What changed in this filing

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Item 1. Business

2022-02-18 compared with 2021-02-19 · 49 added, 63 removed, 246 unchanged (31% of the section changed)

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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 and preferred and direct equity.

Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, single-family rental (“SFR”) and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages and preferred and direct equity.

We also invest in real estate-related joint ventures and may 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").

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 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, and originate and sell finance products through conduit/commercial mortgage-backed securities ("CMBS") 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 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 and, originate and sell finance products through conduit/commercial mortgage-backed securities (“CMBS”) programs.

We pool and securitize the Private Label loans and sell certificates in the securitizations to third-party investors, while retaining the servicing rights and the highest risk bottom tranche certificate of the securitization (“APL certificates”).

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.

Substantially all our operations are conducted through our operating partnership, Arbor Realty Limited Partnership (“ARLP”), for which we serve as the indirect general partner, and ARLP’s subsidiaries.

We are organized to qualify as a real estate investment trust (“REIT”) for U.S.

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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.

Certain of our assets that produce non-qualifying REIT income, primarily within the Agency Business, are operated through taxable REIT subsidiaries (“TRS”), which are part of our TRS consolidated group (the “TRS Consolidated Group”) and are subject to U.S.

federal, state and local income taxes.

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Investment Strategy

The financing of multifamily, senior housing, healthcare, single-family rental and other diverse commercial real estate offers opportunities that demand customized financing solutions.

The financing of multifamily, senior housing, healthcare, SFR and other diverse commercial real estate offers opportunities that demand customized financing solutions.

We believe that providing both structured products and GSE/agency loans through direct originations and in-house underwriting capabilities throughout our national network of sales offices and lending solutions through various GSE and HUD programs provides us with a competitive advantage, since this allows us to meet the multiple needs of borrowers through fully integrated, comprehensive product offerings.

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Provide Customized Financing.

We provide customized financing to meet the needs of borrowers.

We provide a suite of comprehensive customized financing solutions to meet the various needs of borrowers.

We target borrowers whose options may be limited by conventional bank financing, have demonstrated a history of enhancing the value of the properties they operate and who may benefit from the customized financing solutions we offer.

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We offer bridge financing products to borrowers who are typically seeking short-term capital to use in an acquisition of property.

The borrower has usually identified an undervalued asset that has been under managed and/or is located in a recovering market.

The borrower has usually identified an undervalued asset that has been under managed and/or is in a recovering market.

From the borrower’s perspective, shorter term bridge financing is advantageous because it allows for time to improve the property value without encumbering it with restrictive, long-term debt that may not reflect optimal leverage for a non-stabilized property.

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In cases where the terms of a first mortgage prohibit additional liens on the ownership entity, investments structured as preferred equity in the entity owning the property serve as viable financing substitutes.

With preferred equity investments, we typically become a member in the ownership entity.

With preferred equity

investments, we typically become a member in the ownership entity.

Similar to our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest payments, yield look-backs and participating interests.

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We may also require additional security such as personal guarantees, letters of credit and/or additional collateral unrelated to the property.

Similar to our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest

payments, yield look-backs and participating interests.

Similar to our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest payments, yield look-backs and participating interests.

We hold a majority of our mezzanine loans through subsidiaries of our operating partnership that are pass-through entities for tax purposes.

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Similar to our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest payments, yield look-backs and participating interests.

Single-Family Rental Portfolio Financing.

SFR Portfolio Financing.

We offer various financing products to borrowers who are looking to acquire conventional, workforce and affordable single-family housing.

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We pool and securitize the Private Label loans and sell certain certificates in the securitizations to third-party investors, while retaining the APL certificates.

SFR Fixed Rate.

We underwrite, originate and service long-term permanent fixed rate loans on SFR properties.

The loans are subsequently sold to third party investors while retaining mortgage servicing.

We retain the servicing rights and asset management responsibilities on substantially all Agency Business loans.

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Debt Securities.

We have, and may in the future, invest in bond securities, such as those issued by Freddie Mac SBL securitizations from loans originated under the Freddie Mac SBL program and single-family rental bonds.

We have, and may in the future, invest in bond securities, such as those issued by Freddie Mac SBL securitizations from loans originated under the Freddie Mac SBL program and SFR bonds.

These securities are generally carried at cost and are often purchased at a discount to their face value, which is accreted into interest income, if deemed collectable, over the expected remaining life of the related security as a yield adjustment.

