, were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis when it is received. Full income recognition will resume when the loan becomes contractually current and performance has recommenced.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

A summary of our non-performing loans by asset class is as follows (in thousands):

September 30, 2020

December 31, 2019

Less Than 

Greater  Than

Less Than 

Greater  Than

90 Days

90 Days

90 Days

90 Days

     

UPB

     

Past Due

     

Past Due

     

UPB

     

Past Due

     

Past Due

Student Housing

$

36,500

$

$

36,500

$

$

$

Multifamily

17,700

17,700

Healthcare

4,625

4,625

Retail

3,553

3,553

1,000

1,000

Commercial

1,700

1,700

1,700

1,700

Office

880

880

880

880

Total

$

64,958

$

$

64,958

$

3,580

$

$

3,580

In addition, we have 6 loans with a carrying value totaling $120.9 million at September 30, 2020, that are collateralized by a land development project. These loans were scheduled to mature in September 2020 and we are currently in negotiations with the borrower to extend the maturity. The loans do not carry a current pay rate of interest, however, 5 of the loans with a carrying value totaling $111.5 million entitle us to a weighted average accrual rate of interest of 7.86%. In 2008, we suspended the recording of the accrual rate of interest on these loans, as they were impaired and we deemed the collection of this interest to be doubtful. At September 30, 2020 and December 31, 2019, we had a cumulative allowance for credit losses of $71.4 million and $61.4 million, respectively, related to these loans. The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development's outputs upon completion of the project, and litigation risk. Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

At both September 30, 2020 and December 31, 2019, we had 0 loans contractually past due 90 days or more that are still accruing interest. During both the three and nine months ended September 30, 2020 and 2019, interest income recognized on nonaccrual loans was de minimis.

In the fourth quarter of 2019, we purchased $50.0 million of a $110.0 million bridge loan, which is collateralized by a hotel property and scheduled to mature in December 2022. In the first quarter of 2020, we recorded a $7.5 million allowance for credit losses due to a reduction in the appraisal value of the property. In August 2020, we purchased the remaining $60.0 million bridge loan at a discount for $39.9 million, which we determined had experienced a more than insignificant deterioration in credit quality since origination and, therefore, deemed to be a purchased loan with credit deterioration. The total discount received of $20.1 million was classified as a noncredit discount and no portion of the discount was allocated to allowance for credit losses at the date of purchase since the appraised value of the property is greater than the purchase price. Shortly after the purchase, we entered into a forbearance agreement with the borrower to temporarily reduce the interest rate from LIBOR plus 3.00% with a 1.50% LIBOR floor to a pay rate of 1.00% and to include a $10.0 million principal reduction if the loan is paid-off by March 2, 2021. The temporary reduction in the interest rate is deferred to payoff.

In August 2020, we entered into a loan modification agreement on a $26.5 million bridge loan with an interest rate of LIBOR plus 6.00% with a 2.375% LIBOR floor and a $6.1 million mezzanine loan with a fixed rate of 12% collateralized by a retail property to: (1) reduce the interest rate on both loans to the greater of: (i) LIBOR plus 5.50% and (ii) 6.50%, and (2) to extend the maturity date three years to December 2024. A portion of the foregoing interest equal to 2.00% will be deferred to payoff and will be waived if the loan is paid-off by December 31, 2022. The loan modification agreement also includes a $6.0 million required principal paydown, which occurred at the closing of the modification transaction, and an $8.0 million principal reduction once the borrower deposits an additional reserve deposit of approximately $4.6 million by December 31, 2021. We have the ability to potentially recapture up to $8.0 million of the principal reduction to the extent that the property is sold or refinanced in excess of the debt.

These 2 loan modifications were deemed troubled debt restructurings. There were 0 loan modifications, refinancing's and/or extensions during 2019 that were considered troubled debt restructurings.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs. At September 30, 2020 and December 31, 2019, we had total interest reserves of $56.6 million and $37.0 million, respectively, on 152 loans and 131 loans, respectively, with an aggregate UPB of $2.99 billion and $2.43 billion, respectively.

Note 4 — Loans Held-for-Sale, Net

Our GSE loans held-for-sale are typically sold within 60 days of loan origination, while our Private Label loans are generally expected to be sold and securitized within 180 days of loan origination. Loans held-for-sale, net consists of the following (in thousands):

     

September 30, 2020

     

December 31, 2019

Fannie Mae

$

392,343

$

408,534

Freddie Mac

 

155,729

36,303

FHA

58,546

1,082

Private Label

11,302

401,207

 

617,920

847,126

Fair value of future MSR

14,577

16,519

Unearned discount

 

(1,359)

(2,285)

Loans held-for-sale, net

$

631,138

$

861,360

During the three and nine months ended September 30, 2020, we sold $1.22 billion and $4.17 billion, respectively, of loans held-for-sale and recorded gain on sales of $19.2 million and $57.3 million, respectively. Included in the total loans sold in the second quarter of 2020 were Private Label loans totaling $727.2 million, which were sold to an unconsolidated affiliate of ours who pooled and securitized the loans in May 2020. We retained the most subordinate class of certificates in the securitization totaling $63.6 million in satisfaction of credit risk retention requirements (see Note 7 for details), and are the primary servicer of the mortgage loans.

During the three and nine months ended September 30, 2019, we sold $1.49 billion and $3.51 billion, respectively, of loans held-for-sale and recorded gain on sales of $20.1 million and $48.1 million, respectively. At September 30, 2020 and December 31, 2019, there were 0 loans held-for-sale that were 90 days or more past due, and there were 0 loans held-for-sale that were placed on a non-accrual status.

