ABR

Arbor Realty Trust, Inc. - Q2 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. Arbor Realty Trust, Inc. is a Maryland corporation organized as a Real Estate Investment Trust (REIT) that invests in a diversified portfolio of multi-family and commercial real estate-related assets, primarily consisting of bridge loans, mezzanine loans, junior participating interests, and preferred and direct equity. The Company is externally managed by Arbor Commercial Mortgage, LLC (ACM).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 34% for the three months and 38% for the six months compared to the prior year periods. Interest income dropped significantly due to a decrease in average yield on assets (from 7.91% to 5.41% for the quarter) and a reduction in the loan portfolio size.
• Significant Losses: The Company recorded a $23.0 million provision for loan losses for the quarter and $90.5 million for the six months, driven by impairments on 22 loans with an aggregate carrying value of $605.7 million. Additionally, a $23.8 million loss on restructured loans was recorded in the quarter.
• Non-Operating Gains: The Company recognized a $21.5 million gain on extinguishment of debt for the quarter (and $47.7 million for the six months) resulting from the settlement of a repurchase facility and the purchase of CDO notes at a discount. A $56.0 million gain on exchange of profits interest was recorded in the first quarter related to the POM transaction.
• Derivative Losses: A $8.7 million loss on termination of swaps was recorded due to the restructuring of trust preferred securities.
• Dividends: The Board elected not to pay a common stock dividend for the quarter ended June 30, 2009, to retain capital for working capital purposes.

Guidance, Outlook, and Risks

• Management Agreement Amendment: On August 6, 2009, the Company amended its management agreement with ACM. The base management fee structure was changed from a percentage of equity to a reimbursement of actual costs (estimated at $8.0–$9.0 million for 2009). The incentive fee hurdle was raised, and the termination fee was capped at $10.0 million.
• Debt Restructuring: In July 2009, the Company restructured its credit facilities with Wachovia Bank, extending maturities to 2012 and eliminating margin call provisions on most assets, though interest rates increased. The Company also restructured $247.1 million of trust preferred securities into unsecured junior subordinated notes with a temporary 0.50% interest rate.
• Liquidity: Cash and cash equivalents increased to $29.5 million. The Company maintains restricted cash of $66.6 million, primarily for CDO collateral. Management believes existing sources of funds are adequate for short-term needs but notes that capital market conditions remain difficult.
• Risks: Key risks include the continued disruption in debt and secondary mortgage markets, potential further impairments on the loan portfolio, and the Company's reliance on its manager (ACM) and related-party transactions. The Company is subject to concentration risk, with 29% of total assets tied to five unrelated borrowers.

Investor Verification Checklist

• Loan Loss Reserves: Verify the adequacy of the $221.0 million allowance for loan losses against the $605.7 million of impaired loans.
• Debt Covenants: Confirm compliance with the new financial covenants established in the July 2009 Wachovia restructuring (minimum liquidity of $7.5 million, minimum GAAP net worth of $150.0 million).
• Dividend Policy: Monitor future dividend declarations given the suspension of the Q2 2009 dividend and the requirement to distribute 90% of REIT taxable income.
• Related Party Transactions: Review the impact of the amended management agreement on future expense structures and the $3.0 million payment to the manager for 2008 expenses.
• CDO Performance: Assess the status of the three CDO vehicles, particularly CDO I which reached the end of its replenishment period, and the Company's ability to meet over-collateralization tests.