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Student Housing

Preferred Equity

Mezzanine Loans

Preferred Equity

Single‑Family Rental

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Our cost of funds in 2021 was 2.79% on average borrowings of $6.96 billion, which was computed by dividing the interest expense incurred during 2021 by the average borrowings during 2021.

As of December 31, 2020, our loan and investment portfolio was comprised of 90% floating rate loans and 10% fixed rate loans.

As of December 31, 2021, our loan and investment portfolio were comprised of 96% floating rate loans and 4% fixed rate loans.

We also own unconsolidated investments in equity affiliates totaling $89.7 million, which consists primarily of a joint venture formed to invest in a residential mortgage banking business and an investment in a multifamily-focused commercial real estate investment fund.

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One of the Agency Business’s primary sources of revenue are the gains and fees recognized from the origination and sale of mortgage loans.

Loans originated under GSE and HUD programs are generally sold within 60 days from the loan origination date, while our Private Label loans are pooled and generally expected to be sold and securitized within 180 days of loan origination.

Loans originated under GSE and HUD programs, as well as our SFR fixed rate product, are generally sold within 60 days from the loan origination date, while our Private Label loans are pooled and generally expected to be sold and securitized within 180 days of loan origination.

Our loan activity in 2021 was comprised of originations totaling $6.41 billion, sales totaling $6.42 billion and commitment volume totaling $6.35 billion.

Our gains and fees as a percentage of our loan sales volume ("sales margin,") was 144 basis points for 2020.

We also retain the mortgage servicing rights (“MSRs”) on substantially all of the loans we originate, and record as revenue the fair value of the expected net future cash flows associated with the servicing of these loans.

Our gains and fees as a percentage of our loan sales volume (“sales margin”) was 192 basis points for 2021.

We also retain the mortgage servicing rights (“MSRs”) on substantially all the loans we originate, and record as revenue the fair value of the expected net future cash flows associated with the servicing of these loans.

Servicing revenue is generated from the fees we receive for servicing the loans and on escrow deposits held on behalf of borrowers, net of amortization on the MSR assets.

Our income from MSRs as a percentage of loan commitment volume was 243 basis points for 2020.

Our income from MSRs as a percentage of loan commitment volume (“MSR rate”) was 205 basis points for 2021.

Product and geographic concentration information about our Agency Business servicing portfolio as of December 31, 2021 is as follows ($ in thousands):

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(basis points)

North Carolina

Private Label

North Carolina

SFR - Fixed Rate

(1) Excludes loans in 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).

(2) No other individual state represented 4% or more of the total.

The following describes our lending and investment process for both our Structured and Agency Businesses.

We have a network of sales and support offices in California, Florida, Georgia, Indiana, Massachusetts, New Jersey, New York, Ohio, Oklahoma, Pennsylvania and Texas that staff approximately 28 loan originators who solicit property owners, developers, and mortgage loan brokers.

We have a network of sales and support offices in California, Florida, Georgia, Indiana, Maryland, Massachusetts, New Jersey, New York, Ohio, Oklahoma, Pennsylvania and Texas that staff approximately 28 loan originators who solicit property owners, developers, and mortgage loan brokers.

In some instances, the originators accept loan applications which meet our underwriting criteria from a select group of mortgage loan brokers.

Once potential borrowers have been identified, we determine which of our

financing products best meet the borrower’s needs.

Loan originators in every sales office are able to offer borrowers the full array of finance products for both the Structured and Agency businesses.

Once potential borrowers have been identified, we determine which of our financing products best meet the borrower’s needs.

Loan originators in every sales office can offer borrowers the full array of finance products for both the Structured and Agency businesses.

After identifying a suitable product, we work with the borrower to prepare a loan application.

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The underwriters analyze each loan application in accordance with the guidelines below to determine the loan’s conformity with the guidelines.

Key factors considered in credit decisions include, but are not limited to, debt service coverage, loan to value ratios and property financial and operating performance.

considered in credit decisions include, but are not limited to, debt service coverage, loan to value ratios and property financial and operating performance.

In general, our underwriting guidelines require evaluation of the following:

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● For any application for one of our Agency products, we will underwrite the loan to the relevant agency or Company guidelines.

With respect to our Fannie Mae loans, we maintain concentration limits to further mitigate risk.