Note 5 — Capitalized Mortgage Servicing Rights

Our capitalized mortgage servicing rights (“MSRs”) reflect commercial real estate MSRs derived from loans sold in our Agency Business or acquired MSRs. The discount rates used to determine the present value of our MSRs throughout the periods presented for all MSRs were between 8% - 13% (representing a weighted average discount rate of 11%) based on our best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 8.3 years and 8.0 years at September 30, 2020 and December 31, 2019, respectively.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

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

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

     

Originated

     

Acquired

     

Total

     

Originated

     

Acquired

     

Total

Beginning balance

$

260,452

$

52,836

$

313,288

$

221,901

$

64,519

$

286,420

Additions

37,403

37,403

97,554

97,554

Amortization

(8,811)

(3,605)

(12,416)

(24,425)

(11,704)

(36,129)

Write-downs and payoffs

(2,081)

(959)

(3,040)

(8,067)

(4,543)

(12,610)

Ending balance

$

286,963

$

48,272

$

335,235

$

286,963

$

48,272

$

335,235

     

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Beginning balance

$

197,156

$

79,492

$

276,648

$

176,686

$

97,084

$

273,770

Additions

25,945

25,945

62,477

62,477

Amortization

(7,084)

(5,041)

(12,125)

(20,229)

(16,502)

(36,731)

Write-downs and payoffs

(3,772)

(3,008)

(6,780)

(6,689)

(9,139)

(15,828)

Ending balance

$

212,245

$

71,443

$

283,688

$

212,245

$

71,443

$

283,688

We collected prepayment fees totaling $2.0 million and $10.1 million during the three and nine months ended September 30, 2020, respectively, and $5.3 million and $13.8 million during the three and nine months ended September 30, 2019, respectively. Prepayment fees are included as a component of servicing revenue, net on the consolidated statements of income. As of September 30, 2020 and December 31, 2019, we had 0 valuation allowance recorded on any of our MSRs.

The expected amortization of capitalized MSRs recorded as of September 30, 2020 is as follows (in thousands):

Year

     

Amortization

2020 (three months ending 12/31/2020)

$

12,869

2021

 

49,613

2022

 

45,577

2023

 

41,522

2024

37,388

2025

34,236

Thereafter

 

114,030

Total

$

335,235

Actual amortization may vary from these estimates.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Note 6 — Mortgage Servicing

Product and geographic concentrations that impact our servicing revenue are as follows ($ in thousands):

September 30, 2020

Product Concentrations

Geographic Concentrations

UPB 

    

    

Percent of

    

    

Percentage

 

Product

UPB (1)

Total

State

of Total

Fannie Mae

$

16,462,041

73

%  

Texas

17

%

Freddie Mac

4,687,197

 

21

%  

New York

9

%

Private Label (2)

727,063

3

%  

North Carolina

9

%

FHA

685,263

 

3

%  

California

8

%

Total

$

22,561,564

100

%  

Florida

7

%

Georgia

6

%

Other (3)

44

%

Total

100

%

December 31, 2019

Fannie Mae

    

$

14,832,844

    

74

%  

Texas

    

19

%

Freddie Mac

4,534,714

23

%  

North Carolina

9

%

FHA

691,519

3

%  

New York

9

%

Total

$

20,059,077

100

%  

California

9

%

Florida

6

%

Georgia

6

%

Other (3)

42

%

Total

100

%

(1)Excludes loans which we are not collecting a servicing fee.
(2)Represents loans we service in connection with our Private Label securitization in May 2020 (see Note 4 for details).
(3)NaN other individual state represented 4% or more of the total.

At September 30, 2020 and December 31, 2019, our weighted average servicing fee was 44.8 basis points and 43.8 basis points, respectively. At September 30, 2020 and December 31, 2019, we held total escrow balances of $1.15 billion and $947.1 million, respectively, which is not reflected in our consolidated balance sheets. Of the total escrow balances, we held $784.4 million and $562.1 million at September 30, 2020 and December 31, 2019, respectively, related to loans we are servicing within our Agency Business. These escrows are maintained in separate accounts at several federally insured depository institutions, which may exceed FDIC insured limits. We earn interest income on the total escrow deposits, generally based on a market rate of interest negotiated with the financial institutions that hold the escrow deposits. Interest earned on total escrows, net of interest paid to the borrower, was $1.3 million and $5.8 million during the three and nine months ended September 30, 2020, respectively, and $4.7 million and $12.9 million during the three and nine months ended September  30, 2019, respectively, and is a component of servicing revenue, net in the consolidated statements of income.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Note 7 — Securities Held-to-Maturity

Agency B Piece Bonds. Freddie Mac may choose to hold, sell or securitize loans we sell to them under the Freddie Mac SBL program. As part of the securitizations under the SBL program, we have the option to purchase the B Piece bond through a bidding process, which represents the bottom 10%, or highest risk, of the securitization. As of September 30, 2020, we retained 49%, or $106.2 million initial face value, of 7 B Piece bonds, which were purchased at a discount for $74.7 million, and sold the remaining 51% to a third-party at par. These securities are collateralized by a pool of multifamily mortgage loans, bear interest at an initial weighted average variable rate of 3.74% and have an estimated weighted average remaining maturity of 5.7 years. The weighted average effective interest rate was 10.68% and 10.85% at September 30, 2020 and December 31, 2019, respectively, including the accretion of a portion of the discount deemed collectible. Approximately $12.8 million is estimated to mature within one year, $37.8 million is estimated to mature after one year through five years, $14.6 million is estimated to mature after five years through ten years and $15.8 million is estimated to mature after ten years.

Agency Private Label Certificates. In connection with our $727.2 million Private Label securitization in May 2020, we retained the most subordinate class of certificates with an initial face value of $63.6 million (the “APL certificates”). We purchased the APL certificates at a discount for $37.9 million, which are collateralized by a pool of 40 fixed rate 10-year mortgage loans secured by first mortgage leans on 49 multifamily properties, bear interest at an initial weighted average variable rate of 4.95% and have an estimated weighted average remaining maturity of 9.3 years. The weighted average effective interest rate was 10.15% at September 30, 2020 and the full $63.6 million is expected to mature after five years through ten years.

Structured Single-Family Rental Bonds (“SFR bonds”). As of September 30, 2020, we held $20.0 million initial face value of Class A2 securitized SFR bonds at par, which are collateralized by a pool of single-family rental properties. These securities have a three-year maturity, bear interest at a weighted average fixed interest rate of 4.58% and have an estimated weighted average remaining maturity of 0.4 years. Approximately $19.0 million is estimated to mature within one year and $1.0 million is estimated to mature after one year through five years.

