Arbor Realty Trust, Inc. Form 8-K Summary
Business Context and Reporting Period
Arbor Realty Trust, Inc. (Arbor) filed this Current Report on Form 8-K on June 5, 2019, to disclose the closing of a commercial real estate mortgage securitization. The transaction involves two consolidated subsidiaries, Arbor Realty Commercial Real Estate Notes 2019-FL1, Ltd. (the Issuer) and Arbor Realty Commercial Real Estate Notes 2019-FL1, LLC (the Co-Issuer).
Key Financial Metrics and Transaction Details
The securitization resulted in the issuance of notes with an aggregate principal amount of $602,062,000, comprised of:
- Investment Grade Notes: $533,000,000
- Below Investment Grade Notes: $69,062,000
- Preferred Shares: $47,938,000 (notional amount, sold to a consolidated subsidiary)
The notes are secured by a portfolio of real estate-related assets and cash with a face value of approximately $650,000,000, consisting primarily of first mortgage bridge loans. The financing includes $129,560,000 in proceeds designated for acquiring additional mortgage assets within 120 days of the closing date.
Cost of Capital: The Offered Notes carry an initial weighted average interest rate of approximately 1.44% plus one-month LIBOR. Interest payments are monthly, commencing June 17, 2019.
Use of Proceeds: Net proceeds will be used to repay borrowings under Arbor's current credit facilities, pay transaction expenses, and fund future loans and investments.
Material Changes and Structure
This filing represents a material definitive agreement and the creation of a direct financial obligation. The transaction structure includes:
- Accounting Treatment: Arbor intends to own the portfolio of mortgage assets until maturity and will account for the issuance of the Offered Notes on its balance sheet as a financing.
- Replacement Period: The financing has an approximate three-year replacement period allowing principal and sale proceeds to be reinvested in qualifying replacement mortgage assets.
- Fee Waivers: The Collateral Manager and Servicer (consolidated subsidiaries of Arbor) have waived their right to receive management and servicing fees, though the Servicer is entitled to cost reimbursement.
- Advancing Agent Fee: Arbor Realty SR, Inc. serves as the advancing agent and is entitled to a fee of 0.07% per annum on the aggregate outstanding principal amount of the Notes.
Outlook, Risks, and Contingencies
Maturity and Weighted Average Life: The stated maturity date for all classes of Notes is May 15, 2037. However, the weighted average life is expected to be between 3.73 and 4.86 years, assuming no prepayments, defaults, extensions, or delinquencies.
Redemption Provisions:
- Clean-up Call: Available if the outstanding principal is reduced to 10% or less of the initial amount.
- Optional Redemption: Available on or after November 15, 2021, at the direction of a majority of Preferred Shareholders.
- Mandatory Redemption: Triggered if note protection tests are not satisfied or if ratings are downgraded/withdrawn following the 120-day asset acquisition period.
Risks: The Notes are non-recourse obligations payable solely from the mortgage assets. If assets are insufficient, the Issuers have no further obligation to pay. Risks include the inability to invest additional financing capacity in suitable assets within 120 days, which would trigger a redemption of the Notes. Additionally, the transaction is subject to Regulation RR retention requirements.
Investor Verification Checklist
- Verify the specific allocation of the $129,560,000 designated for additional asset acquisition within the 120-day window.
- Confirm the impact of the securitization on Arbor's leverage ratios and liquidity position following the repayment of existing credit facilities.
- Review the credit ratings assigned to the various classes of Notes (Class A through G) to assess the cost of capital relative to market conditions.
- Monitor the performance of the underlying first mortgage bridge loan portfolio for prepayments, defaults, or delinquencies that could alter the weighted average life.
- Check for any subsequent filings regarding the mandatory redemption triggers or rating agency actions on the Notes.