Geographic concentrations of such loans are limited, based on regional employment concentration and trends, and we limit the aggregate amount of such loans subject to full risk-sharing for any one borrower and elect to use modified risk-sharing for such loans of more than $50.0 million, in accordance with Fannie Mae requirements.

All our Fannie Mae loans are subject to credit committee and management review and approval in accordance with our policies and procedures, and loans of $50.0 million and greater are subject to modified risk-sharing in accordance with Fannie Mae requirements.

We also rely heavily on loan surveillance and credit risk management.

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The report also includes an analysis of borrower liquidity, net worth, cash investment, income, credit history and operating experience.

All transactions require the approval of a majority of the members of our credit committee.

Following the approval of a transaction, our

underwriting and servicing departments, together with our asset management group, assure that all loan approval terms have been satisfied and conform to lending requirements established for that particular transaction.

All transactions require the approval of the majority of the members of our credit committee.

Following the approval of a transaction, our underwriting and servicing departments, together with our asset management group, assure that all loan approval terms have been satisfied and conform to lending requirements established for that particular transaction.

Our loan approval process for the Agency Business requires the submission of a detailed loan package in accordance with our underwriting checklist to our agency loan committee for approval.

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Operating Policies and Strategies

Investment Guidelines.

Our Board of Directors has adopted general guidelines for our investments and borrowings to the effect that:

(1) no investment will be made that would cause us to fail to qualify as a REIT;

(2) no investment will be made that would cause us to be regulated as an investment company under the Investment Company Act;

(3) no more than 25% of our equity (including junior subordinated notes as equity), determined as of the date of such investment, will be invested in any single asset;

(4) no single mezzanine loan or preferred equity investment will exceed $75 million;

(5) our Structured Business leverage (including junior subordinated notes as equity) will generally not exceed 80% of the UPB of our assets, in the aggregate;

(6) we will not co-invest with Arbor Commercial Mortgage, LLC ("ACM"), our former manager, or any of its affiliates unless such co-investment is otherwise in accordance with these guidelines and its terms are at least as favorable to us as to ACM or the affiliate making such co-investment;

and (7) no more than 15% of our gross assets may consist of mortgage-related securities.

Any exceptions to the above general guidelines require the approval of our Board of Directors.

Financing Policies.

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However, we intend to maintain an adequate capital base to protect against various business environments in which our financing and hedging costs might exceed the interest income from our investments.

Our Structured Business investments are financed primarily by collateralized loan obligations (“CLOs”), credit facilities and repurchase agreements with institutional lenders, and senior and convertible debt instruments.

Although we expect that these will be the principal means of leveraging these investments, we may issue common stock, preferred stock or senior, unsecured or convertible notes of any maturity if it appears advantageous to do so.

Our Structured Business investments are financed primarily by collateralized loan obligations (“CLOs”) and credit and repurchase facilities with institutional lenders.

We also finance the business through public and private offerings of our equity and debt, including senior and convertible debt instruments and common stock or preferred stock, when it appears advantageous to do so.

Our Agency Business finances loan originations with several committed and uncommitted warehouse credit facilities on a short-term basis, as these loans are generally transferred or sold within 60 days from the loan origination date.

We also meet our restricted liquidity requirements and purchase and loss obligations with Fannie Mae and Freddie Mac through letters of credit issued by a financial institution.

We also meet a significant portion of our restricted liquidity requirements and purchase and loss obligations with Fannie Mae and Freddie Mac through letters of credit issued by a financial institution.

Credit Risk Management Policy.

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We, including our chief credit officer and our asset management group, review and monitor credit risk and other risks of loss associated with each investment.

In addition, we seek to diversify our portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentrations.

In addition, within our primary business line of financing multi-family assets, we seek to diversify our portfolio to avoid undue geographic, issuer, industry and certain other types of concentrations.

Our Board of Directors monitors the overall portfolio risk and reviews levels of provision for loss.

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We minimize our interest rate risk from borrowings by attempting to structure the key terms of our borrowings to generally correspond to the interest rate terms of our assets.

We may enter into hedging transactions to protect our investment portfolio from interest rate fluctuations and other changes in market conditions.

We may enter into hedging transactions to protect our investment portfolio from interest rate fluctuations and credit risk exposure.

These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments.

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Conflicts of Interest Policies.

We, our executive officers, and ACM face conflicts of interests because of our relationships with each other.