A summary of our securities held-to-maturity is as follows (in thousands):

Net Carrying

Unrealized 

Estimated 

Allowance for

    

Face Value

    

Value

    

Gain/(Loss)

    

Fair Value

    

Credit Losses

September 30, 2020

B Piece bonds

$

80,929

$

60,662

$

953

$

61,615

$

861

APL certificates

63,627

37,598

(2,012)

35,586

767

SFR bonds

20,000

20,000

(1,588)

18,412

Total

$

164,556

$

118,260

$

(2,647)

$

115,613

$

1,628

December 31, 2019

B Piece bonds

$

91,028

$

68,699

$

2,965

$

71,664

$

SFR bonds

20,000

20,000

74

20,074

Total

$

111,028

$

88,699

$

3,039

$

91,738

$

A summary of the changes in the allowance for credit losses for our securities held-to-maturity is as follows (in thousands):

    

Three Months Ended September 30, 2020

APL 

B Piece 

    

        

Certificates

    

Bonds

    

Total

Beginning balance

$

2,079

$

1,069

$

3,148

Provision for credit loss expense

 

(1,312)

 

(208)

 

(1,520)

Ending balance

$

767

$

861

$

1,628

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Nine Months Ended September 30, 2020

APL
Certificates

B Piece
Bonds

Total

Beginning balance, prior to adoption of CECL

$

$

$

Impact of adopting CECL - January 1, 2020

 

 

501

 

501

Provision for credit loss expense

 

767

 

360

 

1,127

Ending balance

$

767

$

861

$

1,628

The allowance for credit losses on our held-to-maturity securities was estimated on a collective basis by major security type and was based on a reasonable and supportable forecast period and a historical loss reversion for similar securities. The issuers continue to make timely principal and interest payments and we continue to accrue interest on all our securities. As of September 30, 2020, 0 other-than-temporary impairment was recorded on our held-to-maturity securities.

We recorded interest income (including the amortization of discount) related to these investments of $2.9 million and $6.9 million during the three and nine months ended September 30, 2020, respectively, and $2.3 million and $6.8 million during the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, accrued interest receivable related to these bonds totaling $0.6 million was excluded from the estimate of credit losses and is included in other assets on the consolidated balance sheet.

Note 8 — Investments in Equity Affiliates

We account for all investments in equity affiliates under the equity method. A summary of our investments in equity affiliates is as follows (in thousands):

UPB of Loans to

Investments in Equity Affiliates at

Equity Affiliates at

Equity Affiliates

    

September 30, 2020

    

December 31, 2019

    

September 30, 2020

Arbor Residential Investor LLC

$

67,783

$

26,520

$

AMAC Holdings III LLC

9,746

10,520

North Vermont Avenue

2,473

2,440

Lightstone Value Plus REIT L.P

1,895

1,895

JT Prime

 

425

 

425

 

West Shore Café

1,687

Lexford Portfolio

East River Portfolio

 

 

 

Total

$

82,322

$

41,800

$

1,687

Arbor Residential Investor LLC (“ARI”). During the three and nine months ended September 30, 2020, we recorded income of $32.3 million and $56.1 million, respectively, and during the three and nine months ended September 30, 2019, we recorded income of $2.6 million and $6.1 million, respectively, to income from equity affiliates in our consolidated statements of income. During the third quarter of 2020, we received a $15.0 million cash distribution from this equity investment, which was classified as a return on capital.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Summarized statements of income for our investment in ARI are as follows (in thousands):

Nine Months Ended September 30, 

    

2020

    

2019

Statements of Income:

 

  

 

  

Total revenues

$

1,050,946

 

$

335,610

Total expenses

 

665,552

 

294,660

Net income

$

385,394

 

$

40,950

Lexford Portfolio. During the first quarter of 2020, we received distributions of $1.1 million and during the three and nine months ended September 30, 2019, we received distributions of $1.2 million and $3.0 million, respectively, from this equity investment, which was recognized as income. As a result of COVID-19, Lexford has temporarily suspended paying distributions to its equity holders.

See Note 18 for details of certain investments described above.

Note 9 — Real Estate Owned

A summary of our real estate assets is as follows (in thousands):

September 30, 2020

December 31, 2019

    

Office

    

Hotel

    

Office

    

Building

Property

Building

Total

Land

$

4,509

$

3,294

$

4,509

$

7,803

Building and intangible assets

2,010

 

31,541

 

2,010

 

33,551

Less: Impairment loss

(2,500)

(14,307)

(2,500)

(16,807)

Less: Accumulated depreciation and amortization

(1,125)

 

(10,320)

 

(1,007)

 

(11,327)

Real estate owned, net

$

2,894

$

10,208

$

3,012

$

13,220

In September 2020, we sold our hotel property for $8.4 million and recorded a $1.9 million loss, which was included in loss on sale of real estate. In addition, we recorded a $2.5 million charge for a litigation settlement, which is included in selling and administrative expenses.

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

At December 31, 2019, our hotel property had a restricted cash balance totaling $0.5 million due to escrow requirements.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Note 10 — Debt Obligations

Credit Facilities and Repurchase Agreements

Borrowings under our credit facilities and repurchase agreements are as follows ($ in thousands):

September 30, 2020

December 31, 2019

Debt

Collateral

Debt

Collateral

 

Current

Extended

Carrying

Carrying

Wtd. Avg.

Carrying

Carrying

Wtd. Avg.

  

Maturity

  

Maturity

  

Note Rate

  

Value (1)

  

Value

  

Note Rate

  

Value (1)

  

Value

  

Note Rate

 

Structured Business

$500 million joint repurchase facility (2)

Mar. 2022

N/A

L +

1.75

%  

to

3.50

%  

$

315,181

$

485,250

2.82

%

$

224,658

$

339,378

4.06

$400 million repurchase facility

June. 2021

Mar. 2023

L +

2.20

%;  

L floor

0.75

%  

 

180,642

 

254,068

2.99

%

 

218,418

 

291,292

3.76

$200 million repurchase facility

Sept. 2021

N/A

L +

2.40

%  

to

3.00

%;

L floor

0.25

%  

58,112

70,377

2.71

%

40,530

48,086

4.22

$149.6 million loan specific credit facilities

Nov. 2020 to May 2022

June 2021 to Dec. 2021

L +

2.20

%  

to

2.50

%;

3.50

%  

 

149,377

 

200,549

2.68

%

 

133,528

 

190,716

4.14

$100 million credit facility

July 2021

N/A

L+

2.30

%  

to

3.00

%;

L floor

0.50

%

25,633

32,079

1.92

%

4,570

7,000

3.56

$100 million repurchase facility

Sept. 2021

N/A

L +

1.75

%  

to

2.50

%;

L floor

0.50

%  

 

50,309

 

66,486

1.92

 

45,843

 

63,800

3.56

$50 million credit facility

April 2021

April 2022

L +

2.00

%  

 

24,785

 

32,300

2.18

 

14,933

 

17,650

3.81

$50 million credit facility

Oct. 2022

Oct. 2023

L +

2.50

%;  

4.00

%

all in floor rate

23,414

31,374

4.06

%

12,191

16,499

4.32

$25 million credit facility

June 2022

June 2023

L +

2.25

%  

10,894

17,022

2.43

%

19,651

28,572

4.07

$25 million working capital facility

Nov. 2020

N/A

L +

2.25

%  

$1.8 million master security agreements

Dec. 2022

N/A

2.97

%  

to

4.60

%  

1,815

4.14

%

3,267

4.08

%

Repurchase facilities - securities (3)

N/A

N/A

L +

2.25

%

to

5.00

%

42,226

4.72

%

217,105

3.90

%

Structured Business total

$

882,388

$

1,189,505

2.85

%

$

934,694

$

1,002,993

3.94

Agency Business

$750 million ASAP agreement

N/A

N/A

L +

1.05

%;  

L floor

0.35

%

$

163,851

$

163,851

1.40

%

$

148,725

$

148,725

2.81

$600 million joint repurchase facility

Mar. 2021

Mar. 2022

L +

2.50

%  

to

2.75

%

6,927

11,302

2.77

299,824

300,446

3.26

$300 million repurchase facility (4)

Oct. 2020

N/A

L +

1.15

%  

160,398

183,177

1.30

%

187,698

187,742

2.91

$150 million credit facility

Mar. 2021

N/A

L +

1.15

%  

54,586

77,676

1.30

%

89,657

89,673

2.91

$150 million credit facility

July 2021

N/A

L +

1.40

%;

L floor

0.25

%

117,413

117,537

1.65

%

17,690

17,792

2.91

$100 million credit facility

June 2021

N/A

L +

1.15

%;

L floor

0.50

%

64,377

64,377

1.65

%

Agency Business total

$

567,552

$

617,920

2.98

%

$

743,594

$

744,378

3.03

Consolidated total

$

1,449,940

$

1,807,425

2.90

%

$

1,678,288

$

1,747,371

3.54

(1)The debt carrying value for the Structured Business at September 30, 2020 and December 31, 2019 was net of unamortized deferred finance costs of $3.5 million and $2.1 million, respectively. The debt carrying value for the Agency Business at September 30, 2020 and December 31, 2019 was net of unamortized deferred finance costs of $0.9 million and $0.2 million, respectively.
(2)This facility includes a LIBOR floor equal to 75% of the LIBOR floors included in our originated loans.
(3)These repurchase facilities are subject to margin call provisions associated with changes in interest spreads. As of September 30, 2020 and December 31, 2019, these facilities were collateralized by our CLO bonds retained and consolidated by us with a principal balance of $275.7 million and $234.9 million, respectively, B Piece bonds held-to-maturity with a carrying value of $60.7 million and $68.7 million, respectively, and SFR bonds with a carrying value of $20.0 million at both September 30, 2020 and December 31, 2019. During the nine months ended September 30, 2020, we significantly reduced the UPB of these facilities by $175.0 million to $42.2 million through a debt restructuring and the use of proceeds from our senior notes issued in the second quarter of 2020.
(4)This facility was amended in October 2020 to increase the facility to $400.0 million, extend the maturity to October 2021 and increase the interest rate to LIBOR plus 150 basis points.

Generally, our credit facilities and repurchase agreements have extension options that are at the discretion of the banking institutions in which we have long standing relationships with. These facilities typically renew annually and also include a "wind-down" feature.

Joint Repurchase Facility. During the first quarter of 2020, we amended our joint repurchase facility shared between the Structured Business and the Agency Business to increase the total committed amount by $400.0 million to $1.10 billion, of which $600.0 million matures in March 2021 and $500.0 million matures in March 2022, with each maturity eligible for a one-year extension option. The amended facility includes an $800.0 million sublimit for Private Label loans, which reduces to $500.0 million in March 2021 unless that portion of the facility is extended through March 2022.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Structured Business

At September 30, 2020 and December 31, 2019, the weighted average interest rate for the credit facilities and repurchase agreements of our Structured Business, including certain fees and costs, such as structuring, commitment, non-use and warehousing fees, was 3.18% and 4.39%, respectively. The leverage on our loan and investment portfolio financed through our credit facilities and repurchase agreements, excluding the securities repurchase facilities, working capital facility and the master security agreements used to finance leasehold and capital expenditure improvements at our corporate office, was 71% at both September 30, 2020 and December 31, 2019.

In September 2020, we amended our $200.0 million repurchase facility to extend the maturity date to September 2021 and increase the interest rate 60 basis points with a LIBOR floor of 25 basis points on new loans and on existing loans after February 2021.

In September 2020, we amended our $100.0 million repurchase facility to extend the maturity date to September 2021, remove the stated interest rate range of 175 basis points to 195 basis points over LIBOR to a loan specific rate to be determined on a loan-by-loan basis and added a LIBOR floor of 50 basis points.