We, our executive officers, and Arbor Commercial Mortgage, LLC (“ACM”) face conflicts of interests because of our relationships with each other and the way in which our business is structured.

ACM has approximately 8% of the voting interest in our stock as of December 31, 2021.

Our chairman and chief executive officer is also the chief executive officer of ACM and beneficially owns approximately 35% of the outstanding membership interests of ACM.

Our chairman and chief executive officer is also the chief executive officer of ACM, beneficially owns approximately 35% of the outstanding membership interests of ACM and controls all voting interests in ACM.

One of our directors is the chief operating officer of Arbor Management, LLC (the managing member of ACM) and a trustee of two trusts that own noncontrolling membership interests in ACM.

Our senior counsel is also the general counsel to ACM.

Our chief financial officer is the chief financial officer of ACM.

Our treasurer is the treasurer of ACM.

In addition, our general counsel, chief financial officer and our treasurer also perform similar roles for ACM.

Our chief executive officer, one of our directors and certain aforementioned executive officers are members of ACM’s executive committee and, excluding our chief executive officer, own minority membership interests in ACM.

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Our Board of Directors has approved the operating policies and the strategies set forth above.

Our Board of Directors has the power to modify or waive these policies and strategies without the consent of our stockholders to the extent that the Board of Directors determines that such modification or waiver is in the best interest of our stockholders.

Our Board of Directors has the power to modify or waive these policies and strategies without the consent of our stockholders to the extent that the Board of Directors

determines that such modification or waiver is in the best interest of our stockholders.

Among other factors, developments in the market that either affects the policies and strategies mentioned herein, or that change our assessment of the market, may cause our Board of Directors to revise its policies and strategies.

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These laws allow third parties to seek recovery from owners of real properties for personal injuries associated with materials containing asbestos.

Our operating costs and the values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, and our income and ability to make distributions to our stockholders could be affected adversely by the existence of an environmental liability with respect

to properties we may acquire.

We endeavor to ensure these properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products.

Our operating costs and the values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances, and regulations, as well as the cost of complying with future legislation, and our income and ability to make distributions to our stockholders could be affected adversely by the existence of an environmental liability with respect to properties we may acquire.

We endeavor to ensure these properties are complying in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products.

Requirements of the GSEs and HUD

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Our competitors may also be willing to accept lower returns on their investments and may succeed in originating the loans that we have targeted.

We compete on the basis of quality of service, relationships, loan structure, terms, pricing and industry experience, including the knowledge of local and national commercial real estate market conditions, loan product expertise and the ability to analyze and manage credit risk.

Our competitors also seek to compete aggressively on the basis of these factors and our success depends on our ability to offer attractive loan products, provide superior service, demonstrate our industry knowledge and experience, maintain and capitalize on relationships with investors, borrowers and key loan correspondents and remain competitive in pricing.

We compete based on quality of service, relationships, loan structure, terms, pricing, and industry experience, including the knowledge of local and national commercial real estate market conditions, loan product expertise and the ability to analyze and manage credit risk.

Our competitors also seek to compete aggressively based on these factors and our success depends on our ability to offer attractive loan products, provide superior service, demonstrate our industry knowledge and experience, maintain and capitalize on relationships with investors, borrowers and key loan correspondents and remain competitive in pricing.

In addition, future changes in laws, regulations and GSE/HUD program requirements, and consolidation in the commercial real estate finance market could lead to the entry of more competitors or enhance the competitive strength of our existing competitors.

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All employees are eligible for health insurance including mental health coverage, prescription drug benefits, dental and vision insurance, flexible spending accounts, paid and unpaid leaves, disability/accident coverage and participation in a 401K plan.

During the COVID-19 pandemic, we have implemented various flexible plans allowing employees to work remotely in accordance with local safety protocols.

We have also implemented a flexible telecommuting policy, which allows eligible employees to work remotely for up to two days per week.

To assess and improve employee retention and engagement, we conduct periodic employee surveys and take actions to address areas of employee concerns.

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Our internet address is www.arbor.com.

All of our filings with the Securities and Exchange Commission (“SEC”) are made available free of charge through our website, including this report, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing.

All our filings with the Securities and Exchange Commission (“SEC”) are made available free of charge through our website, including this report, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing.

Our website also contains our code of business conduct and ethics, code of ethics for chief executive and senior financial officers, corporate governance guidelines, stockholder communications with the Board of Directors, and the charters of the key committees of our Board of Directors.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business