In July 2020, we amended our $125.0 million credit facility decreasing the committed amount under the facility to $100.0 million and extended the maturity date to July 2021. Previously during 2020, we increased the committed amount under this facility from $75.0 million to $125.0 million, increased the interest rate range by 50 to 55 basis points and added a LIBOR floor of 50 basis points.

In June 2020, we entered into a $23.0 million credit facility used to finance a multifamily bridge loan. The facility bears interest at a fixed rate of 3.50% and matures in September 2021.

In March 2020, we amended our $300.0 million repurchase agreement, increasing the committed amount to $400.0 million. In June 2020, we further amended this repurchase agreement extending the maturity date to June 2021 and increasing the interest rate by 25 basis points with a LIBOR floor of 75 basis points.

Agency Business

In the third quarter of 2020, we amended one of our $150.0 million credit facilities increasing the interest rate 25 basis points and adding a LIBOR floor of 25 basis points and extending the maturity date to July 2021. In addition, we added a $50.0 million sublimit for principal and interest advances we make as the primary servicer to Fannie Mae in connection with potential delinquent loans under the Fannie Mae forbearance program. The sublimit bears interest at a rate of 200 basis points over LIBOR, with a LIBOR floor of 25 basis points.

In September 2020, we amended our $50.0 million letter of credit facility with a financial institution to secure obligations under the Fannie Mae DUS program and the Freddie Mac SBL program to extend the maturity three years to September 2023.

In March 2020, we amended our $500.0 million repurchase facility reducing the committed amount to $300.0 million.

Collateralized Loan Obligations (“CLOs”)

We account for CLO transactions on our consolidated balance sheet as financing facilities. Our CLOs are VIEs for which we are the primary beneficiary and are consolidated in our financial statements. The investment grade tranches are treated as secured financings, and are non-recourse to us.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Borrowings and the corresponding collateral under our CLOs are as follows ($ in thousands):

Debt

Collateral (3)

Loans

Cash

    

    

Carrying

    

Wtd. Avg.

    

    

Carrying

    

Restricted

September 30, 2020

Face Value

Value (1)

Rate (2)

UPB

Value

Cash (4)

CLO XIII

$

668,000

$

663,506

1.58

%  

$

764,080

$

760,847

$

21

CLO XII

534,193

530,361

1.67

%  

613,702

611,790

9,210

CLO XI

533,000

529,554

1.61

%  

632,441

630,452

414

CLO X

441,000

438,169

1.62

%  

520,153

518,537

32,276

CLO IX

 

356,400

 

354,442

1.53

%  

 

473,158

 

471,970

 

3,369

Total CLOs

$

2,532,593

$

2,516,032

1.61

%  

$

3,003,534

$

2,993,596

$

45,290

December 31, 2019

    

CLO XII

$

534,193

$

529,448

3.30

%  

$

596,366

$

593,652

$

17,800

CLO XI

533,000

528,690

3.25

%  

624,443

621,508

15,550

CLO X

 

441,000

 

437,391

3.26

%  

 

509,887

 

507,854

 

37,287

CLO IX

356,400

353,473

3.17

%  

407,696

406,463

47,230

CLO VIII

282,874

281,119

3.12

%  

359,186

357,914

544

Total CLOs

$

2,147,467

$

2,130,121

3.23

%  

$

2,497,578

$

2,487,391

$

118,411

(1)Debt carrying value is net of $16.6 million and $17.3 million of deferred financing fees at September 30, 2020 and December 31, 2019, respectively.
(2)At September 30, 2020 and December 31, 2019, the aggregate weighted average note rate for our CLOs, including certain fees and costs, was 1.94% and 3.63%, respectively.
(3)As of September 30, 2020, there was 1 loan with a UPB of $16.6 million deemed at risk of default or a “credit risk” as defined by the CLO indenture, which we repurchased from the respective CLOs in October 2020. As of December 31, 2019, there was 0 collateral deemed a credit risk.
(4)Represents restricted cash held for principal repayments as well as for reinvestment in the CLOs. Does not include restricted cash related to interest payments, delayed fundings and expenses totaling $58.1 million and $58.6 million at September 30, 2020 and December 31, 2019, respectively.

CLO XIII. In March 2020, we completed CLO XIII, issuing 8 tranches of CLO notes through 2 newly-formed wholly-owned subsidiaries totaling $738.0 million. Of the total CLO notes issued, $668.0 million were investment grade notes issued to third party investors and $70.0 million were below investment grade notes retained by us. As of the CLO closing date, the notes were secured by a portfolio of loan obligations with a face value of $640.5 million, consisting primarily of bridge loans that were contributed from our existing loan portfolio. The financing has a three-year replacement period that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $159.5 million for the purpose of acquiring additional loan obligations for a period of up to 180 days from the CLO closing date (all of which was subsequently utilized) which resulted in the issuer owning loan obligations with a face value of $800.0 million, representing leverage of 84%. We retained a residual interest in the portfolio with a notional amount of $132.0 million, including the $70.0 million below investment grade notes. The notes sold to third parties had an initial weighted average interest rate of 1.41% plus one-month LIBOR and interest payments on the notes are payable monthly.

CLO VIII. In March 2020, we completed the unwind of CLO VIII, redeeming $282.9 million of outstanding notes, which were repaid primarily from the refinancing of the remaining assets primarily within CLO XIII, as well as with cash held by CLO VIII, and expensed $1.5 million of deferred financing fees into loss on extinguishment of debt on the consolidated statements of income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

Luxembourg Debt Fund

Our Luxembourg commercial real estate debt fund (“Debt Fund”) was a VIE for which we were the primary beneficiary and was consolidated in our financial statements. In April 2020, we completed the unwind of the Debt Fund and redeemed all the outstanding notes with a portion of the proceeds from our senior unsecured notes issued in March 2020 described below and recorded a loss on extinguishment of debt of $1.6 million, which was primarily comprised of deferred financing fees.

Senior Unsecured Notes

A summary of our senior unsecured notes is as follows (in thousands):

Senior

September 30, 2020

December 31, 2019

 

Unsecured

Issuance 

Carrying 

Wtd. Avg. 

Carrying 

Wtd. Avg. 

 

Notes

    

Date

    

Maturity

    

UPB

    

Value (1)

    

Rate (2)

    

UPB

    

Value (1)

    

Rate (2)

 

8.00% Notes (3)

 

Apr. 2020

 

Apr. 2023

 

$

70,750

$

69,691

 

8.00

%  

$

$

 

4.50% Notes (3)

 

Mar. 2020

 

Mar. 2027

 

 

275,000

 

271,873

 

4.50

%  

 

 

 

4.75% Notes (4)

 

Oct. 2019

 

Oct. 2024

 

 

110,000

 

108,580

 

4.75

%  

 

110,000

 

108,370

 

4.75

%

5.75% Notes (4)

 

Mar. 2019

 

Apr. 2024

 

 

90,000

 

88,655

 

5.75

%  

 

90,000

 

88,369

 

5.75

%

5.625% Notes (4)

 

Mar. 2018

 

May 2023

 

 

125,000

 

123,490

 

5.63

%  

 

125,000

 

123,060

 

5.63

%

$

670,750

$

662,289

 

5.29

%  

$

325,000

$

319,799

 

5.44

%

(1)At September 30, 2020 and December 31, 2019, the carrying value is net of deferred financing fees of $8.5 million and $5.2 million, respectively.
(2)At September 30, 2020 and December 31, 2019, the aggregate weighted average note rate, including certain fees and costs, was 5.65% and 5.82%, respectively.
(3)These notes can be redeemed by us prior to three months before the maturity date, at a redemption price equal to 100% of the aggregate principal amount, plus a "make-whole" premium and accrued and unpaid interest. We have the right to redeem the notes three months prior to or after the maturity date, at a redemption price equal to 100% of the aggregate principal amount, plus accrued and unpaid interest.
(4)These notes can be redeemed by us at any time prior to the maturity date, at a redemption price equal to 100% of the aggregate principal amount, plus a “make-whole” premium and accrued and unpaid interest. We have the right to redeem the notes on or after the maturity date, at a redemption price equal to 100% of the aggregate principal amount, plus accrued and unpaid interest.

In April 2020, we issued $40.5 million aggregate principal amount of 8.00% senior unsecured notes due in April 2023 (the "Initial Notes") in a private placement, and, in June 2020, we issued an additional $30.3 million (the "Reopened Notes" and, together with the Initial Notes, the "8.00% Notes,") which brought the aggregate outstanding principal amount to $70.8 million. The Reopened Notes are fully fungible with, and rank equally in right of payment with the Initial Notes. We have the right to redeem the 8.00% Notes on or after January 15, 2023. We received total proceeds of $69.6 million from the issuances, after deducting the underwriting discount and other offering expenses. We used the net proceeds from the issuances to repay secured indebtedness, make investments relating to our business and for general corporate purposes.

Convertible Senior Unsecured Notes

In 2019, we issued $264.0 million in aggregate principal amount of 4.75% convertible senior notes (the “4.75% Convertible Notes”) through a private placement offering, which includes the exercised purchaser’s total over-allotment option of $34.0 million. The 4.75% Convertible Notes pay interest semiannually in arrears and are scheduled to mature in November 2022, unless earlier converted or repurchased by the holders pursuant to their terms. The initial conversion rate and the conversion rate at December 31, 2019 was 56.1695 shares of common stock per $1,000 of principal representing a conversion price of $17.80 per share of common stock. We received proceeds totaling $256.5 million, net of the underwriter’s discount and fees, which is being amortized through interest expense over the life of such notes. We used the net proceeds from the issuance primarily for the exchange of $228.7 million of our 5.25% convertible notes for a combination of $233.1 million in cash (which includes accrued interest) and 4,478,315 shares of our common stock. The remaining net proceeds were used for general corporate purposes. During 2019, we recorded a loss on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

extinguishment of debt of $7.3 million in connection with this exchange, which included an inducement charge of $1.1 million. As of September 30, 2020, the 4.75% Convertible Notes had conversion rates of 56.2185 shares, common stock per $1,000 of principal, which represented a conversion price of $17.79 per share of common stock.

In 2018, we completed a similar exchange where we used the net proceeds from 2 separate private placements of our 5.25% convertible senior notes (the "5.25% Convertible Notes") to initially exchange portions of our 5.375% convertible senior notes (the "5.375% Convertible Notes") and 6.50% convertible senior notes (the "6.50% Convertible Notes").

At September 30, 2020, there were $0.5 million, $13.8 million and $0.2 million aggregate principal amount remaining of our 5.25% Convertible Notes issued on July 3, 2018, 5.25% Convertible Notes issued on July 20, 2018 and 5.375% Convertible Notes, respectively. The initial conversion rates of the 5.25% Convertible Notes issued on July 3, 2018, 5.25% Convertible Notes issued on July 20, 2018 and 5.375% Convertible Notes were 86.9943 shares, 77.8331 shares and 107.7122 shares, respectively, of common stock per $1,000 of principal, which represented a conversion price of $11.50 per share, $12.85 per share and $9.28 per share of common stock, respectively. At September 30, 2020, the 5.25% Convertible Notes issued on July 3, 2018, 5.25% Convertible Notes issued on July 20, 2018 and 5.375% Convertible Notes had conversion rates of 90.5672 shares, 81.0297 shares and 118.2123 shares, respectively, of common stock per $1,000 of principal, which represented a conversion price of $11.04 per share, $12.34 per share and $8.46 per share of common stock, respectively. The 5.25% Convertible Notes and 5.375% Convertible Notes pay interest semiannually in arrears and have scheduled maturity dates in July 2021 and November 2020, respectively, unless earlier converted or repurchased by the holders pursuant to their terms.

Our convertible senior unsecured notes are not redeemable by us prior to their maturities and are convertible by the holder into, at our election, cash, shares of our common stock, or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rates are subject to adjustment upon the occurrence of certain specified events and the holders may require us to repurchase all, or any portion, of their notes for cash equal to 100% of the principal amount, plus accrued and unpaid interest, if we undergo a fundamental change specified in the agreements. We intend to settle the principal balance of our convertible debt in cash and have not assumed share settlement of the principal balance for purposes of computing earnings per share (“EPS”). At the time of issuance, there was no precedent or policy that would indicate that we would settle the principal in shares or the conversion spread in cash.

Accounting guidance requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component reflects the present value of the discounted cash flows using the nonconvertible debt borrowing rate at the time of the issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is accreted back to the notes principal amount through interest expense over the term of the notes, which was 2.02 years and 2.67 years at September 30, 2020 and December 31, 2019, respectively, on a weighted average basis.

The UPB, unamortized discount and net carrying amount of the liability and equity components of our convertible notes are as follows (in thousands):

Liability

Equity

 Component

 Component

Unamortized Debt 

Unamortized Deferred 

Net Carrying 

Net Carrying 

Period

    

UPB

    

Discount

    

Financing Fees

    

Value

    

Value

September 30, 2020

$

278,490

$

6,439

$

5,345

$

266,706

$

9,962

December 31, 2019

$

300,914

$

9,235

$

7,527

$

284,152

$

9,962

During the three months ended September 30, 2020, we incurred interest expense on the notes totaling $4.8 million, of which $3.3 million, $0.8 million and $0.7 million related to the cash coupon, amortization of the debt discount and of the deferred financing fees, respectively. During the nine months ended September 30, 2020, we incurred interest expense on the notes totaling $14.8 million, of which $10.0 million, $2.5 million and $2.3 million related to the cash coupon, amortization of the debt discount and of the deferred

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September 30, 2020

financing fees, respectively. During the three months ended September 30, 2019, we incurred total interest expense on the notes of $5.0 million, of which $3.5 million, $0.8 million and $0.7 million related to the cash coupon, amortization of the debt discount and of the deferred financing fees, respectively. During the nine months ended September 30, 2019, we incurred total interest expense on the notes of $15.1 million, of which $10.4 million, $2.5 million and $2.2 million related to the cash coupon, amortization of the debt discount and of the deferred financing fees, respectively. Including the amortization of the deferred financing fees and debt discount, our weighted average total cost of the notes was 6.75% and 6.80% at September 30, 2020 and December 31, 2019, respectively.

Junior Subordinated Notes

The carrying values of borrowings under our junior subordinated notes were $141.5 million and $140.9 million at September 30, 2020 and December 31, 2019, respectively, which is net of a deferred amount of $11.0 million and $11.4 million, respectively, (which is amortized into interest expense over the life of the notes) and deferred financing fees of $1.9 million and $2.0 million, respectively. These notes have maturities ranging from March 2034 through April 2037 and pay interest quarterly at a floating rate based on LIBOR. The weighted average note rate was 3.05% and 4.75% at September 30, 2020 and December 31, 2019, respectively. Including certain fees and costs, the weighted average note rate was 3.14% and 4.83% at September 30, 2020 and December 31, 2019, respectively.

Debt Covenants

Credit Facilities, Repurchase Agreements and Unsecured Debt. The credit facilities, repurchase agreements and unsecured debt (senior and convertible notes) contain various financial covenants, including, but not limited to, minimum liquidity requirements, minimum net worth requirements, as well as certain other debt service coverage ratios, debt to equity ratios and minimum servicing portfolio tests. We were in compliance with all financial covenants and restrictions at September 30, 2020.

CLOs. Our CLO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments. If we fail these covenants in any of our CLOs, all cash flows from the applicable CLO would be diverted to repay principal and interest on the outstanding CLO bonds and we would not receive any residual payments until that CLO regained compliance with such tests. Our CLOs were in compliance with all such covenants as of September 30, 2020, as well as on the most recent determination dates in October 2020. In the event of a breach of the CLO covenants that could not be cured in the near-term, we would be required to fund our non-CLO expenses, including employee costs, distributions required to maintain our REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CLO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, or (v) accessing the equity or debt capital markets, if available. We have the right to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CLOs. However, we may not have sufficient liquidity available to do so at such time.

Our CLO compliance tests as of the most recent determination dates in October 2020 are as follows:

Cash Flow Triggers

    

CLO IX

    

CLO X

     

CLO XI

CLO XII

CLO XIII

Overcollateralization (1)

Current

 

134.68

%  

126.98

%

121.95

%

118.87

%

119.76

%

Limit

 

133.68

%  

125.98

%

120.95

%

117.87

%

118.76

%

Pass / Fail

 

Pass

Pass

Pass

Pass

Pass

Interest Coverage (2)

Current

 

522.55

%  

445.37

%

403.28

%

377.12

%

371.60

%

Limit

 

120.00

%  

120.00

%

120.00

%

120.00

%

120.00

%

Pass / Fail

 

Pass

Pass

Pass

Pass

Pass

(1)The overcollateralization ratio divides the total principal balance of all collateral in the CLO by the total principal balance of the bonds associated with the applicable ratio. To the extent an asset is considered a defaulted security, the asset’s principal balance

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies. Rating downgrades of CLO collateral will generally not have a direct impact on the principal balance of a CLO asset for purposes of calculating the CLO overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CLO vehicle.
(2)The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.

Our CLO overcollateralization ratios as of the determination dates subsequent to each quarter are as follows:

Determination (1)

    

CLO  IX

    

CLO X

CLO XI

CLO XII

     

CLO XIII

October 2020

134.68

%

126.98

%

121.95

%

118.87

%

119.76

%

July 2020

134.68

%

126.98

%

121.95

%

118.87

%

119.76

%

April 2020

134.68

%

126.98

%

121.95

%

118.87

%

119.76

%

January 2020

134.68

%

126.98

%

121.95

%

118.87

%

October 2019

134.68

%  

126.98

%  

121.95

%  

(1)The table above represents the quarterly trend of our overcollateralization ratio, however, the CLO determination dates are monthly and we were in compliance with this test for all periods presented.

The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CLOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs. NaN payment due under the junior subordinated indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee. The junior subordinated indentures are also cross-defaulted with each other.

Note 11 — Allowance for Loss-Sharing Obligations

Our allowance for loss-sharing obligations related to the Fannie Mae DUS program is as follows (in thousands):

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

Beginning balance

$

73,220

$

34,417

$

34,648

$

34,298

Impact of adopting CECL - January 1, 2020

���

14,406

Provisions for loss sharing

(2,031)

1,326

22,538

3,880

Provisions reversal for loan repayments

(196)

(591)

(832)

(2,323)

Recoveries (charge-offs), net

 

167

373

 

400

(330)

Ending balance

$

71,160

$

35,525

$

71,160

$

35,525

When a loan is sold under the Fannie Mae DUS program, we undertake an obligation to partially guarantee the performance of the loan. A liability is recognized for the fair value of the guarantee obligation undertaken for the non-contingent aspect of the guarantee and is removed only upon either the expiration or settlement of the guarantee. At September 30, 2020 and 2019, guarantee obligations of $33.2 million and $32.1 million, respectively, were included in the allowance for loss-sharing obligations.

In addition to and separately from the fair value of the guarantee, we estimate our allowance for loss-sharing under CECL over the contractual period in which we are exposed to credit risk. The current expected loss related to loss-sharing was based on a collective pooling basis with similar risk characteristics, a reasonable and supportable forecast and a reversion period based on our average historical losses through the remaining contractual term of the portfolio. The increase in the provision for credit losses during the nine months ended September 30, 2020 of $22.5 million, compared to the January 1, 2020 cumulative-effect adjustment upon adoption of CECL of $14.4 million, is primarily attributed to the significant adverse change in the economic outlook due to the COVID-19 pandemic.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

When we settle a loss under the DUS loss-sharing model, the net loss is charged-off against the previously recorded loss-sharing obligation. The settled loss is often net of any previously advanced principal and interest payments in accordance with the DUS program, which are reflected as reductions to the proceeds needed to settle losses. At September 30, 2020 and December 31, 2019, we had outstanding advances of $0.1 million and $0.5 million, respectively, which were netted against the allowance for loss-sharing obligations.

At September 30, 2020, our allowance for loss-sharing obligations, associated with expected losses under CECL was $38.0 million and represented 0.23% of the Fannie Mae servicing portfolio.

At September 30, 2020 and December 31, 2019, the maximum quantifiable liability associated with our guarantees under the Fannie Mae DUS agreement was $3.06 billion and $2.73 billion, respectively. The maximum quantifiable liability is not representative of the actual loss we would incur. We would be liable for this amount only if all of the loans we service for Fannie Mae, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.

Note 12 — Derivative Financial Instruments

We enter into derivative financial instruments to manage exposures that arise from business activities resulting in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. We do not use these derivatives for speculative purposes, but are instead using them to manage our exposure to interest rate risk.

Agency Rate Lock and Forward Sale Commitments. We enter into contractual commitments to originate and sell mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrower "rate locks" a specified interest rate within time frames established by us. All potential borrowers are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers under the GSE programs, we enter into a forward sale commitment with the investor simultaneously with the rate lock commitment with the borrower. The forward sale contract locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for closing of the loan and processing of paperwork to deliver the loan into the sale commitment.

These commitments meet the definition of a derivative and are recorded at fair value, including the effects of interest rate movements which are reflected as a component of other income, net in the consolidated statements of operations. The estimated fair value of rate lock commitments also includes the fair value of the expected net cash flows associated with the servicing of the loan which is recorded as income from MSRs in the consolidated statements of operations. During the three and nine months ended September 30, 2020, we recorded a net loss of $0.9 million and a net gain of $3.3 million, respectively, from changes in the fair value of these derivatives in loss on derivative instruments, net and $42.4 million and $96.7 million, respectively, of income from MSRs. During the three and nine months ended September 30, 2019, we recorded a net loss of $4.7 million and $6.1 million, respectively, from changes in the fair value of these derivatives in loss on derivative instruments, net and $29.9 million and $62.9 million, respectively, of income from MSRs. See Note 13 for details.

Interest Rate Swap Futures. We enter into over-the-counter interest rate swap futures (“Swap Futures”) to hedge our exposure to changes in interest rates inherent in (1) our Structured Business SFR loans from the time the loans are originated until the time they can be financed with match term fixed rate securitized debt, and (2) our held-for-sale Agency Business Private Label loans from the time the loans are rate locked until sale and securitization. The Swap Futures do not meet the criteria for hedge accounting, typically have a three-month maturity and are tied to the five-year and ten-year swap rates. Our Swap Futures are cleared by a central clearing house and variation margin payments, made in cash, are treated as a legal settlement of the derivative itself as opposed to a pledge of collateral.

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2020

During the three months ended September 30, 2020, we recorded realized losses of $0.2 million and unrealized gains of $0.4 million to our Structured Business and realized losses of $0.1 million and unrealized gains of $0.1 million to our Agency Business related to our Swap Futures. During the nine months ended September 30, 2020, we recorded realized losses of $3.0 million and unrealized losses of $0.1 million to our Structured Business and realized losses of $57.3 million and unrealized losses of $1.5 million to our Agency Business related to our Swap Futures. During the three and nine months ended September 30, 2019, we recorded realized losses of $0.4 million and $0.6 million, respectively, and unrealized gains of $0.1 million and unrealized losses of less than $0.1 million, respectively, to our Structured Business related to our Swap Futures. During both the three and nine months ended September 30, 2019, we recorded realized gains of $0.2 million and unrealized losses of $0.2 million to our Agency Business related to our Swap Futures. The realized and unrealized gains and losses are recorded in loss on derivative instruments, net on our consolidated statements of income.

A summary of our non-qualifying derivative financial instruments is as follows ($ in thousands):

September 30, 2020

Fair Value

Notional

Balance Sheet

Derivative

Derivative

Derivative

    

Count

    

Value

    

Location

    

Assets

    

Liabilities

Agency Business

Rate Lock Commitments

14

$

81,743

Other Assets/Other Liabilities

$

2,160

$

(110)

Forward Sale Commitments

79

688,361

Other Assets/Other Liabilities

1,387

(742)

Swap Futures

84